Republic

SUPREME
Baguio City

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 142936 - April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
CORPORATION, Petitioners, vs. ANDRADA ELECTRIC &
COMPANY, respondent.

DEVELOPMENT
ENGINEERING

PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct and separate from
the persons and entities owning it. The corporate veil may be lifted only if it has been
used to shield fraud, defend crime, justify a wrong, defeat public convenience,
insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine
National Bank (PNB) acquired ownership or management of some assets of the
Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased
at the resulting public auction by the Development Bank of the Philippines (DBP), will
not make PNB liable for the PASUMIL's contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court
of Appeals (CA) in CA-GR CV No. 57610. The decretal portion of the challenged
Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED."2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as
follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly
organized, existing, and operating under the laws of the Philippines, with office and
principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while
the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB),
is a semi-government corporation duly organized, existing and operating under the
laws of the Philippines, with office and principal place of business at Escolta Street,
Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development
Corporation (NASUDECO in brief), is also a semi-government corporation and the
sugar arm of the PNB, with office and principal place of business at the 2nd Floor,
Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills
(PASUMIL in short), is a corporation organized, existing and operating under the 1975

laws of the Philippines, and had its business office before 1975 at Del Carmen,
Floridablanca, Pampanga; that the plaintiff is engaged in the business of general
construction for the repairs and/or construction of different kinds of machineries and
buildings; that on August 26, 1975, the defendant PNB acquired the assets of the
defendant PASUMIL that were earlier foreclosed by the Development Bank of the
Philippines (DBP) under LOI No. 311; that the defendant PNB organized the defendant
NASUDECO in September, 1975, to take ownership and possession of the assets and
ultimately to nationalize and consolidate its interest in other PNB controlled sugar
mills; that prior to October 29, 1971, the defendant PASUMIL engaged the services
of plaintiff for electrical rewinding and repair, most of which were partially paid by
the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that
finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a
contract for the plaintiff to perform the following, to wit '(a) Construction of one (1) power house building;
'(b) Construction of three (3) reinforced concrete foundation for three (3) units 350
KW diesel engine generating set[s];
'(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and
1,250 KW turbo generator sets;
'(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel
engine generating set[s];
'(e) Installation of turbine and diesel generating sets including transformer,
switchboard, electrical wirings and pipe provided those stated units are completely
supplied with their accessories;
'(f) Relocating of 2,400 V transmission line, demolition of all existing concrete
foundation and drainage canals, excavation, and earth fillings - all for the total
amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto
attached as Annex 'A' and made an integral part of this complaint;'
that aside from the work contract mentioned-above, the defendant PASUMIL required
the plaintiff to perform extra work, and provide electrical equipment and spare parts,
such as:
'(a) Supply of electrical devices;
'(b) Extra mechanical works;
'(c) Extra fabrication works;
'(d) Supply of materials and consumable items;
'(e) Electrical shop repair;

'(f) Supply of parts and related works for turbine generator;

'(g) Supply of electrical equipment for machinery;
'(h) Supply of diesel engine parts and other related works including fabrication of
parts.'
that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to
P527,263.80, as shown in the Certification of the chief accountant of the PNB, a
machine copy of which is appended as Annex 'C' of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to
the plaintiff of P14,000.00, in broken amounts, covering the period from January 5,
1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the
defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO,
failed and refused to pay the plaintiff their just, valid and demandable obligation;
that the President of the NASUDECO is also the Vice-President of the PNB, and this
official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought
this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as
the defendant PNB and NASUDECO now owned and possessed the assets of the
defendant PASUMIL, and these defendants all benefited from the works, and the
electrical, as well as the engineering and repairs, performed by the plaintiff; that
because of the failure and refusal of the defendants to pay their just, valid, and
demandable obligations, plaintiff suffered actual damages in the total amount of
P513,263.80; and that in order to recover these sums, the plaintiff was compelled to
engage the professional services of counsel, to whom the plaintiff agreed to pay a
sum equivalent to 25% of the amount of the obligation due by way of attorney's fees.
Accordingly, the plaintiff prayed that judgment be rendered against the defendants
PNB, NASUDECO, and PASUMIL, jointly and severally to wit:
'(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with
annual interest of 14% from the time the obligation falls due and demandable;
'(2) Condemning the defendants to pay attorney's fees amounting to 25% of the
amount claim;
'(3) Ordering the defendants to pay the costs of the suit.'
"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint
chiefly on the ground that the complaint failed to state sufficient allegations to
establish a cause of action against both defendants, inasmuch as there is lack or want
of privity of contract between the plaintiff and the two defendants, the PNB and
NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case
law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service,
et al. v. Court of Appeals, et al., 20 SCRA 1214.

"The motion to dismiss was by the court a quo denied in its Order of November 27,
1980; in the same order, that court directed the defendants to file their answer to
the complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated the grounds of its motion to
dismiss, to wit:
'That the complaint does not state a sufficient cause of action against the defendant
NASUDECO because: (a) NASUDECO is not x x x privy to the various electrical
construction jobs being sued upon by the plaintiff under the present complaint; (b)
the taking over by NASUDECO of the assets of defendant PASUMIL was solely for the
purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial
law powers of the President under the Constitution; (c) nothing in the LOI No. 189A (as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary
corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that
being involved in the present case; and, (d) all that was mentioned by the said letter
of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB,
or its subsidiary corporation the NASUDECO, to make a study of, and submit [a]
recommendation on the problems concerning the same.'
"By way of counterclaim, the NASUDECO averred that by reason of the filing by the
plaintiff of the present suit, which it [labeled] as unfounded or baseless, the
defendant NASUDECO was constrained to litigate and incur litigation expenses in the
amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly,
NASUDECO prayed that the complaint be dismissed and on its counterclaim, that the
plaintiff be condemned to pay P50,000.00 in concept of attorney's fees as well as
exemplary damages.
"In its answer, the defendant PNB likewise reiterated the grounds of its motion to
dismiss, namely: (1) the complaint states no cause of action against the defendant
PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and
that the alleged services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiff's suit is erected, was rendered long before PNB took possession of the
assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over
of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose
of reconditioning the sugar central so that PASUMIL may resume its operations in
time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as
well as in LOI No. 311, authorized or directed PNB to assume the corporate
obligation/s of PASUMIL, let alone that for which the present action is brought; (4)
that PNB's management and operation under LOI No. 311 did not refer to any asset
of PASUMIL which the PNB had to acquire and thereafter [manage], but only to those
which were foreclosed by the DBP and were in turn redeemed by the PNB from the
DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the PNB and the
Development Bank of the Philippines (DBP) entered into a 'Redemption Agreement'
whereby DBP sold, transferred and conveyed in favor of the PNB, by way of
redemption, all its (DBP) rights and interest in and over the foreclosed real and/or
personal properties of PASUMIL, as shown in Annex 'C' which is made an integral part
of the answer; (6) that again, conformably with LOI No. 311, PNB pursuant to a Deed

of Assignment dated October 21, 1975, conveyed, transferred, and assigned for
valuable consideration, in favor of NASUDECO, a distinct and independent
corporation, all its (PNB) rights and interest in and under the above 'Redemption
Agreement.' This is shown in Annex 'D' which is also made an integral part of the
answer; [7] that as a consequence of the said Deed of Assignment, PNB on October
21, 1975 ceased to managed and operate the above-mentioned assets of PASUMIL,
which function was now actually transferred to NASUDECO. In other words, so
asserted PNB, the complaint as to PNB, had become moot and academic because of
the execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did
not authorize or direct PNB to assume the corporate obligations of PASUMIL, including
the alleged obligation upon which this present suit was brought; and [9] that, at
most, what was granted to PNB in this respect was the authority to 'make a study of
and submit recommendation on the problems concerning the claims of PASUMIL
creditors,' under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate
and to incur expenses in this case, hence it is entitled to claim attorney's fees in the
amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay
defendant PNB the sum of P50,000.00 as attorney's fees, aside from exemplary
damages in such amount that the court may seem just and equitable in the premises.
"Summons by publication was made via the Philippines Daily Express, a newspaper
with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant
PASUMIL, which was thereafter declared in default as shown in the August 7, 1981
Order issued by the Trial Court.
"After due proceedings, the Trial Court rendered judgment, the decretal portion of
which reads:
'WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the
defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR
DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS
(PASUMIL), ordering the latter to pay jointly and severally the former the following:
'1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as
claimed from September 25, 1980 until fully paid;
'2. The sum of P102,724.76 as attorney's fees; and,
'3. Costs.
'SO ORDERED.
'Manila, Philippines, September 4, 1986.

'(SGD)
'Judge'"3

ERNESTO

S.

TENGCO

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice
and equity for a corporation to take over and operate the business of another
corporation, while disavowing or repudiating any responsibility, obligation or liability
arising therefrom.4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following errors for the Court's
consideration:
"I
The Court of Appeals gravely erred in law in holding the herein petitioners liable for
the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has
not been legally extinguished or terminated, simply because of petitioners['] takeover of the management and operation of PASUMIL pursuant to the mandates of LOI
No. 189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the case at bench the
ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB
is liable for the unpaid debts of PASUMIL to respondent.
This Court's Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review under
Rule 45 of the Rules of Court.7 To this rule, however, there are some exceptions
enumerated in Fuentes v. Court of Appeals.8 After a careful scrutiny of the records
and the pleadings submitted by the parties, we find that the lower courts
misappreciated the evidence presented.9 Overlooked by the CA were certain relevant

facts that would justify a conclusion different from that reached in the assailed
Decision.10
Petitioners posit that they should not be held liable for the corporate debts of
PASUMIL, because their takeover of the latter's foreclosed assets did not make them
assignees. On the other hand, respondent asserts that petitioners and PASUMIL
should be treated as one entity and, as such, jointly and severally held liable for
PASUMIL's unpaid obligation.
As a rule, a corporation that purchases the assets of another will not be liable for the
debts of the selling corporation, provided the former acted in good faith and paid
adequate consideration for such assets, except when any of the following
circumstances is present: (1) where the purchaser expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to a consolidation or merger
of the corporations, (3) where the purchasing corporation is merely a continuation of
the selling corporation, and (4) where the transaction is fraudulently entered into in
order to escape liability for those debts.11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses the right
of succession and such powers, attributes, and properties expressly authorized by
law or incident to its existence.12 It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to which it may be
related.13 This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation.14 For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled15 only when it becomes a shield for fraud,
illegality or inequity committed against third persons.16
Hence, any application of the doctrine of piercing the corporate veil should be done
with caution.17 A court should be mindful of the milieu where it is to be applied.18 It
must be certain that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in disregard of its
rights.19 The wrongdoing must be clearly and convincingly established; it cannot be
presumed.20 Otherwise, an injustice that was never unintended may result from an
erroneous application.21
This Court has pierced the corporate veil to ward off a judgment credit,22 to avoid
inclusion of corporate assets as part of the estate of the decedent,23 to escape liability
arising from a debt,24 or to perpetuate fraud and/or confuse legitimate issues25 either
to promote or to shield unfair objectives26 or to cover up an otherwise blatant
violation of the prohibition against forum-shopping.27 Only in these and similar
instances may the veil be pierced and disregarded.28

The question of whether a corporation is a mere alter ego is one of fact.29 Piercing
the veil of corporate fiction may be allowed only if the following elements concur: (1)
control -- not mere stock control, but complete domination -- not only of finances,
but of policy and business practice in respect to the transaction attacked, must have
been such that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own; (2) such control must have been used by the
defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or
other positive legal duty, or a dishonest and an unjust act in contravention of
plaintiff's legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of.30
We believe that the absence of the foregoing elements in the present case precludes
the piercing of the corporate veil. First, other than the fact that petitioners acquired
the assets of PASUMIL, there is no showing that their control over it warrants the
disregard of corporate personalities.31 Second, there is no evidence that their juridical
personality was used to commit a fraud or to do a wrong; or that the separate
corporate entity was farcically used as a mere alter ego, business conduit or
instrumentality of another entity or person.32Third, respondent was not defrauded or
injured when petitioners acquired the assets of PASUMIL.33
Being the party that asked for the piercing of the corporate veil, respondent had the
burden of presenting clear and convincing evidence to justify the setting aside of the
separate corporate personality rule.34However, it utterly failed to discharge this
burden;35 it failed to establish by competent evidence that petitioner's separate
corporate veil had been used to conceal fraud, illegality or inequity.36
While we agree with respondent's claim that the assets of the National Sugar
Development Corporation (NASUDECO) can be easily traced to PASUMIL,37 we are
not convinced that the transfer of the latter's assets to petitioners was fraudulently
entered into in order to escape liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the mortgage executed
by PASUMIL and acquired the assets as the highest bidder at the public auction
conducted.39 The bank was justified in foreclosing the mortgage, because the
PASUMIL account had incurred arrearages of more than 20 percent of the total
outstanding obligation.40 Thus, DBP had not only a right, but also a duty under the
law to foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMIL's
assets that DBP had foreclosed and purchased in the normal course. Petitioner bank
was likewise tasked to manage temporarily the operation of such assets either by
itself or through a subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets
pursuant to Section 6 of Act No. 3135.45 These assets were later conveyed to PNB for
a consideration, the terms of which were embodied in the Redemption
Agreement.46 PNB, as successor-in-interest, stepped into the shoes of DBP as

PASUMIL's creditor.47 By way of a Deed of Assignment,48 PNB then transferred to

NASUDECO all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we had the occasion to
resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable
for Marinduque Mining's unpaid obligations to Remington Industrial Sales Corporation
(Remington) after the two banks had foreclosed the assets of Marinduque Mining. We
likewise held that Remington failed to discharge its burden of proving bad faith on
the part of Marinduque Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial court's lifting of the corporate
mask.50 The CA did not point to any fact evidencing bad faith on the part of PNB and
its transferee.51 The corporate fiction was not used to defeat public convenience,
justify a wrong, protect fraud or defend crime.52 None of the foregoing exceptions
was shown to exist in the present case.53 On the contrary, the lifting of the corporate
veil would result in manifest injustice. This we cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid
obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly
authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners
contend that their takeover of the operations of PASUMIL did not involve any
corporate merger or consolidation, because the latter had never lost its separate
identity as a corporation.
A consolidation is the union of two or more existing entities to form a new entity
called the consolidated corporation. A merger, on the other hand, is a union whereby
one or more existing corporations are absorbed by another corporation that survives
and continues the combined business.54
The merger, however, does not become effective upon the mere agreement of the
constituent corporations.55Since a merger or consolidation involves fundamental
changes in the corporation, as well as in the rights of stockholders and creditors,
there must be an express provision of law authorizing them.56 For a valid merger or
consolidation, the approval by the Securities and Exchange Commission (SEC) of the
articles of merger or consolidation is required.57 These articles must likewise be duly
approved by a majority of the respective stockholders of the constituent
corporations.58
In the case at bar, we hold that there is no merger or consolidation with respect to
PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation
Code59 was not followed.
In fact, PASUMIL's corporate existence, as correctly found by the CA, had not been
legally extinguished or terminated.60 Further, prior to PNB's acquisition of the
foreclosed assets, PASUMIL had previously made partial payments to respondent for
the former's obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL

had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974,
another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to
respondent.61 LOI No. 11 explicitly provides that PNB shall study and submit
recommendations on the claims of PASUMIL's creditors.62 Clearly, the corporate
separateness between PASUMIL and PNB remains, despite respondent's insistence to
the contrary.63
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET
ASIDE. No pronouncement as to costs.
SO ORDERED.

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-48930

February 23, 1944

ANTONIO
vs.
FRANCISCO DE BORJA, respondent.

VAZQUEZ, petitioner,

x---------------------------------------------------------x
G.R. No. L-48931

February 23, 1944

FRANCISCO
vs.
ANTONIO VAZQUEZ, respondent.

DE

BORJA, petitioner,

OZAETA, J.:
This action was commenced in the Court of First Instance of Manila by Francisco de
Borja against Antonio Vazquez and Fernando Busuego to recover from them jointly
and severally the total sum of P4,702.70 upon three alleged causes of action, to wit:
First, that in or about the month of January, 1932, the defendants jointly and
severally obligated themselves to sell to the plaintiff 4,000 cavans of palay at P2.10
per cavan, to be delivered during the month of February, 1932, the said defendants
having subsequently received from the plaintiff in virtue of said agreement the sum

of P8,400; that the defendants delivered to the plaintiff during the months of
February, March, and April, 1932, only 2,488 cavans of palay of the value of
P5,224.80 and refused to deliver the balance of 1,512 cavans of the value of
P3,175.20 notwithstanding repeated demands. Second, that because of defendants'
refusal to deliver to the plaintiff the said 1,512 cavans of palay within the period
above mentioned, the plaintiff suffered damages in the sum of P1,000. And, third,
that on account of the agreement above mentioned the plaintiff delivered to the
defendants 4,000 empty sacks, of which they returned to the plaintiff only 2,490 and
refused to deliver to the plaintiff the balance of 1,510 sacks or to pay their value
amounting to P377.50; and that on account of such refusal the plaintiff suffered
damages in the sum of P150.
The defendant Antonio Vazquez answered the complaint, denying having entered into
the contract mentioned in the first cause of action in his own individual and personal
capacity, either solely or together with his codefendant Fernando Busuego, and
alleging that the agreement for the purchase of 4,000 cavans of palay and the
payment of the price of P8,400 were made by the plaintiff with and to the NatividadVasquez Sabani Development Co., Inc., a corporation organized and existing under
the laws of the Philippines, of which the defendant Antonio Vazquez was the acting
manager at the time the transaction took place. By way of counterclaim, the said
defendant alleged that he suffered damages in the sum of P1,000 on account of the
filing of this action against him by the plaintiff with full knowledge that the said
defendant had nothing to do whatever with any and all of the transactions mentioned
in the complaint in his own individual and personal capacity.
The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to
the plaintiff the sum of P3,175.20 plus the sum of P377.50, with legal interest on
both sums, and absolving the defendant Fernando Busuego (treasurer of the
corporation) from the complaint and the plaintiff from the defendant Antonio Vazquez'
counterclaim. Upon appeal to the Court of Appeals, the latter modified that judgment
by reducing it to the total sum of P3,314.78, with legal interest thereon and the costs.
But by a subsequent resolution upon the defendant's motion for reconsideration, the
Court of Appeals set aside its judgment and ordered that the case be remanded to
the court of origin for further proceedings. The defendant Vazquez, not being
agreeable to that result, filed the present petition for certiorari (G.R. No. 48930) to
review and reverse the judgment of the Court of Appeals; and the plaintiff Francisco
de Borja, excepting to the resolution of the Court of Appeals whereby its original
judgment was set aside and the case was ordered remanded to the court of origin
for further proceedings, filed a cross-petition for certiorari (G.R. No. 48931) to
maintain the original judgment of the Court of Appeals.
The original decision of the Court of Appeals and its subsequent resolutions on
reconsideration read as follows:
Es hecho no controvertido que el 25 de Febrero de 1932, el demandadoapelante vendio al demandante 4,000 cavanes de palay al precio de P2.10 el
cavan, de los cuales, dicho demandante solamente recibio 2,583 cavanes; y
que asimismo recibio para su envase 4,000 sacos vacios. Esta provbado que

de dichos 4,000 sacos vacios solamente se entregaron, 2,583 quedando en

poder del demandado el resto, y cuyo valor es el de P0.24 cada uno.
Presentada la demanda contra los demandados Antonio Vazquez y Fernando
Busuego para el pago de la cantidad de P4,702.70, con sus intereses legales
desde el 1.o de marzo de 1932 hasta su completo pago y las costas, el Juzgado
de Primera Instancia de Manila el asunto condenando a Antonio Vazquez a
pagar al demandante la cantidad de P3,175.20, mas la cantidad de P377.50,
con sus intereses legales, absolviendo al demandado Fernando Busuego de la
demanda y al demandante de la reconvencion de los demandados, sin especial
pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado
Antonio Vazquez, apuntado como principal error el de que el habia sido
condenado personalmente, y no la corporacion por el representada.
Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez
a favor de Francisco de Borja de los 4,000 cavanes de palay fue en su
capacidad de Presidente interino y Manager de la corporacion NatividadVazquez Sabani Development Co., Inc. Asi resulta del Exh. 1, que es la copia
al carbon del recibo otorgado por el demandado Vazquez, y cuyo original lo
habia perdido el demandante, segun el. Asi tambien consta en los libros de la
corporacion arriba mencionada, puesto que en los mismos se ha asentado
tanto la entrada de los P8,400, precio del palay, como su envio al gobierno en
pago de los alquileres de la Hacienda Sabani. Asi mismo lo admitio Francisco
de Borja al abogado Sr. Jacinto Tomacruz, posterior presidente de la
corporacion sucesora en el arrendamiento de la Sabani Estate, cuando el
solicito sus buenos oficios para el cobro del precio del palay no entregado. Asi
igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe
Veneracion, cuyo testimonio no ha sido refutado. Y asi se deduce de la misma
demanda, cuando se incluyo en ella a Fernando Busuego, tesorero de la
Natividad-Vazquez Sabani Development Co., Inc.
Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani
Development Co., Inc., que quedo insolvente y dejo de existir. El Juez
sentenciador declaro, sin embargo, al demandado Vazquez responsable del
pago de la cantidad reclamada por su negligencia al vender los referidos 4,000
cavanes de palay sin averiguar antes si o no dicha cantidad existia en las
bodegas de la corporacion.
Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a
Francisco de Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500
cavanes al precio de P2.00 el cavan, y decimos 'despues' porque esta ultima
venta aparece asentada despues de la primera. Segun esto, el apelante no
solamente obro con negligencia, sino interviniendo culpa de su parte, por lo
que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser
responsable subsidiariamente del pago de la cantidad objecto de la demanda.
En meritos de todo lo expuesto, se confirma la decision apelada con la
modificacion de que el apelante debe pagar al apelado la suma de P2,295.70
como valor de los 1,417 cavanes de palay que dejo de entregar al demandante,

mas la suma de P339.08 como importe de los 1,417 sacos vacios, que dejo de
devolver, a razon de P0.24 el saco, total P3,314.78, con sus intereses legales
desde la interposicion de la demanda y las costas de ambas instancias.
Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre
de 1942, y alegandose en la misma que cuando el apelante vendio los 1,500
cavanes de palay a Ah Phoy, la corporacion todavia tenia bastante existencia
de dicho grano, y no estando dicho extremo suficientemente discutido y
probado, y pudiendo variar el resultado del asunto, dejamos sin efecto nuestra
citada decision, y ordenamos la devolucion de la causa al Juzgado de origen
para que reciba pruebas al efecto y dicte despues la decision correspondiente.
Upon consideration of the motion of the attorney for the plaintiff-appellee in
case CA-G.R. No. 8676, Francisco de Borja vs. Antonio Vasquez et al., praying,
for the reasons therein given, that the resolution of December 22, 1942, be
reconsidered: Considering that said resolution remanding the case to the lower
court is for the benefit of the plaintiff-appellee to afford him opportunity to
refute the contention of the defendant-appellant Antonio Vazquez, motion
denied.
The action is on a contract, and the only issue pleaded and tried is whether the
plaintiff entered into the contract with the defendant Antonio Vazquez in his personal
capacity or as manager of the Natividad-Vazquez Sabani Development Co., Inc. The
Court of Appeals found that according to the preponderance of the evidence "the sale
made by Antonio Vazquez in favor of Francisco de Borja of 4,000 cavans of palay was
in his capacity as acting president and manager of the corporation Natividad-Vazquez
Sabani Development Co., Inc." That finding of fact is final and, it resolving the only
issue involved, should be determinative of the result.
The Court of Appeals doubly erred in ordering that the cause be remanded to the
court of origin for further trial to determine whether the corporation had sufficient
stock of palay at the time appellant sold, 1500 cavans of palay to Kwong Ah Phoy.
First, if that point was material to the issue, it should have been proven during the
trial; and the statement of the court that it had not been sufficiently discussed and
proven was no justification for ordering a new trial, which, by the way, neither party
had solicited but against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and this we shall now
discuss in connection with the original judgment of the Court of Appeals which the
plaintiff cross-petitioner seeks to maintain.
The action being on a contract, and it appearing from the preponderance of the
evidence that the party liable on the contract is the Natividad-Vazquez Sabani
Development Co., Inc. which is not a party herein, the complaint should have been
dismissed. Counsel for the plaintiff, in his brief as respondent, argues that altho by
the preponderance of the evidence the trial court and the Court of Appeals found that
Vazquez celebrated the contract in his capacity as acting president of the corporation
and altho it was the latter, thru Vazquez, with which the plaintiff had contracted and
which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that was

true from the point of view of a legal fiction, "ello no impede que tambien sea verdad
lo alegado en la demanda de que la misma persona de Vasquez fue la que contrato
con Borja y que la misma persona de Vasquez fue quien recibio la suma de P8,400."
But such argument is invalid and insufficient to show that the president of the
corporation is personally liable on the contract duly and lawfully entered into by him
in its behalf.
It is well known that a corporation is an artificial being invested by law with a
personality of its own, separate and distinct from that of its stockholders and from
that of its officers who manage and run its affairs. The mere fact that its personality
is owing to a legal fiction and that it necessarily has to act thru its agents, does not
make the latter personally liable on a contract duly entered into, or for an act lawfully
performed, by them for an in its behalf. The legal fiction by which the personality of
a corporation is created is a practical reality and necessity. Without it no corporate
entities may exists and no corporate business may be transacted. Such legal fiction
may be disregarded only when an attempt is made to use it as a cloak to hide an
unlawful or fraudulent purpose. No such thing has been alleged or proven in this
case. It has not been alleged nor even intimated that Vazquez personally benefited
by the contract of sale in question and that he is merely invoking the legal fiction to
avoid personal liability. Neither is it contended that he entered into said contract for
the corporation in bad faith and with intent to defraud the plaintiff. We find no legal
and factual basis upon which to hold him liable on the contract either principally or
subsidiarily.
The trial court found him guilty of negligence in the performance of the contract and
held him personally liable on that account. On the other hand, the Court of Appeals
found that he "no solamente obro con negligencia, sino interveniendo culpa de su
parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe
ser responsable subsidiariamente del pago de la cantidad objeto de la demanda." We
think both the trial court and the Court of Appeals erred in law in so holding. They
have manifestly failed to distinguish a contractual from an extracontractual
obligation, or an obligation arising from contract from an obligation arising from culpa
aquiliana. The fault and negligence referred to in articles 1101-1104 of the Civil Code
are those incidental to the fulfillment or nonfullfillment of a contractual obligation;
while the fault or negligence referred to in article 1902 is the culpa aquiliana of the
civil law, homologous but not identical to tort of the common law, which gives rise to
an obligation independently of any contract. (Cf. Manila R.R. Co. vs. Cia.
Trasatlantica, 38 Phil., 875, 887-890; Cangco vs. Manila R.R. Co., 38 Phil. 768.) The
fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence
in the fulfillment of the contract, did not make Vazquez principally or even subsidiarily
liable for such negligence. Since it was the corporation's contract, its nonfulfillment,
whether due to negligence or fault or to any other cause, made the corporation and
not its agent liable.
On the other hand if independently of the contract Vazquez by his fault or negligence
cause damaged to the plaintiff, he would be liable to the latter under article 1902 of
the Civil Code. But then the plaintiff's cause of action should be based on culpa
aquiliana and not on the contract alleged in his complaint herein; and Vazquez'

liability would be principal and not merely subsidiary, as the Court of Appeals has
erroneously held. No such cause of action was alleged in the complaint or tried by
express or implied consent of the parties by virtue of section 4 of Rule 17. Hence the
trial court had no jurisdiction over the issue and could not adjudicate upon it
(Reyes vs. Diaz, G.R. No. 48754.) Consequently it was error for the Court of Appeals
to remand the case to the trial court to try and decide such issue.
It only remains for us to consider petitioner's second assignment of error referring to
the lower courts' refusal to entertain his counterclaim for damages against the
respondent Borja arising from the bringing of this action. The lower courts having
sustained plaintiff's action. The finding of the Court of Appeals that according to the
preponderance of the evidence the defendant Vazquez celebrated the contract not in
his personal capacity but as acting president and manager of the corporation, does
not warrant his contention that the suit against him is malicious and tortious; and
since we have to decide defendant's counterclaim upon the facts found by the Court
of Appeals, we find no sufficient basis upon which to sustain said counterclaim.
Indeed, we feel that a a matter of moral justice we ought to state here that the
indignant attitude adopted by the defendant towards the plaintiff for having brought
this action against him is in our estimation not wholly right. Altho from the legal point
of view he was not personally liable for the fulfillment of the contract entered into by
him on behalf of the corporation of which he was the acting president and manager,
we think it was his moral duty towards the party with whom he contracted in said
capacity to see to it that the corporation represented by him fulfilled the contract by
delivering the palay it had sold, the price of which it had already received. Recreant
to such duty as a moral person, he has no legitimate cause for indignation. We feel
that under the circumstances he not only has no cause of action against the plaintiff
for damages but is not even entitled to costs.
The judgment of the Court of Appeals is reversed, and the complaint is hereby
dismissed, without any finding as to costs.

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. 119002

October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION, respondents.

DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour Services, Inc.,
through its managing director, wrote a letter to the Philippine Football Federation
(Federation), through its president private respondent Henri Kahn, wherein the
former offered its services as a travel agency to the latter.1 The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the
Federation to the South East Asian Games in Kuala Lumpur as well as various other
trips to the Peoples Republic of China and Brisbane. The total cost of the tickets
amounted to P449,654.83. For the tickets received, the Federation made two partial
payments, both in September of 1989, in the total amount of P176,467.50.2
On 4 October 1989, petitioner wrote the Federation, through the private respondent
a demand letter requesting for the amount of P265,894.33.3 On 30 October 1989,
the Federation, through the Project Gintong Alay, paid the amount of P31,603.00.4
On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000
as partial payment for the outstanding balance of the Federation.5 Thereafter, no
further payments were made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila.
Petitioner sued Henri Kahn in his personal capacity and as President of the Federation
and impleaded the Federation as an alternative defendant. Petitioner sought to hold
Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation
on the ground that Henri Kahn allegedly guaranteed the said obligation.6
Henri Kahn filed his answer with counterclaim. While not denying the allegation that
the Federation owed the amount P207,524.20, representing the unpaid balance for
the plane tickets, he averred that the petitioner has no cause of action against him
either in his personal capacity or in his official capacity as president of the Federation.
He maintained that he did not guarantee payment but merely acted as an agent of
the Federation which has a separate and distinct juridical personality.7
On the other hand, the Federation failed to file its answer, hence, was declared in
default by the trial court.8
In due course, the trial court rendered judgment and ruled in favor of the petitioner
and declared Henri Kahn personally liable for the unpaid obligation of the Federation.
In arriving at the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly
established that defendant Federation is a corporation. The trouble, however, is that
neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving
the corporate existence of the defendant Federation. In paragraph 2 of its complaint,
plaintiff asserted that Defendant Philippine Football Federation is a sports association
xxx. This has not been denied by defendant Henri Kahn in his Answer. Being the
President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the

assertion of the plaintiff that it is a mere sports association, if it were a domestic

corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no power to
enter into, or to ratify, a contract. The contract entered into by its officers or agents
on behalf of such association is not binding on, or enforceable against it. The officers
or agents are themselves personally liable.
x x x9
The dispositive portion of the trial courts decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff
the principal sum of P207,524.20, plus the interest thereon at the legal rate computed
from July 5, 1990, the date the complaint was filed, until the principal obligation is
fully liquidated; and another sum of P15,000.00 for attorneys fees.
The complaint of the plaintiff against the Philippine Football Federation and the
counterclaims of the defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn.10
Only Henri Kahn elevated the above decision to the Court of Appeals. On 21
December 1994, the respondent court rendered a decision reversing the trial court,
the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED
and SET ASIDE and another one is rendered dismissing the complaint against
defendant Henri S. Kahn.11
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of
the Federation. It rationalized that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not be held liable for the same
as said entity has a separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that
the Federation be held liable for the unpaid obligation. The same was denied by the
appellate court in its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly declaring
in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for
the unpaid obligation, it should be remembered that the trial court dismissed the
complaint against the Philippine Football Federation, and the plaintiff did not appeal
from this decision. Hence, the Philippine Football Federation is not a party to this
appeal and consequently, no judgment may be pronounced by this Court against the
PFF without violating the due process clause, let alone the fact that the judgment
dismissing the complaint against it, had already become final by virtue of the
plaintiffs failure to appeal therefrom. The alternative prayer is therefore similarly
DENIED.12
Petitioner now seeks recourse to this Court and alleges that the respondent court
committed the following assigned errors:13

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD

DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE
ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE
ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE
RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED
THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED
PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY
LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE
OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of the
Philippine Football Federation as a juridical person. In the assailed decision, the
appellate court recognized the existence of the Federation. In support of this, the CA
cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine
Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which
said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604
recognized the juridical existence of national sports associations. This may be gleaned
from the powers and functions granted to these associations. Section 14 of R.A. 3135
provides:
SEC. 14. Functions, powers and duties of Associations. The National Sports
Association shall have the following functions, powers and duties:
1. To adopt a constitution and by-laws for their internal organization and
government;
2. To raise funds by donations, benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and personal,
for the accomplishment of their purpose;
4. To affiliate with international or regional sports Associations after due consultation
with the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper accomplishment
of their purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. The National
sports associations shall have the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government
which shall be submitted to the Department and any amendment thereto shall take
effect upon approval by the Department: Provided, however, That no team, school,
club, organization, or entity shall be admitted as a voting member of an association

unless 60 per cent of the athletes composing said team, school, club, organization,
or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose subject to
the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for
the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic
and Asian Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due consultation
with the Department;
xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations clearly
indicate that these entities may acquire a juridical personality. The power to
purchase, sell, lease and encumber property are acts which may only be done by
persons, whether natural or artificial, with juridical capacity. However, while we agree
with the appellate court that national sports associations may be accorded corporate
status, such does not automatically take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling
act. We cannot agree with the view of the appellate court and the private respondent
that the Philippine Football Federation came into existence upon the passage of these
laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the
Philippine Football Federation. These laws merely recognized the existence of national
sports associations and provided the manner by which these entities may acquire
juridical personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports Association; organization and recognition. A National
Association shall be organized for each individual sports in the Philippines in the
manner hereinafter provided to constitute the Philippine Amateur Athletic Federation.
Applications for recognition as a National Sports Association shall be filed with the
executive committee together with, among others, a copy of the constitution and bylaws and a list of the members of the proposed association, and a filing fee of ten
pesos.
The Executive Committee shall give the recognition applied for if it is satisfied that
said association will promote the purposes of this Act and particularly section three
thereof. No application shall be held pending for more than three months after the
filing thereof without any action having been taken thereon by the executive
committee. Should the application be rejected, the reasons for such rejection shall
be clearly stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be considered as
unacted upon: Provided, however, That until the executive committee herein
provided shall have been formed, applications for recognition shall be passed upon
by the duly elected members of the present executive committee of the Philippine

Amateur Athletic Federation. The said executive committee shall be dissolved upon
the organization of the executive committee herein provided: Provided, further, That
the functioning executive committee is charged with the responsibility of seeing to it
that the National Sports Associations are formed and organized within six months
from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. Application for accreditation or recognition as
a national sports association for each individual sport in the Philippines shall be filed
with the Department together with, among others, a copy of the Constitution and ByLaws and a list of the members of the proposed association.
The Department shall give the recognition applied for if it is satisfied that the national
sports association to be organized will promote the objectives of this Decree and has
substantially complied with the rules and regulations of the Department: Provided,
That the Department may withdraw accreditation or recognition for violation of this
Decree and such rules and regulations formulated by it.
The Department shall supervise the national sports association: Provided, That the
latter shall have exclusive technical control over the development and promotion of
the particular sport for which they are organized.
Clearly the above cited provisions require that before an entity may be considered as
a national sports association, such entity must be recognized by the accrediting
organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under P.D. 604. This fact of
recognition, however, Henri Kahn failed to substantiate. In attempting to prove the
juridical existence of the Federation, Henri Kahn attached to his motion for
reconsideration before the trial court a copy of the constitution and by-laws of the
Philippine Football Federation. Unfortunately, the same does not prove that said
Federation has indeed been recognized and accredited by either the Philippine
Amateur Athletic Federation or the Department of Youth and Sports Development.
Accordingly, we rule that the Philippine Football Federation is not a national sports
association within the purview of the aforementioned laws and does not have
corporate existence of its own.
Thus being said, it follows that private respondent Henry Kahn should be held liable
for the unpaid obligations of the unincorporated Philippine Football Federation. It is
a settled principal in corporation law that any person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and
becomes personally liable for contract entered into or for other acts performed as
such agent.14 As president of the Federation, Henri Kahn is presumed to have known
about the corporate existence or non-existence of the Federation. We cannot
subscribe to the position taken by the appellate court that even assuming that the
Federation was defectively incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt with the Federation
in such a manner as to recognize and in effect admit its existence.15 The doctrine of
corporation by estoppel is mistakenly applied by the respondent court to the
petitioner. The application of the doctrine applies to a third party only when he tries
to escape liability on a contract from which he has benefited on the irrelevant ground

of defective incorporation.16 In the case at bar, the petitioner is not trying to escape
liability from the contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The
decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595
is hereby REINSTATED.
SO ORDERED.