Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-37331
March 18, 1933
FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all other stockholders of the Balatoc
Mining Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W.
BEAM, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden, acting in his own behalf and
that of all other stockholders of the Balatoc Mining Co. who might join in the action and contribute to the expense of the suit. With
the plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequently associated themselves. The defendants are the
Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal purpose
of the original action was to annul a certificate covering 600,000 shares of the stock of the Balatoc Mining Co., which have been
issued to the Benguet Consolidated Mining Co., and to secure to the Balatoc Mining Co., the restoration of a large sum of money
alleged to have been unlawfully collected by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of
the amount expended by the latter company under a contract between the two companies, bearing date of March 9, 1927. The
complaint was afterwards amended so as to include a prayer for the annulment of this contract. Shortly prior to the institution of
this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the certificate for 600,000 shares of the
Balatoc Mining Co. which constitute the principal subject matter of the action. This was done apparently to facilitate the splitting up
to the shares in the course of the sale or distribution. To prevent this the plaintiffs, upon filing their original complaint, procured a
preliminary injunction restraining the defendants, their agents and servants, from selling, assigning or transferring the 600,000
shares of the Balatoc Mining Co., or any part thereof, and from removing said shares from the Philippine Islands. This explains the
connection of Renz with the case. The other individual defendants are made merely as officials of the Benguet Consolidated Mining
Co. Upon hearing the cause the trial court dismissed the complaint and dissolved the preliminary injunction, with costs against the
plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. Briefly told these facts are as
follows: The Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedad anonima in conformity with the provisions
of Spanish law; while the Balatoc Mining Co. was organized in December 1925, as a corporation, in conformity with the provisions of
the Corporation Law (Act No. 1459). Both entities were organized for the purpose of engaging in the mining of gold in the Philippine
Islands, and their respective properties are located only a few miles apart in the subprovince of Benguet. The capital stock of the
Balatoc Mining Co. consists of one million shares of the par value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the original
stockholders were unable to supply the means needed for profitable operation. For this reason, the board of directors of the
corporation ordered a suspension of all work, effective July 31, 1926. In November of the same year a general meeting of the
company's stockholders appointed a committee for the purpose of interesting outside capital in the mine. Under the authority of
this resolution the committee approached A. W. Beam, then president and general manager of the Benguet Company, to secure the
capital necessary to the development of the Balatoc property. As a result of the negotiations thus begun, a contract, formally
authorized by the management of both companies, was executed on March 9, 1927, the principal features of which were that the
Benguet Company was to proceed with the development and construct a milling plant for the Balatoc mine, of a capacity of 100 tons
of ore per day, and with an extraction of at least 85 per cent of the gold content. The Benguet Company also agreed to erect an
appropriate power plant, with the aerial tramlines and such other surface buildings as might be needed to operate the mine. In
return for this it was agreed that the Benguet Company should receive from the treasurer of the Balatoc Company shares of a par
value of P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent upon the development
the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousand shares of the stock of the Balatoc
Company has been delivered to the Benguet Company, and the excess value of the work in the amount of P817,952.15 has been
returned to the Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its stockholders, and
at the time of the filing of the complaint the value of its shares had increased in the market from a nominal valuation to more than
eleven pesos per share. While the Benguet Company was pouring its million and a half into the Balatoc property, the arrangements
made between the two companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of
many thousands of the shares of the Balatoc Company. But as soon as the success of the development had become apparent, he
began this litigation in which he has been joined by two others of the eighty shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold any interest in a
mining corporation and that the contract by which the interest here in question was acquired must be annulled, with the
consequent obliteration of the certificate issued to the Benguet Company and the corresponding enrichment of the shareholders of
the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States, in the attention of the Philippine Commission was early
drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion of the corporation in English and
American law; and in the Philippine Bill, approved July 1, 1902, the Congress of the United States inserted certain provisions, under
the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter of granting of
franchises, privileges and concessions. These provisions are found in section 74 and 75 of the Act. The provisions of section 74 have
been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there is a provision referring to mining
corporations, which still remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful
for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except
irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the
enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of
legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of
the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to

hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American
corporate law.
For the purposes general description only, it may be stated that the sociedad anonima is something very much like the English joint
stock company, with features resembling those of both the partnership is shown in the fact that sociedad, the generic component of
its name in Spanish, is the same word that is used in that language to designate other forms of partnership, and in its organization it
is constructed along the same general lines as the ordinary partnership. It is therefore not surprising that for purposes of loose
translation the expression sociedad anonima has not infrequently the other hand, the affinity of this entity to the American
corporation has not escaped notice, and the expression sociedad anonima is now generally translated by the word corporation. But
when the word corporation is used in the sense of sociedad anonima and close discrimination is necessary, it should be associated
with the Spanish expression sociedad anonima either in a parenthesis or connected by the word "or". This latter device was adopted
in sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13 of that Act (No. 1459) the
words which we have already quoted from section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it is of course
obvious that whatever meaning originally attached to this provision in the Act of Congress, the same significance should be attached
to it in section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into Philippine law in the place
of the sociedad anonima, it was necessary to make certain adjustments resulting from the continued co-existence, for a time, of the
two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law "so far as such provisions may be applicable", and giving to the sociedades
anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of
the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates
to sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial
entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of
the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue
their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the
laws that were in force prior to the passage of this Act "in relation to their organization and method of transacting business and to
the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the
provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902 (Philippine Bill), generally
prohibiting corporations engaged in mining and members of such from being interested in any other corporation engaged in mining,
was amended by section 7 of Act No. 3518 of the Philippine Legislature, approved by Congress March 1, 1929. The change in the law
effected by this amendment was in the direction of liberalization. Thus, the inhibition contained in the original provision against
members of a corporation engaged in agriculture or mining from being interested in other corporations engaged in agriculture or in
mining was so modified as merely to prohibit any such member from holding more than fifteen per centum of the outstanding
capital stock of another such corporation. Moreover, the explicit prohibition against the holding by any corporation (except for
irrigation) of an interest in any other corporation engaged in agriculture or in mining was so modified as to limit the restriction to
corporations organized for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly penalizing the act of a
corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of section 13 of the Act. The Philippine
Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the Philippine Legislature, approved on February 18,
1919, but this provision was declared invalid by this court in Government of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399),
for lack of an adequate title to the Act. Subsequently the Legislature reenacted substantially the same penal provision in section 21
of Act No. 3518, under a title sufficiently broad to comprehend the subject matter. This part of Act No. 3518 became effective upon
approval by the Governor-General, on December 3, 1928, and it was therefore in full force when the contract now in question was
made.
This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act as it now stands. Omitting
the proviso, which seems not to be pertinent to the present controversy, said provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its amendments not otherwise penalized
therein, shall be punished by a fine of not more than five thousand pesos and by imprisonment for not more than five
years, in the discretion of the court. If the violation is committed by a corporation, the same shall, upon such violation being
proved, be dissolved by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal by order of
said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved in this controversy. The
first is whether the plaintiffs can maintain an action based upon the violation of law supposedly committed by the Benguet Company
in this case. The second is whether, assuming the first question to be answered in the affirmative, the Benguet Company, which was
organized as a sociedad anonima, is a corporation within the meaning of the language used by the Congress of the United States,
and later by the Philippine Legislature, prohibiting a mining corporation from becoming interested in another mining corporation. It
is obvious that, if the first question be answered in the negative, it will be unnecessary to consider the second question in this
lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with a sole view to the public
policy that should control in the granting of mining rights. Furthermore, the penalties imposed in what is now section 190 (A) of the
Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant Benguet Company has
committed no civil wrong against the plaintiffs, and if a public wrong has been committed, the directors of the Balatoc Company,
and the plaintiff Harden himself, were the active inducers of the commission of that wrong. The contract, supposing it to have been
unlawful in fact, has been performed on both sides, by the building of the Balatoc plant by the Benguet Company and the delivery to
the latter of the certificate of 600,000 shares of the Balatoc Company. There is no possibility of really undoing what has been done.
Nobody would suggest the demolition of the mill. The Balatoc Company is secure in the possession of that improvement, and talk
about putting the parties in status quo ante by restoring the consideration with interest, while the Balatoc Company remains in
possession of what it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet Company in many
millions of dollars in favor of individuals who have not the slightest equitable right to that money in a proposition to which no court
can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of the contracting parties has
been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the Balatoc Company, is wholly innocent to

participation in that wrong. The plaintiffs would then have us apply the second paragraph of article 1305 of the Civil Code which
declares that an innocent party to an illegal contract may recover anything he may have given, while he is not bound to fulfill any
promise he may have made. But, supposing that the first hurdle can be safely vaulted, the general remedy supplied in article 1305 of
the Civil Code cannot be invoked where an adequate special remedy is supplied in a special law. It has been so held by this court
in Go Chioco vs. Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising upon a usurious loan.
The reason given for the decision on this point was that the Usury Act, as amended, contains all the provisions necessary for the
effectuation of its purposes, with the result that the remedy given in article 1305 of the Civil Code is unnecessary. Much more is that
idea applicable to the situation now before us, where the special provisions give ample remedies for the enforcement of the law by
action in the name of the Government, and where no civil wrong has been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising upon our own statutes; and it would seem to be unnecessary
to ransack the American decisions for analogies pertinent to the case. We may observe, however, that the situation involved is not
unlike that which has frequently arisen in the United States under provisions of the National Bank Act prohibiting banks organized
under that law from holding real property. It has been uniformly held that a trust deed or mortgaged conveying property of this kind
to a bank, by way of security, is valid until the transaction is assailed in a direct proceeding instituted by the Government against the
bank, and the illegality of such tenure supplies no basis for an action by the former private owner, or his creditor, to annul the
conveyance. (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the
same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes &
Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), for the reason that
this case arose under a provision of the Foraker Act, a law analogous to our Philippine Bill. It appears that the registrar had refused
to register two deeds in favor of the Compaia Azucarera on the ground that the land thereby conveyed was in excess of the area
permitted by law to the company. The Porto Rican court reversed the ruling of the registrar and ordered the registration of the
deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter has until the State acts every power and capacity
that any other individual capable of acquiring lands, possesses. The corporation may exercise every act of ownership over
such lands; it may sue in ejectment or unlawful detainer and it may demand specific performance. It has an absolute title
against all the world except the State after a proper proceeding is begun in a court of law. ... The Attorney General is the
exclusive officer in whom is confided the right to initiate proceedings for escheat or attack the right of a corporation to hold
land.
Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the infraction of law supposed
to have been committed, we forego cny discussion of the further question whether a sociedad anonima created under Spanish law,
such as the Benguet Company, is a corporation within the meaning of the prohibitory provision already so many times mentioned.
That important question should, in our opinion, be left until it is raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with costs against the appellants.
Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and Butte, JJ., concur.
SECOND DIVISION
[G.R. No. L-7231. March 28, 1956.]
BENGUET CONSOLIDATED MINING CO., Petitioner, vs. MARIANO PINEDA, in his capacity as Securities and Exchange
Commissioner, Respondent. CONSOLIDATED MINES, INC., Intervenor.
DECISION
REYES, J. B. L., J.:
Appeal under Rule 43 from a decision of the Securities and Exchange Commissioner, denying the right of a sociedad anonima to
extend its corporate existence by amendment of its original articles of association, or alternatively, to reform and continue existing
under the Corporation Law (Act 1459) beyond the original period.
The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed Benguet for short), was organized on June 24,1903, as a
sociedad anonima regulated by Articles 151 et seq., of the Spanish Code of Commerce of 1886, then in force in the Philippines. The
articles of association expressly provided that it was organized for a term of fifty (50) years. In 1906, the governing Philippine
Commission enacted Act 1459, commonly known as the Corporation Law, establishing in the islands the American type of juridical
entities known as corporation, to take effect on April 1, 1906. Of its enactment, this Court said in its decision in Harden vs. Benguet
Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and 147:chanroblesvirtuallawlibrary
When the Philippine Islands passed to the sovereignty of the United States, the attention of the Philippine Commission was early
drawn to the fact there is no entity in Spanish law exactly corresponding to the motion of the corporation in English and American
law; chan roblesvirtualawlibraryand in the Philippine Bill, approved July 1, 1906, the Congress of the United States inserted certain
provisions, under the head of Franchises, which were intended to control the lawmaking power in the Philippine Islands in the
matter of granting of franchises, privileges and concessions. These provisions are found in sections 74 and 75 of the Act. The
provisions of section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916, but in section 75 there is a
provision referring to mining corporations, which still remains the law, as amended. This provision, in its original form, reads as
follows:chanroblesvirtuallawlibrary cralaw it shall be unlawful for any member of a corporation engaged in agriculture or mining
and for any corporation organized for any purpose except irrigation to be in any wise interested in any other corporation engaged in
agriculture or in mining.
Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commission entered upon the
enactment of a general law authorizing the creation of corporations in the Philippine Islands. This rather elaborate piece of
legislation is embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of
the commission was to introduce the American corporation into the Philippine Islands as the standard commercial entity and to
hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort of codification of American
corporate law.
As it was the intention of our lawmakers to stimulate the introduction of the American corporation into the Philippine law in the
place of the sociedad anonima, it was necessary to make certain adjustment resulting from the continued co-existence, for a time, of
the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law so far as such provisions may be applicable and giving to the sociedades
anonimas previously created in the Islands the option to continue business as such or to reform and organize under the provisions of
the Corporation Law. Again, in section 191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to
sociedades anonimas. The purpose of the commission in repealing this part of the Code of Commerce was to compel commercial
entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or other of

the partnership. To this provision was added another to the effect that existing sociedades anonimas, which elected to continue
their business as such, instead of reforming and reorganizing under the Corporation Law, should continue to be governed by the
laws that were in force prior to the passage of this Act in relation to their organization and method of transacting business and to
the rights of members thereof as between themselves, but their relations to the public and public officials shall be governed by the
provisions of this Act.
Specifically, the two sections of Act No. 1459 referring to sociedades anonimas then already existing, provide as
follows:chanroblesvirtuallawlibrary
SEC. 75. Any corporation or a sociedad anonima formed, organized, and existing under the laws of the Philippines on the date of
the passage of this Act, shall be subject to the provisions hereof so far as such provisions may be applicable and shall be entitled at
its option either to continue business as such corporation or to reform and organize under and by virtue of the provisions of this Act,
transferring all corporate interests to the new corporation which, if a stock corporation, is authorized to issue its shares of stock at
par to the stockholders or members of the old corporation according to their interests.
SEC. 191. The Code of Commerce, in so far as it relates to corporation or sociedades anonimas, and all other Acts or parts of Acts in
conflict or inconsistent with this Act, are hereby repealed with the exception of Act Numbered fifty-two, entitled An Act providing
for examinations of banking institutions in the Philippines, and for reports by their officers, as amended, and Act Numbered Six
hundred sixty-seven, entitled An Act prescribing the method of applying to governments of municipalities, except the city of Manila
and of provinces for franchises to contract and operate street railway, electric light and power and telephone lines, the conditions
upon which the same may be granted, certain powers of the grantee of said franchises, and of grantees of similar franchises under
special Act of the Commission, and for other purposes. Provided, however, That nothing in this Act contained shall be deemed to
repeal the existing law relating to those classes of associations which are termed sociedades colectivas, and sociedades de cuentas
en participacion, as to which association the existing law shall be deemed to be still in force; chan roblesvirtualawlibraryAnd
provided, further, That existing corporations or sociedades anonimas, lawfully organized as such, which elect to continue their
business as such sociedades anonimas instead of reforming and reorganizing under and by virtue of the provisions of this Act, shall
continue to be governed by the laws that were in force prior to the passage of this Act in relation to their organization and method
of transacting business and to the rights of members thereof as between themselves, but their relations to the public and public
officials shall be governed by the provisions of this Act.
As the expiration of its original 50 year term of existence approached, the Board of Directors of Benguet adopted in 1946 a
resolution to extend its life for another 50 years from July 3, 1946 and submitted it for registration to the Respondent Securities and
Exchange Commissioner. Upon advice of the Secretary of Justice (Op. No. 45, Ser. 1917) that such extension was contrary to law, the
registration was denied. The matter was dropped, allegedly because the stockholders of Benguet did not approve of the Directors
action.
Some six years later in 1953, the shareholders of Benguet adopted a resolution empowering the Director to effectuate the
extension of the Companys business life for not less than 20 and not more than 50 years, and this by either (1) an amendment to
the Articles of Association or Charter of this Company or (2) by reforming and reorganizing the Company as a Philippine Corporation,
or (3) by both or (4) by any other means. Accordingly, the Board of Directors on May 27, 1953, adopted a resolution to the
following effect
Be It
Resolved, that the Company be reformed, reorganized and organized under the provisions of section 75 and other provisions of the
Philippine Corporation Law as a Philippine corporation with a corporate life and corporate powers as set forth in the Articles of
Incorporation attached hereto as Schedule I and made a part hereof by this reference; chan roblesvirtualawlibraryand
Be It
FURTHER RESOLVED, that any five or more of the following shareholders of the Company be and they hereby are authorized as
instructed to act for and in behalf of the share holders of the Company and of the Company as Incorporators in the reformation,
reorganization and organization of the Company under and in accordance with the provisions aforesaid of said Philippine
Corporation Law, and in such capacity, they are hereby authorized and instructed to execute the aforesaid Articles of Incorporation
attached to these Minutes as Schedule I hereof, with such amendments, deletion and additions thereto as any five or more of
those so acting shall deem necessary, proper, advisable or convenient to effect prompt registration of said Articles under Philippine
Law; chan roblesvirtualawlibraryand five or more of said Incorporators are hereby further authorized and directed to do all things
necessary, proper, advisable or convenient to effect such registration.
In pursuance of such resolution, Benguet submitted in June, 1953, to the Securities and Exchange Commissioner, for alternative
registration, two documents:chanroblesvirtuallawlibrary (1) Certification as to the Modification of (the articles of association of) the
Benguet Consolidated Mining Company, extending the term of its existence to another fifty years from June 15, 1953; chan
roblesvirtualawlibraryand (2) articles of incorporation, covering its reformation or reorganization as a corporation in accordance
with section 75 of the Philippine Corporation Law.
Relying mainly upon the adverse opinion of the Secretary of Justice (Op. No. 180, s. 1953), the Securities and Exchange
Commissioner denied the registration and ruled:chanroblesvirtuallawlibrary
(1) That the Benguet, as sociedad anonima, had no right to extend the original term of corporate existence stated in its Articles of
Association, by subsequent amendment thereof adopted after enactment of the Corporation Law (Act No. 1459); chan
roblesvirtualawlibraryand
(2) That Benguet, by its conduct, had chosen to continue as sociedad anonima, under section 75 of Act No. 1459, and could no
longer exercise the option to reform into a corporation, specially since it would indirectly produce the effect of extending its life.
This ruling is the subject of the present appeal.
Petitioner Benguet contends:chanroblesvirtuallawlibrary
(1) That the proviso of section 18 of the Corporation Law to the effect
that the life of said corporation shall not be extended by amendment beyond the time fixed in the original articles.
does not apply to sociedades anonimas already in existence at the passage of the law, like Petitioner herein;
(2) That to apply the said restriction imposed by section 18 of the Corporation Law to sociedades anonimas already functioning
when the said law was enacted would be in violation of constitutional inhibitions;
(3) That even assuming that said restriction was applicable to it, Benguet could still exercise the option of reforming and
reorganizing under section 75 of the Corporation Law, thereby prolonging its corporate existence, since the law is silent as to the
time when such option may be exercised or availed of.
The first issue arises because the Code of Commerce of 1886 under which Benguet was organized, contains no prohibition (to extend
the period of corporate existence), equivalent to that set forth in section 18 of the Corporation Law. Neither does it expressly
authorize the extension. But the text of Article 223, reading:chanroblesvirtuallawlibrary
ART. 223. After the termination of the period for which commercial associations are constituted, it shall not be understood as
extended by the implied or presumed will of the members; chan roblesvirtualawlibraryand if the members desire to continue in

association, they shall draw up new articles, subject to all the formalities prescribed for their creation as provided in Article 119.
(Code of Commerce.)
would seem to imply that the period of existence of the sociedad anonimas (or of any other commercial association for that matter)
may be extended if the partners or members so agree before the expiration of the original period.
While the Code of Commerce, in so far as sociedades anonimas are concerned, was repealed by Act No 1459, Benguet claims that
article 223 is still operative in its favor under the last proviso of section 191 of the Corporation law (ante, p. 4 to the effect that
existing sociedades anonimas would continue to be governed by the law in force before Act 1459,
in relation to their organization and method of transacting business and to the rights of members among themselves, but their
relations to the public and public officials shall be governed by the provisions of this Act.
Benguet contends that the period of corporate life relates to its organization and the rights of its members inter se, and not to its
relations to the public or public officials.
We find this contention untenable.
The term of existence of association (partnership or sociedad anonima) is coterminous with their possession of an independent legal
personality, distinct from that of their component members. When the period expires, the sociedad anonima loses the power to
deal and enter into further legal relations with other persons; chan roblesvirtualawlibraryit is no longer possible for it to acquire new
rights or incur new obligations, have only as may be required by the process of liquidating and winding up its affairs. By the same
token, its officers and agents can no longer represent it after the expiration of the life term prescribed, save for settling its business.
Necessarily, therefore, third persons or strangers have an interest in knowing the duration of the juridical personality of the
sociedad anonima, since the latter cannot be dealt with after that period; chan roblesvirtualawlibrarywherefore its prolongation or
cessation is a matter directly involving the companys relations to the public at large.
On the importance of the term of existence set in the articles of association of commercial companies under the Spanish Code of
Commerce, D. Lorenzo Benito y Endar, professor of mercantile law in the Universidad Central de Madrid, has this to
say:chanroblesvirtuallawlibrary
La duracion de la Sociedad. La necesidad de consignar este requisito en el contrato social tiene un valor analogo al que dijimos
tenia el mismo al tratar de las compaias colectivas, aun cuando respecto de las anonimas no haya de tenerse en cuenta para nada
lo que dijimos entonces acerca de la trascendencia que ello tiene para los socios; chan roblesvirtualawlibraryporque no existiendo
en las anonimas la serie de responsibilidades de caracter personal que afectan a los socios colectivos, es claro que la duracion de la
sociedad importa conocerla a los socios y los terceros, porque ella marca al limite natural del desenvolvimiento de la empresa
constituida y el comienzo de la liquidacion de la sociedad. (3 Benito, Derecho Mercantil, 292-293.)
Interesa, pues, la fijacion de la vida de la compaia, desenvolviendose con normalidad y regularidad, tanto a los asociados como a
los terceros. A aquellos, porque su libertad economica, en cierto modo limitada por la existencia del contrato de compaia, se
recobra despues de realizada, mas o menos cumplidamente, la finalidad comun perseguida; chan roblesvirtualawlibraryy a los
terceros, porque les advierte el momento en que, extinguida la compaia, no cabe y a la creacion con ella de nuevas relaciones
juridicas, de que nazcan reciprocamente derechos y obligaciones, sino solo la liquidacion de los negocios hasta entonces convenidos,
sin otra excepcion que la que luego mas adelante habremos de sealar. (3 Benito, Derecho Mercantil, p. 245.)
The State and its officers also have an obvious interest in the term of life of associations, since the conferment of juridical capacity
upon them during such period is a privilege that is derived from statute. It is obvious that no agreement between associates can
result in giving rise to a new and distinct personality, possessing independent rights and obligations, unless the law itself shall decree
such result. And the State is naturally interested that this privilege be enjoyed only under the conditions and not beyond the period
that it sees fit to grant; chan roblesvirtualawlibraryand, particularly, that it be not abused in fraud and to the detriment of other
parties; chan roblesvirtualawlibraryand for this reason it has been ruled that the limitation (of corporate existence) to a definite
period is an exercise of control in the interest of the public (Smith vs. Eastwood Wire Manufacturing Co., 43 Atl. 568).
We cannot assent to the thesis of Benguet that its period of corporate existence has relation to its organization. The latter term is
defined in Websters International Dictionary as:chanroblesvirtuallawlibrary
The executive structure of a business; chan roblesvirtualawlibrarythe personnel of management, with its several duties and places
in administration; chan roblesvirtualawlibrarythe various persons who conduct a business, considered as a unit.
The legal definitions of the term organization are concordant with that given above:chanroblesvirtuallawlibrary
Organize or organization, as used in reference to corporations, has a well-understood meaning, which is the election of officers,
providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to
endow the legal entity with the capacity to transact the legitimate business for which it was created. Waltson vs. Oliver, 30 P. 172,
173, 49 Kan. 107, 33 Am. St. Rep. 355; chan roblesvirtualawlibraryTopeka Bridge Co. vs. Cummings, 3 Kan. 55, 77; chan
roblesvirtualawlibraryHunt vs. Kansas & M. Bridge Co., 11 Kan. 412, 439; chan roblesvirtualawlibraryAspen Water & Light Co., vs.
City of Aspen, 37 P. 728, 730, 6 Colo. App. 12; chan roblesvirtualawlibraryNemaha Coal & Mining Co., vs. Settle 38 P. 483, 484, 54
Kan. 424.
Under a statute providing that, until articles of incorporation should be recorded, the corporation should transact no business
except its own organization, it is held that the term organization means simply the process of forming and arranging into suitable
disposition the parties who are to act together in, and defining the objects of, the compound body, and that this process, even when
complete in all its parts, does not confer a franchise either valid or defective, but, on the contrary, it is only the act of the individuals,
and something else must be done to secure the corporate franchise. Abbott vs. Omaha Smelting & Refining Co. 4 Neb. 416, 421. (30
Words and Phrases, p. 282.)
It is apparent from the foregoing definitions that the term organization relates merely to the systematization and orderly
arrangement of the internal and managerial affairs and organs of the Petitioner Benguet, and has nothing to do with the prorogation
of its corporate life.
From the double fact that the duration of its corporate life (and juridical personality) has evident connection with the Petitioners
relations to the public, and that it bears none to the Petitioners organization and method of transacting business, we derive the
conclusion that the prohibition contained in section 18 of the Corporation Law (Act No. 1459) against extension of corporate life by
amendment of the original articles was designed and intended to apply to compaias anonimas that, like Petitioner Benguet, were
already existing at the passage of said law. This conclusion is reinforced by the avowed policy of the law to hasten the day when
compaias anonimas would be extinct, and replace them with the American type of corporation (Harden vs. Benguet Consolidated
Mining Co., supra), for the indefinite prorogation of the corporation life of sociedades anonimas would maintain the unnecessary
duality of organizational types instead of reducing them to a single one; chan roblesvirtualawlibraryand what is more, it would
confer upon these sociedades anonimas, whose obsolescence was sought, the advantageous privilege of perpetual existence that
the new corporation could not possess.
Of course, the retroactive application of the limitations on the terms of corporate existence could not be made in violation of
constitutional inhibitions specially those securing equal protection of the laws and prohibiting impairment of the obligation of
contracts. It needs no argument to show that if Act No. 1459 allowed existing compaias anonimas to be governed by the old law in

respect to their organization, methods of transacting business and the rights of the members among themselves, it was precisely in
deference to the vested rights already acquired by the entity and its members at the time the Corporation Law was enacted. But we
do not agree with Petitioner Benguet (and here lies the second issue in this appeal) that the possibility to extend its corporate life
under the Code of Commerce constituted a right already vested when Act No. 1459 was adopted. At that time, Benguets existence
was well within the 50 years period set in its articles of association; chan roblesvirtualawlibraryand its members had not entered
into any agreement that such period should be extended. It is safe to say that none of the members of Benguet anticipated in 1906
any need to reach an agreement to increase the term of its corporate life, barely three years after it had started. The prorogation
was purely speculative; chan roblesvirtualawlibrarya mere possibility that could not be taken for granted. It was as yet conditional,
depending upon the ultimate decision of the members and directors. They might agree to extend Benguets existence beyond the
original 50 years; chan roblesvirtualawlibraryor again they might not. It must be remembered that in 1906, the success of Benguet in
its mining ventures was by no means so certain as to warrant continuation of its operations beyond the 50 years set in its articles.
The records of this Court show that Benguet ran into financial difficulties in the early part of its existence, to the extent that, as late
as 1913, ten years after it was found, 301,100 shares of its capital stock (with a par value of $1 per share) were being offered for sale
at 25 centavos per share in order to raise the sum of P75,000 that was needed to rehabilitate the company (Hanlon vs. Hausermann
and Beam, 40 Phil., 796). Certainly the prolongation of the corporate existence of Benguet in 1906 was merely a possibility in futuro,
a contingency that did not fulfill the requirements of a vested right entitled to constitutional protection, defined by this Court in
Balboa vs. Farrales, 51 Phil., 498, 502, as follows:chanroblesvirtuallawlibrary
Vested right is some right or interest in the property which has become fixed and established, and is no longer open to doubt or
controversy,
A vested right is defined to be an immediate fixed right of present or future enjoyment, and rights are vested in contradistinction
to being expectant or contingent (Pearsall vs. Great Northern R. Co., 161 U. S. 646, 40 L. Ed. 838).
In Corpus Juris Secundum we find:chanroblesvirtuallawlibrary
Rights are vested when the right to enjoyment, present or prospective, has become the property of some particular person or
persons as a present interest. The right must be absolute, complete, and unconditional, independent of a contingency, and a mere
expectancy of future benefit, or a contingent interest in property founded on anticipated continuance of existing laws, does not
constitute a vested right. So, inchoate rights which have not been acted on are not vested. (16 C.J. S. 214-215.)
Since there was no agreement as yet to extend the period of Benguets corporate existence (beyond the original 50 years) when the
Corporation Law was adopted in 1906, neither Benguet nor its members had any actual or vested right to such extension at that
time. Therefore, when the Corporation Law, by section 18, forbade extensions of corporate life, neither Benguet nor its members
were deprived of any actual or fixed right constitutionally protected.
To hold, as Petitioner Benguet asks, that the legislative power could not deprive Benguet or its members of the possibility to enter at
some indefinite future time into an agreement to extend Benguets corporate life, solely because such agreements were authorized
by the Code of Commerce, would be tantamount to saying that the said Code was irrepealable on that point. It is a well settled rule
that no person has a vested interest in any rule of law entitling him to insist that it shall remain unchanged for his benefit. (New York
C. R. Co. vs. White, 61 L. Ed (U.S.) 667; chan roblesvirtualawlibraryMondou vs. New York N. H. & H. R. Co., 56 L. Ed. 327; chan
roblesvirtualawlibraryRainey vs. U. S., 58 L. Ed. 617; chan roblesvirtualawlibraryLilly Co. vs. Saunders, 125 ALR. 1308; chan
roblesvirtualawlibraryShea vs. Olson, 111 ALR. 998).
There can be no vested right in the continued existence of a statute or rule of the common law which precludes its change or
repeal, nor in any omission to legislate on a particular matter or subject. Any right conferred by statute may be taken away by
statute before it has become vested, but after a right has vested, repeal of the statute or ordinance which created the right does not
and cannot affect much right. (16 C.J. S. 222-223.)
It is a general rule of constitutional law that a person has no vested right in statutory privileges and exemptions (Brearly School vs.
Ward, 201 NY. 358, 40 LRA NS. 1215; chan roblesvirtualawlibraryalso, Cooley, Constitutional Limitations, 7th ed., p. 546).
It is not amiss to recall here that after Act No. 1459 the Legislature found it advisable to impress further restrictions upon the power
of corporations to deal in public lands, or to hold real estate beyond a maximum area; chan roblesvirtualawlibraryand to prohibit
any corporation from endeavouring to control or hold more than 15 per cent of the voting stock of an agricultural or mining
corporation (Act No. 3518). These prohibitions are so closely integrated with our public policy that Commonwealth Act No. 219
sought to extend such restrictions to associations of all kinds. It would be subversive of that policy to enable Benguet to prolong its
peculiar status of sociedad anonimas, and enable it to cast doubt and uncertainty on whether it is, or not, subject to those
restrictions on corporate power, as it once endeavoured to do in the previous case of Harden vs. Benguet Mining Corp. 58 Phil., 149.
Stress has been laid upon the fact that the Compaia Maritima (like Benguet, a sociedad anonima established before the enactment
of the Corporation Law) has been twice permitted to extend its corporate existence by amendment of its articles of association,
without objection from the officers of the defunct Bureau of Commerce and Industry, then in charge of the enforcement of the
Corporation Laws, although the exact question was never raised then. Be that as it may, it is a well established rule in this
jurisdiction that the government is never estopped by mistake or error on the part of its agents (Pineda vs. Court of First Instance of
Tayabas, 52 Phil., 803, 807), and that estopped cannot give validity to an act that is prohibited by law or is against public policy
(Eugenio vs. Perdido, (97 Phil., 41, May 19, 1955; chan roblesvirtualawlibrary19 Am. Jur. 802); chan roblesvirtualawlibraryso that
the Respondent, Securities and Exchange Commissioner, was not bound by the rulings of his predecessor if they be inconsistent with
law. Much less could erroneous decisions of executive officers bind this Court and induce it to sanction an unwarranted
interpretation or application of legal principles.
We now turn to the third and last issue of this appeal, concerning the exercise of the option granted by section 75 of the
Corporation Law to every sociedad anonima formed, organized and existing under the laws of the Philippines on the date of the
passage of this Act to either continue business as such sociedad anonima or to reform and organize under the provisions of the
Corporation Law. Petitioner-Appellant Benguet contends that as the law does not determine the period within which such option
may be exercised, Benguet may exercise it at any time during its corporate existence; chan roblesvirtualawlibraryand that in fact on
June 22, 1953, it chose to reform itself into a corporation for a period of 50 years from that date, filing the corresponding papers and
by-laws with the Respondent Commissioner of Securities and Exchange registration; chan roblesvirtualawlibrarybut the latter
refused to accept them as belatedly made.
The Petitioners argument proceeds from the unexpressed assumption that Benguet, as sociedad anonima, had not exercised the
option given by section 75 of the Corporation Law until 1953. This we find to be incorrect. Under that section, by continuing to do
business as sociedad anonima, Benguet in fact rejected the alternative to reform as a corporation under Act No. 1459. It will be
noted from the text of section 75 (quoted earlier in this opinion) that no special act or manifestation is required by the law from the
existing sociedades anonimas that prefer to remain and continue as such. It is when they choose to reform and organize under the
Corporation Law that they must, in the words of the section, transfer all corporate interests to the new corporation. Hence if they
do not so transfer, the sociedades anonimas affected are to be understood to have elected the alternative to continue business as
such corporation (sociedad anonima) 2

The election of Benguet to remain a sociedad anonima after the enactment of the Corporation Law is evidence, not only by its
failure, from 1906 to 1953, to adopt the alternative to transfer its corporate interests to a new corporation, as required by section
75; chan roblesvirtualawlibraryit also appears from positive acts. Thus around 1933, Benguet claimed and defended in court its
acquisition of shares of the capital stock of the Balatoc Mining Company, on the ground that as a sociedad anonima it (Benguet) was
not a corporation within the purview of the laws prohibiting a mining corporation from becoming interested in another mining
corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present proceedings, Benguet has urged its right to
amend its original articles of association as sociedad anonima and extend its life as such under the provisions of the Spanish Code
of Commerce. Such appeals to privileges as sociedad anonima under the Code of 1886 necessarily imply that Benguet has rejected
the alternative of reforming under the Corporation Law. As Respondent Commissioners order, now under appeal, has stated
A sociedad anonima could not claim the benefit of both, but must have to choose one and discard the other. If it elected to become
a corporation it could not continue as a sociedad anonima; chan roblesvirtualawlibraryand if it choose to remain as a sociedad
anonima, it could not become a corporation.
Having thus made its choice, Benguet may not now go back and seek to change its position and adopt the reformation that it had
formerly repudiated. The election of one of several alternatives is irrevocable once made (as now expressly recognized in article 940
of the new Civil Code of the Philippines):chanroblesvirtuallawlibrary such rule is inherent in the nature of the choice, its purpose
being to clarify and render definite the rights of the one exercising the option, so that other persons may act in consequence. While
successive choices may be provided there is nothing in section 75 of the Corporation Law to show or hint that a sociedad anonima
may make more than one choice thereunder, since only one option is provided for.
While no express period of time is fixed by the law within which sociedades anonimas may elect under section 75 of Act No. 1459
either to reform or to retain their status quo, there are powerful reasons to conclude that the legislature intended such choice to be
made within a reasonable time from the effectivity of the Act. To enable a sociedad anonima to choose reformation when its
stipulated period of existence is nearly ended, would be to allow it to enjoy a term of existence far longer than that granted to
corporations organized under the Corporation Law; chan roblesvirtualawlibraryin Benguets case, 50 years as sociedad anonima, and
another 50 years as an American type of corporation under Act 1459; chan roblesvirtualawlibrarya result incompatible with the
avowed purpose of the Act to hasten the disappearance of the sociedades anonimas. Moreover, such belated election, if permitted,
would enable sociedades anonimas to reap the full advantage of both types of organization. Finally, it would permit sociedades
anonimas to prolong their corporate existence indirectly by belated reformation into corporations under Act No. 1459, when they
could not do so directly by amending their articles of association.
Much stress is laid upon allegedly improper motives on the part of the intervenor, Consolidated Mines, Inc., in supporting the orders
appealed from, on the ground that intervenor seeks to terminate Benguets operating contract and appropriate the profits that are
the result of Benguets efforts in developing the mines of the intervenor. Suffice it to say that whatever such motives should be, they
are wholly irrelevant to the issues in this appeal, that exclusively concern the legal soundness of the order of
the Respondent Securities and Exchange Commissioner rejecting the claims of the Benguet Consolidated Mining Company to extend
its corporate life.
Neither are we impressed by the prophesies of economic chaos that would allegedly ensure with the cessation of Benguets
activities. If its mining properties are really susceptible of profitable operation, inexorable economic laws will ensure their
exploitation; chan roblesvirtualawlibraryif, on the other hand, they can no longer be worked at a profit, then catastrophe becomes
inevitable, whether or not Petitioner Benguet retains corporate existence.
Sustaining the opinions of the Respondent Securities and Exchange Commissioner and of the Secretary of Justice, we rule
that:chanroblesvirtuallawlibrary
(1) The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate existence by amendment of
the original articles, was intended to apply, and does apply, to sociedades anonimas already formed, organized and existing at the
time of the effectivity of the Corporation Law (Act No. 1459) in 1906;
(2) The statutory prohibition is valid and impairs no vested rights or constitutional inhibition where no agreement to extend the
original period of corporate life was perfected before the enactment of the Corporation Law;
(3) A sociedad anonima, existing before the Corporation Law, that continues to do business as such for a reasonable time after its
enactments, is deemed to have made its election and may not subsequently claim to reform into a corporation under section 75 of
Act No. 1459.
In view of the foregoing, the order appealed from is affirmed. Costs against Petitioner-AppellantBenguet Consolidated Mining
Company.
Padilla, Montemayor, Reyes, A. Labrador, Concepcion and Endencia, JJ., concur.
Separate Opinions
PARAS, C.J., dissenting:chanroblesvirtuallawlibrary
The Petitioner, Benguet Consolidated Mining Company, was organized as a sociedad anonima on June 24, 1903, under the provisions
of the Code of Commerce, and its term as fixed in the articles of association was fifty years. It has been a leading enterprise, long
and widely reputed to have pioneered in and boosted the mining industry, distributed profits among its shareholders, and given
employment to thousands. To be more approximately exact, the Petitioner has kept on its payrolls over four thousand Filipino
employees who have about twenty thousand dependents. The taxes and other dues paid by it to the Government have been in
enormous amounts. It has always been subject to such supervision and control of Government officials as are prescribed by law.
When, therefore, the Petitioner on June 3, 1953, presented all necessary documents to the Respondent, the Securities and Exchange
Commissioner, with a view to the extension of its term as a sociedad anonima for a period of fifty years from June 15, 1953; chan
roblesvirtualawlibrarywhen on June 22, 1953, it filed with said Respondent the necessary articles of incorporation and other
documents, with a view to reforming itself as a corporation under the Corporation Law for a period of fifty years from June 22, 1953,
followed by the filing on July 22, 1953, of the corresponding by-laws; chan roblesvirtualawlibraryand when on October 27, 1953,
the Respondent issued an order denying the registration of the instruments as well for extension as for reformation, Petitioners
corporate life was being snapped out with such lightning abruptness as undoubtedly to spell damage and prejudice not so much to
its shareholders as to its beneficiaries thousands of employees and their dependents and even to the Government which
stands to lose a good source of revenue.
The Petitioner contends (1) that the Respondent had the ministerial duty of registering the documents presented either for
extension of Petitioners term as a sociedad anonima or for its reformation under the Corporation Law, in the absence (as in this
case) of any pretense that said documents are formally defective or that Petitioners purposes are unlawful; chan
roblesvirtualawlibraryand (2) that as the Petitioner had organized as a sociedad anonima under the Code of Commerce, it has
acquired a vested right which cannot subsequently be affected or taken away by the Corporation Law enacted on April 1, 1906. I
would not dwell upon these contentions, because I hold that, even under the provisions of the Corporation Law, the Petitioner may
either extend its life as a sociedad anonima or reform as a corporation.

Section 75 of the Corporation Law provides:chanroblesvirtuallawlibrary

Any corporation or sociedad anonima formed, organized and existing under the laws of the Philippine Islands and lawfully
transacting business in the Philippine Islands on the date of the passage of this Act, shall be subject to the provisions hereof so far as
such provisions may be applicable and shall be entitled at its option either to continue business as such corporation or to reform and
organize under, and by virtue of the provisions of this Act, transferring all corporate interests to the new corporation which, if a
stock corporation, is authorized to issue its shares of stock at par to the stockholders or members of the old corporation according to
their interests.
Upon the other hand, section 191 reads as follows:chanroblesvirtuallawlibrary
The Code of Commerce, in so far as it relates to corporations or sociedades anonimas, and all other or parts of Acts in conflict or
inconsistent with this Act, are hereby repealed cralaw And provided, further, That existing corporations or sociedades anonimas
lawfully organized as such, which elect to continue their business as such sociedades anonimas instead of reforming and
reorganizing under and by virtue of the provisions of this Act, shall continue to be governed by the laws that were in force prior to
the passage of this Act in relation to their organization and method of transacting business and to the rights of members thereof as
between themselves, but their relations to the public and public officials shall be governed by the provisions of this Act.
It is noteworthy that section 75 has not limited the optional continuance of a sociedad anonima to its unexpired term, and section
191 expressly allows a sociedad anonima which has elected to continue its business as such to be governed by the laws in force prior
to the enactment of the Corporation Law in relation to its organization and method of transacting business and to the rights of
members as between themselves. It is admitted that the Code of Commerce, while containing no express provision allowing it, does
not prohibit a sociedad anonima from extending its term; chan roblesvirtualawlibraryand commentators Gay de Montella (Tratado
Practico de Sociedad Marcantiles Compaias Anonimas, Tomo II, p. 285) and Cesar Vivante (Tratado de Derecho Mercantil, pp.
254, 258) have observed that a sociedad anonima may prolong its corporate duration by amendment of its articles of association
before the expiration of the term.
When a business or commercial association is organized, the members are naturally interested in knowing not only their rights and
obligations but also the duration of their legal relations. While organization in a strict sense may refer to formalities like election of
officers, adoption of by-laws, and subscription and payment of capital stock, it cannot be spoken of or conceived in a wider sense
without necessarily involving the specification of the term of the entity formed. Extension of corporation life is thus essentially an
incident of organization and, in any event, a matter directly affecting or in relation to the rights of the shareholders as between
themselves, within the contemplation of section 191, and should accordingly be governed by the Code of Commerce. As pointed out
by the Supreme Court of Wyoming in the case of Drew vs. Beckwith, (114 P. 2d. 98), extension merely involves an additional
privilege to carry out the business of enterprise undertaken by the corporation, and is but an enlargement of the enterprise
undertaken by the corporation. It is true that the duration of a sociedad anonima is of some concern to the public and public
officials who ought to know the time when it will cease to exist and its business will be wound up. Notice to the world is however
served by the registration of Petitioners articles of association as a sociedad anonima or articles of incorporation as a reformed
corporation with the Securities and Exchange Commission.
When section 191 mentions relations to the public and public officials as being governed by the provisions of the Corporation Law,
the idea is obviously more to enable the Government to enforce its powers of supervision, inspection and investigation, than to
restrict the freedom of the corporate entity as to organizational or substantive rights of members as between themselves. In one of
the public hearings conducted by the Philippine Commission before the enactment of the Corporation Law, Commissioner Ide
pertinently expressed, Of course, whether they (sociedades) come under the new law or not they would be subject to inspection,
regulations, and examination for the purpose of protecting the community. The Attorney General in turn held that sociedades
anonimas, although governed by the Code of Commerce, are subject to the examination provided in section 54 of the Corporation
Law (5 Op. Atty. Gen. 442). In this connection, the Petitioner has admittedly subjected itself to the provisions of the Corporation
Law.
In Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, it was remarked:chanroblesvirtuallawlibrary The purpose of the
commission in repealing this part of the Code of Commerce was to compel commercial entities thereafter organized to incorporate
under the Corporation Law, unless they should prefer to adopt some form or other of the partnership. This Court already indicated
that the commercial entities compelled to incorporate under the Corporation Law were those organized after its enactment.
Section 6, subsection 4, of the Corporation Law provides that the term for which corporations shall exist shall not exceed fifty
years; chan roblesvirtualawlibrarysection 18 provides that the life of a corporation shall not be extended by amendment beyond the
time fixed in the original articles; chan roblesvirtualawlibraryand section 11 provides that upon the issuance by the Securities and
Exchange Commissioner of the certificate of incorporation, the persons organizing the corporation shall constitute a body politic and
corporate for the term specified in the articles of incorporation, not exceeding fifty years. The corporations contemplated are those
defined in section 22 corporations organized under the Corporation Law. They cannot be sociedades anonimas formed under the
Code of Commerce and licensed to continue as such in virtue of sections 75 and 191. Otherwise the words or sociedad anonima
would have been added to the term corporation in section 18, as was done in sections 75 and 191. A similar observation was made
in Harden vs. Benguet Consolidated Mining Co., supra:chanroblesvirtuallawlibraryBut when the word corporation is used in the
sense of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish expression sociedad
anonima either in parenthesis or connected by the word or. This latter device was adopted in sections 75 and 191 of the
Corporation Law.
The citation from 3 Benito, Derecho Mercantil, p. 245, invoked in the majority decision, to the effect that the duration of a sociedad
anonima is of interest both to its members and to third persons, is clearly an authority for our conclusions that the extension
of Petitioners term is in relation to the rights of members thereof as between themselves. Section 191 does not say that a
sociedad anonima shall be governed by the provisions of the Corporation Law when the matter involved affects not only the rights
of members thereof as between themselves but also the public and public officials.
We are also of the opinion that alternatively, under section 75, the Petitioner may elect to reform and organize under the
Corporation Law, transferring all its corporate interests to the new corporation. Contrary to the ruling of the Respondent, we are
convinced that, as no period was fixed within which it should exercise the option either of continuing as a sociedad anonima or
reforming and organizing under the Corporation Law, the Petitioner was entitled to have its articles of incorporation and by-laws
presented respectively on June 22 and July 22, 1953, registered by the Respondent. Section 75 did not take away Petitioners right to
exhaust its term as a sociedad anonima, already vested before the enactment of the Corporation Law, but merely granted it the
choice to organize as a regular corporation, instead of extending its life as a sociedad anonima. The only limitation imposed is that
prescribed in section 191, namely, that if a sociedad anonima elects to continue its business as such, it shall be governed by the prior
law in relation to its organization and method of transacting business and to the rights of its members as between themselves, and
by the provisions of the Corporation Law as to its relations to the public and public officials. If the intention were to fix a period for
reformation, the law would have expressly so provided, in the same way that section 19 fixes two years during which a corporation
should formally organize and commence the transaction of its business, otherwise its corporate powers would cease; chan

roblesvirtualawlibrarysection 77 fixes three years from the dissolution of a corporation within which it may clear and settle its
affairs; chan roblesvirtualawlibraryand section 78 fixes the same period of three years within which a corporation may convey its
properties to a trustee for the benefit of its stockholders and other interested persons.
It is not correct to argue that the Petitioner is not entitled to elect to continue as a sociedad anonima and at the same time reform
and organize as a regular corporation, because when it continued as a sociedad anonima after the passage of the Corporation Law
and during its full term of fifty years, it merely exercised a right it theretofore had; chan roblesvirtualawlibraryand the Petitioner can
be said properly to have availed itself of the other option only when in June 1953 it filed the necessary papers of incorporation
under the Corporation Law. It is likewise not accurate to contend that, as the Respondent ruled, the Petitioner could reform as and
be a regular corporation at most only for the remainder of its term as a sociedad anonima. Section 75, in allowing a sociedad
anonima to reform and organize under the Corporation Law, also authorizes the transfer of its corporate interests to the new
corporation. This new corporation should have the advantage of the prescribed maximum duration, regardless of the original term
of the old or substituted entity. There is no basis for the criticism that, if the Petitioner were allowed to exhaust its full term as a
sociedad anonima, and afterwards to reform as a regular corporation for another fifty years, it would have a span of life twice as
long as that granted to corporations organized under the Corporation Law. The simple reason is that the Petitioner was already a
corporate entity before the enactment of the Corporation Law, with a fixed duration under its original articles of association. It was
clearly not in parity with any corporation organized under and coming into existence after the effectivity of the Corporation Law
which has no choice on the matter and can therefore have only the prerogative granted by said law, no more no less.
The Respondent has suggested that the Petitioner, if desirous of continuing its business, may organize a new corporation a
suggestion which need not be made because no one would probably think of denying it that right. But we cannot see any cogent
reason or practical purpose for the suggestion. In the first place, the filing of Petitioners articles of incorporation and by-laws in July,
1953, in effect amounted to the formation of a new corporation. To require more is to give greater importance to form than to
substance. In the second place, the public and public officials may not as a matter of fact be adversely affected by allowing
the Petitioner to reform, instead of requiring it technically to form a new corporation. It will acquire no greater rights or obligations
by simple reformation than by newly organizing another corporation. Conversely, the public and public officials will acquire no
greater benefit or control by requiring the Petitioner to form a new corporation, than by allowing it to reform. And as already stated,
whatever interest the public and public officials may have in determining the duration of a sociedad anonima or any corporation for
that matter, is amply protected by registration in the Securities and Exchange Commission.
The Respondent and the intervenor, Consolidated Mines, Inc., have tried to show that the Petitioner holds or owns interests in eight
mining companies, in violation of section 13, subsection 5 of the Corporation Law, in that it has operating contracts with the
intervenor and seven other mining companies, besides owning the majority shares in Balatoc Mining Co. This matter has not merited
any attention or favorable comment in the majority decision, and rightly of course. Even so, we may observe that the alleged
violation was not the subject of any finding by the Respondent, nor relied upon in his order of denial; chan roblesvirtualawlibrarythat
the Petitioner has denied the charge; chan roblesvirtualawlibrarythat the holding by the Petitioner of shares of stock in Balatoc
Mining Co., if really illegal, may look into only in a quo warranto proceeding instituted by the Government; chan
roblesvirtualawlibrarythat at any rate the Petitioner has always been ready and willing to dispose of said shares and, in a proper
proceeding, it should be given reasonable time to do so, as this Court gave the Philippine Sugar Estates a period of six months after
final decision within which to liquidate, dissolve and separate absolutely in every respect and in all of its relations, complained of in
the petition, with the Tayabas Land Company (Government vs. Philippine Sugar Estates Co., 38 Phil., 15).
With special reference to the intervenor, it may be of some moment to know the antecedents and nature of business relations
existing between it and the Petitioner, at least to demonstrate the righteousness of the position of one or the other even from a
factual point of view. The following excerpts from Petitioners Reply to a portion of Intervenors Brief are in
point:chanroblesvirtuallawlibrary
What has happened in our case is that prior to the execution of the Operating Agreement of July 9, 1934, the stockholders,
directors, and officers of the intervenor, Consolidated Mines, Inc., did not want to risk one centavo of their own funds for the
development of their chrome ore mining claims in Zambales province, and proposed to the Petitioner herein, Benguet Consolidated
Mining Company, to explore, develop and operate their mining claims, Benguet to furnish all the funds that might be necessary, and
to explore, develop, mine and concentrate and market all the pay are found on or within paid claims or properties, the intervenor,
Consolidated Mines, Inc., and the Petitioner, Benguet Consolidated Mining Company, after the latter had reimbursed itself for all its
advances, to divide half and half the excess of receipts over disbursements. Benguet agreed to it, and advanced approximately three
million pesos, one-half thereof before the war, and the other half after the war (the intervenors properties having been destroyed
during the war). Paragraph XII of the intervenors complaint in the civil action instituted by it against Benguet in the Court of First
Instance of Manila, No. 18938, and to which counsel for the intervenor refer in page 5 of their brief, makes mention of the large
sums of money that Benguet advanced, as follows:chanroblesvirtuallawlibrary
Initial advances amounting to approximately P1,500,000 made by Defendant during the first phases of said Operating Agreement
which had been fully reimbursed to it before the war, end of the amounts likewise advanced by it (Benguet) for rehabilitation
amounting to close P1,500,000.00.
While Benguet risked and poured approximately three million pesos (P3,000,000) into the venture, and while Benguet was looking
for, and establishing, a market for intervenors chrome ore, the intervenor, Consolidated Mines, Inc., considered the said Operating
Agreement of July 9, 1934, as valid. Now that Benguets efforts have been crowned with success, and Benguet has established a
market for intervenors chrome ore, the intervenor claims that its said operating Agreement of July 9, 1934, with the Petitioner,
Benguet, is contrary to law because Benguet has become interested in intervenors chrome ore mining claims (although the
agreement expressly states that Benguet has no interest therein), and objects to the registration of the documents which Benguet
filed with the Respondent Securities and Exchange Commissioner, extending its life as a sociedad anonima, and reforming itself s a
corporation, in accordance with the provisions of section 75 of the Corporation Law.
Under the foregoing facts, the intervenor, Consolidated Mines, Inc., cannot be heard to complain against Benguet. No court can
give now a helping hand to the intervenor, which claims that Benguet no longer lives, and wants to keep for itself all the products of
Benguets efforts after the latter risked into the venture approximately three million pesos (P3,000,000).
The foregoing considerations may not constitute a legal justification for ruling that the Petitionershould be allowed either to extend
its life as a sociedad anonima or to reform and organize under the provisions of the Corporation Law, but they may aid in resolving
in Petitioners favor and doubt as to the clarity or definiteness of sections 75 and 191 of the Corporation Law regarding its right to
exercise either option in the manner claimed by it.
The same result may be arrived at if, in addition, we bear in mind the possible economic harm that may be brought about by the
affirmance of the order complained of. This aspect is adequately touched in Petitioners brief, as follows:chanroblesvirtuallawlibrary
1. A loss of employment in the Baguio district by about 4,000 Filipino and a loss of direct living from the Benguet operation
supplied to 20,000, that is, the 4,000 employed and their dependents.

(a) This would be calamity to the district of the highest order which could very well produce a snow balling depression which could
react all over the Philippine Islands.
2. Losses of direct and indirect taxes to the Philippine Government in an extremely large yearly amount.
3. No one would be able to continue the Benguet and Balatoc mines in operation should a liquidation of Benguet take place
because the net profits after labor and material costs and taxes in the last two years or more from the gold mining operations have
not warranted their continued operation as independent units. The profits in 1953 certainly do not warrant it. It is merely a case of
taking gold out of the ground in order to pay for labor, materials and taxes with very little return to the stockholders and on the
huge investment made in the reconstruction since 1946.
(a) The relief provided by the elimination of the 17 per cent Excise Tax, the 7 per cent Compensating Tax and the lowering of the
Extraction Tax, when counter-balanced against consistently increasing costs from month to month up to this very month, is now
nothing but an offsetting item against constantly increasing costs.
For whatever persuasive effect it may have, we cannot help calling attention to the fact that there are only about nine sociedades
anonimas in the country, foremost among them being Compaia Maritima, which have existed for years and along with
the Petitioner figured prominently in our economic development. Compaia Maritima, in particular, has been twice allowed to
extend its life by amendment of its articles of incorporation. It may be argued that if there was an official mistake in acceding to the
extension of the term of Compaia Maritima, the same should not warrant the commission of another mistake. But it will go to
show that sections 75 and 191 of the Corporation Law are, on the points herein involved, of doubtful construction; chan
roblesvirtualawlibraryand it is for this reason that we had to advert hereinabove to the somewhat unequitable position of the
intervenor and to the possible adverse effect on Philippine economy of the abrupt termination of Petitioners corporate existence.
By and large, it is my considered opinion that the Respondents order of denial dated October 27, 1953, should be reversed and
the Respondent ordered to register at least the documents presented by the Petitioner, reforming and organizing itself as a
corporation under the provisions of the Corporation Law. This would be in line with the policy of doing away with sociedad
anonimas, at the same time saving the goose that lays the golden egg.
Jugo and Bautista Angelo, JJ., concur.
Endnotes:chanroblesvirtuallawlibrary
2. It must be remembered that sections 75 and 191 of the Corporation law use the phrase corporation or sociedad anonima thus
employing corporation as the equivalent legal designation in English of the Spanish term sociedad anonima, in designating the
same entity. See Harden vs. Benguet Cons. Mining Co., 58 Phil., p. 146.

SECOND DIVISION
BIENVENIDO EJERCITO and G.R. No. 172595
JOSE MARTINEZ,
Petitioners, Present:
QUISUMBING, J.*
Chairperson,
- versus - CARPIO MORALES,
Acting Chairperson,
TINGA,
VELASCO, JR., and
M.R. VARGAS CONSTRUCTION, BRION, JJ.
MARCIAL R. VARGAS, Sole Owner,
**
RENATO AGARAO,
Project Foreman, Promulgated:
Respondents.
April 10, 2008
x---------------------------------------------------------------------------x
DECISION
TINGA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, assailing the Court of Appeals
Decision[1] and Resolution[2] in CA-G.R. SP No. 89001. The appellate courts decision dismissed the petition for certiorari, which
sought to set aside the Order[3] dated 08 November 2004 issued by Hon. Marie Christine Jacob, Presiding Judge of the Regional Trial
Court (RTC) of Quezon City, Branch 100. The appellate courts resolution denied petitioners motion for reconsideration of the
decision.
As culled from the records, the following factual antecedents appear:
On 5 March 2004, the City Government of Quezon City, represented by Mayor Feliciano Belmonte, Jr., entered into a
construction contract[4] with M.R. Vargas Construction, represented by Marcial Vargas in his capacity as general manager of the said
business enterprise, for the improvement and concreting of Panay Avenue.[5] Pursuant to the contract, the business enterprise
commenced its clearing operations by removing the structures and uprooting the trees along the thoroughfare. Its
foreman, Renato Agarao, supervised the clearing operations.[6]
Claiming
that the clearing
operations lacked the necessary permit and prior
consultation,
petitioners Bienvenido Ejercito and Jose Martinez, as well as a certain Oscar Baria, brought the matter to the attention of
the barangay authorities, Mayor Belmonte, Senator Ma. Ana Consuelo A.S. Madrigal, the Department of Environment and Natural
Resources and the Philippine Coconut Authority.[7]
The efforts of petitioners proved unsuccessful. Hence, on 10 September 2004, they filed a petition for injunction before the
Quezon City RTC. The petition named M.R. Vargas Construction Co., represented by herein Marcial R. Vargas and Renato Agarao, as
[8]
respondent.

[9]

The Petition, docketed as Civil Case No. Q-04-53687, indicated that Respondent M.R. Vargas Construction, is an entity,
th
with office address at the 4 Floor, President Tower, Timog Avenue corner Scout Ybardaloza [sic] St., Quezon City, represented
herein by its President Marcial Vargas and its construction foreman Renato Agarao, where they may be served with summons and
other court processes.[10]
The petition was accompanied with an application for a temporary restraining order (TRO) and a writ of preliminary
injunction.[11] Thus, the Office of the Clerk of Court forthwith issued summons and notice of raffle on 10 September 2004. [12] Upon
service of the processes on the aforementioned address, they were returned unserved on the ground that respondent enterprise
was unknown thereat.[13]
The petition was subsequently raffled to the sala of Judge Jacob, before which petitioners application for a temporary
restraining order was heard on 15 September 2004. [14] On the same day, when Agarao was also present in court, Judge Jacob issued
[15]
a TRO directing respondent enterprise to desist from cutting, damaging or transferring the trees found along Panay Avenue.
On 23 September 2004, the Mangoba Tan Agus Law Offices filed a special appearance on behalf of respondent enterprise
and moved for the dismissal of the petition as well as the quashal of the temporary restraining order on the ground of lack of
jurisdiction over respondent enterprise. The motion also assailed the raffle of the case for having been conducted in violation of
Section 4, Rule 58 of the Rules of Court; the issuance of the TRO without requiring the posting of a bond; the failure to implead the
Government of Quezon City despite its being the real party-in-interest; and petitioners application for the injunctive writ which was
allegedly grossly defective in form and substance.[16]
The motion to dismiss the petition and to quash the TRO was heard on 24 September 2004. [17] Before the hearing, a court
interpreter showed to respondent enterprises counsel a copy of the summons and of the notice of raffle in which appear a signature
[18]
at the bottom of each copy, apparently indicating the receipt of the summons. On the mistaken belief that the summons was
received by respondent enterprise, at the hearing of the motion, its counsel withdrew two of the grounds stated in the motion, to
wit, lack of jurisdiction and irregularity in the raffle of the case. [19]
At the hearing of petitioners application for a writ of preliminary injunction on 1 October 2004, the counsel for respondent
[20]
enterprise manifested that he was adopting the arguments in the motion to quash the TRO. On 6 October 2004, the RTC issued an
[21]
Order granting petitioners application for a writ of preliminary injunction.
On 7 October 2004, counsel for respondent enterprise filed a manifestation with urgent omnibus motion to nullify the
proceedings and to cite petitioners and the process server in contempt of court. [22] He argued that respondent enterprise failed to
receive the summons, alleging that it was herein petitioner Jose Martinez who signed as recipient thereof as well as of the notice of
[23]
raffle that was served on 10 September 2004.
On 18 October 2004, the writ of preliminary injunction was issued. Subsequently, petitioners filed a motion for ocular
inspection and another motion praying that respondent enterprise be ordered to
restore the structures damaged by its clearing operations.

case.

[26]

[24]

On 8 November 2004, the RTC issued the assailed Order,[25] nullifying the proceedings thus far conducted in the
Petitioners sought reconsideration, but the motion was denied in an Order dated 20 December 2004. [27]

Thus, petitioners filed a petition for certiorari before the Court of Appeals assailing the 8 November 2004 Order issued by
[28]
Judge Jacob. This time, aside from Judge Jacob and the enterprise M.R. Vargas Construction itself, the petition also
named Marcial R. Vargas and Renato Agarao, the enterprises owner and foreman, respectively, as individual respondents. The
separate addresses of said respondents were also indicated in the initial part of the petition.
It was argued in the petition that Judge Jacob committed grave abuse of direction in nullifying the proceedings on the
ground of lack of jurisdiction in view of Agaraos presence at the hearing on petitioners application for TRO, in failing to act on
petitioners pending motions and in directing instead the issuance of new summons on respondent enterprise. [29]

On 10 October 2005, the Court of Appeals rendered the assailed Decision dismissing the petition for certiorari for lack of
merit.[30] In its Order dated 28 April 2006, the Court of Appeals denied petitioners motion for reconsideration.
Hence, the instant petition attributes the following errors to the Court of Appeals:
I.
THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL COURT DID NOT OBTAIN
JURISDICTION OVER THE RESPONDENTS, DEPSITE THE RECEIPT OF COURT PROCESSES AND VOLUNTARY
APPEARANCE BEFORE THE COURTS.
II.
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE WITHDRAWAL BY PRIVATE RESPONDENTS OF
[31]
THE GROUND OF ABSENCE OF JURISDICTION OVER ITS PERSON CONSTITUTED A WAIVER OF SUCH OBJECTION
The instant petitionwhich similarly impleads the enterprise, M.R. Vargas Construction, Marcial R. Vargas
and Renato Agarao as respondentsraises two issues, namely: (1) whether the trial court acquired jurisdiction over respondent
enterprise and (2) whether the defense of lack of jurisdiction had been waived.

Jurisdiction over the defendant is acquired either upon a valid service of summons or the defendants voluntary appearance
in court. When the defendant does not voluntarily submit to the courts jurisdiction or when there is no valid service of summons,
any judgment of the court, which has no jurisdiction over the person of the defendant is null and void. In an action
strictly in personam, personal service on the defendant is the preferred mode of service, that is, by handing a copy of the summons
to the defendant in person.[32]
Citing the jurisdictional implications of the failure of service of summons, the Court of Appeals concluded that no grave
abuse of discretion was committed by Judge Jacob in nullifying the proceedings thus far conducted in the case based on the finding
that the summons had not been served on respondent enterprise and that Agarao, despite being present at the 15 September 2004
hearing, was not authorized to represent respondent enterprise in said hearing.
Petitioners take exception. They argue that the trial court acquired jurisdiction over respondent enterprise, an entity
without juridical personality, through the appearance of its foreman, Agarao, at the 15 September 2004 hearing on the TRO
application. Petitioners theorize that the voluntary appearance of Agarao in said hearing was equivalent to service of summons
binding upon respondent enterprise, following by analogy, Section 8, Rule 14 [33] which allows the service of summons on any of the
defendants associated to an entity without juridical personality. Furthermore, they contend that the receipt by a certain
Rona Adol of the court processes was binding upon respondent enterprise because the latter did not deny the authority of Adol to
receive communications on its behalf.
Petitioners argument is untenable.
At the outset, it is worthy to note that both the Court of Appeals and the trial court found that summons was not served on
respondent enterprise. The Officers Return stated essentially that the server failed to serve the summons on respondent enterprise
because it could not be found at the address alleged in the petition. This factual finding, especially when affirmed by the appellate
court, is conclusive upon this Court and should not be disturbed because this Court is not a trier of facts.
A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the
enterprise. The law does not vest a separate legal personality on the sole proprietorship or empower it to file or defend an action in
court.[34] Only natural or juridical persons or entities authorized by law may be parties to a civil action and every action must be
[35]
prosecuted and defended in the name of the real parties-in-interest.
The records show that respondent enterprise, M.R. Vargas Construction Co., is a sole proprietorship and, therefore, an
entity without juridical personality. Clearly, the real party-in-interest is Marcial R. Vargas who is the owner of the enterprise. Thus,
the petition for injunction should have impleaded him as the party respondent either simply by mention of his name or by
denominating him as doing business under the name and style of M.R. Vargas Construction Co. It was erroneous to refer to him, as
the petition did in both its caption and body, as representing the enterprise. Petitioners apparently realized this procedural lapse
when in the petition for certiorari filed before the Court of Appeals and in the instant petition, M.R. Vargas Construction, Marcial R.
Vargas and Renato Agaro were separately named as individual respondents.
Since respondent enterprise is only a sole proprietorship, an entity without juridical personality, the suit for injunction may
be instituted only against its owner, Marcial Vargas. Accordingly summons should have been served on Vargas himself, following
[36]
[37]
Rule 14, Sections 6 and 7 of the Rules of Court on personal service and substituted service. In the instant case, no service of
summons, whether personal or substituted, was effected on Vargas. It is well-established that summons upon a respondent or a
defendant must be served by handing a copy thereof to him in person or, if he refuses to receive it, by tendering it to him. Personal
service of summons most effectively ensures that the notice desired under the constitutional requirement of due process is
accomplished. If however efforts to find him personally would make prompt service impossible, service may be completed by
substituted service, i.e., by leaving copies of the summons at his dwelling house or residence with some person of suitable age and
discretion then residing therein or by leaving the copies at his office or regular place of business with some competent person in
charge thereof.[38]
The modes of service of summons should be strictly followed in order that the court may acquire jurisdiction over the
respondents, and failure to strictly comply with the requirements of the rules regarding the order of its publication is a fatal defect in
the service of summons. It cannot be overemphasized that the statutory requirements on service of summons, whether personally,
by substituted service or by publication, must be followed strictly, faithfully and fully, and any mode of service other than that
prescribed by the statute is considered ineffective. [39]
Agarao was not a party respondent in the injunction case before the trial court. Certainly, he is not a real party-in-interest
against whom the injunction suit may be brought, absent any showing that he is also an owner or he acts as an agent of respondent
enterprise. Agarao is only a foreman, bereft of any authority to defend the suit on behalf of respondent enterprise. As earlier
mentioned, the suit against an entity without juridical personality like respondent enterprise may be instituted only by or against its
owner. Impleading Agarao as a party-respondent in the suit for injunction would have no legal consequence. In any event, the
petition for injunction described Agarao only as a representative of M.R. Vargas Construction Co., which is a mere inconsequentiality
considering that only Vargas, as its sole owner, is authorized by the Rules of Court to defend the suit on behalf of the enterprise.
Despite Agaraos not being a party-respondent, petitioners nevertheless confuse his presence or attendance at the hearing
on the application for TRO with the notion of voluntary appearance, which interpretation has a legal nuance as far as jurisdiction is
concerned. While it is true that an appearance in whatever form, without explicitly objecting to the jurisdiction of the court over the
person, is a submission to the jurisdiction of the court over the person, the appearance must constitute a positive act on the part of
[40]
the litigant manifesting an intention to submit to the courts jurisdiction. Thus, in the instances where the Court upheld the
jurisdiction of the trial court over the person of the defendant, the parties showed the intention to participate or be bound by the
[41]
proceedings through the filing of a motion, a plea or an answer.
Neither is the service of the notice of hearing on the application for a TRO on a certain Rona Adol binding on respondent
enterprise. The records show that Rona Adol received the notice of hearing on behalf of an entity named JCB. More importantly, for
purposes of acquiring jurisdiction over the person of the defendant, the Rules require the service of summons and not of any other
court processes.

Petitioners also contend that respondent enterprise waived the defense of lack of jurisdiction when its counsel actively
demanded positive action on the omnibus motion. The argument is implausible.
It should be noted that when the defendants appearance is made precisely to object to the jurisdiction of the court over his
[42]
person, it cannot be considered as appearance in court. Such was the purpose of the omnibus motion, as counsel for respondent
enterprise precisely manifested therein that he erroneously believed that Vargas himself had received the summons when in fact it
was petitioner Martinez who signed as recipient of the summons. Noteworthy is the fact that when the counsel first appeared in
court his appearance was special in character and was only for the purpose of questioning the courts jurisdiction over Vargas,
considering that the latter never received the summons. However, the counsel was shown a copy of the summons where a signature
appears at the bottom which led him to believe that the summons was actually received by Vargas when in fact it was petitioner
Martinez himself who affixed his signature as recipient thereof. When the counsel discovered his mistake, he lost no time pleading
that the proceedings be nullified and that petitioners and the process server be cited for contempt of court. Both the trial and
appellate courts concluded that the improvident withdrawal of the defense of lack of jurisdiction was an innocuous error,
proceeding on the undeniable fact that the summons was not properly served on Vargas. Thus, the Court of Appeals did not commit
a reversible error when it affirmed the trial courts nullification of the proceedings for lack of jurisdiction.

WHEREFORE, the instant petition for certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 89001 are AFFIRMED in toto. Costs against petitioners.
The temporary restraining order issued in this case is DISSOLVED.
SO ORDERED.
DANTE O. TINGA Associate Justice
THIRD DIVISION
[G.R. No. 125027. August 12, 2002]
ANITA MANGILA, petitioner, vs. COURT OF APPEALS and LORETA GUINA, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition fore review on certiorari under Rule 45 of the Rules of Court, seeking to set aside the Decision [1] of the Court
of Appeals affirming the Decision[2] of the Regional Trial Court, Branch 108, Pasay City. The trial court upheld the writ of attachment
and the declaration of default on petitioner while ordering her to pay private respondent P109,376.95 plus 18 percent interest per
annum, 25 percent attorneys fees and costs of suit.
The Facts
Petitioner Anita Mangila (petitioner for brevity) is an exporter of sea foods and doing business under the name and style of
Seafoods Products. Private respondent Loreta Guina (private respondent for brevity) is the President and General Manager of Air
Swift International, a single registered proprietorship engaged in the freight forwarding business.
Sometime in January 1988, petitioner contracted the freight forwarding services of private respondent for shipment of
petitioners products, such as crabs, prawns and assorted fishes, to Guam (USA) where petitioner maintains an outlet. Petitioner
agreed to pay private respondent cash on delivery. Private respondents invoice stipulates a charge of 18 percent interest per annum
on all overdue accounts. In case of suit, the same invoice stipulates attorneys fees equivalent to 25 percent of the amount due plus
costs of suit.[3]
On the first shipment, petitioner requested for seven days within which to pay private respondent. However, for the next three
shipments, March 17, 24 and 31, 1988, petitioner failed to pay private respondent shipping charges amounting to P109, 376.95. [4]
Despite several demands, petitioner never paid private respondent. Thus, on June 10, 1988, private respondent filed Civil Case
No. 5875 before the Regional Trial Court of Pasay City for collection of sum of money.
On August 1, 1988, the sheriff filed his Sheriffs Return showing that summons was not served on petitioner. A woman found at
petitioners house informed the sheriff that petitioner transferred her residence to Sto. Nio, Guagua, Pampanga. The sheriff found
out further that petitioner had left the Philippines for Guam.[5]
Thus, on September 13, 1988, construing petitioners departure from the Philippines as done with intent to defraud her
creditors, private respondent filed a Motion for Preliminary Attachment. On September 26, 1988, the trial court issued an Order of
Preliminary Attachment[6] against petitioner. The following day, the trial court issued a Writ of Preliminary Attachment.
The trial court granted the request of its sheriff for assistance from their counterparts in RTC, Pampanga. Thus, on October 28,
1988, Sheriff Alfredo San Miguel of RTC Pampanga served on petitioners household help in San Fernando, Pampanga, the Notice of
Levy with the Order, Affidavit and Bond.[7]
On November 7, 1988, petitioner filed an Urgent Motion to Discharge Attachment[8] without submitting herself to the
jurisdiction of the trial court. She pointed out that up to then, she had not been served a copy of the Complaint and the summons.
Hence, petitioner claimed the court had not acquired jurisdiction over her person. [9]
In the hearing of the Urgent Motion to Discharge Attachment on November 11, 1988, private respondent sought and was
granted a re-setting to December 9, 1988. On that date, private respondents counsel did not appear, so the Urgent Motion to
Discharge Attachment was deemed submitted for resolution.[10]
The trial court granted the Motion to Discharge Attachment on January 13, 1989 upon filing of petitioners counter-bond. The
trial court, however, did not rule on the question of jurisdiction and on the validity of the writ of preliminary attachment.
On December 26, 1988, private respondent applied for an alias summons, which the trial court issued on January 19, 1989. [11] It
[12]
was only on January 26, 1989 that summons was finally served on petitioner.
On February 9, 1989, petitioner filed a Motion to Dismiss the Complaint on the ground of improper venue. Private respondents
invoice for the freight forwarding service stipulates that if court litigation becomes necessary to enforce collection xxx the agreed
venue for such action is Makati, Metro Manila. [13] Private respondent filed an Opposition asserting that although Makati appears as
the stipulated venue, the same was merely an inadvertence by the printing press whose general manager executed an
[14]
affidavit admitting such inadvertence. Moreover, private respondent claimed that petitioner knew that private respondent was
[15]
holding office in Pasay City and not in Makati. The lower court, finding credence in private respondents assertion, denied the

Motion to Dismiss and gave petitioner five days to file her Answer. Petitioner filed a Motion for Reconsideration but this too was
denied.
[16]
Petitioner filed her Answer on June 16, 1989, maintaining her contention that the venue was improperly laid.
On June 26, 1989, the trial court issued an Order setting the pre-trial for July 18, 1989 at 8:30 a.m. and requiring the parties to
submit their pre-trial briefs. Meanwhile, private respondent filed a Motion to Sell Attached Properties but the trial court denied the
motion.
On motion of petitioner, the trial court issued an Order resetting the pre-trial from July 18, 1989 to August 24, 1989 at 8:30
a.m..
[17]
On August 24, 1989, the day of the pre-trial, the trial court issued an Order terminating the pre-trial and allowing the private
respondent to present evidence ex-parte on September 12, 1989 at 8:30 a.m.. The Order stated that when the case was called for
pre-trial at 8:31 a.m., only the counsel for private respondent appeared. Upon the trial courts second call 20 minutes later,
petitioners counsel was still nowhere to be found. Thus, upon motion of private respondent, the pre-trial was considered
terminated.
On September 12, 1989, petitioner filed her Motion for Reconsideration of the Order terminating the pre-trial. Petitioner
explained that her counsel arrived 5 minutes after the second call, as shown by the transcript of stenographic notes, and was late
because of heavy traffic. Petitioner claims that the lower court erred in allowing private respondent to present evidence exparte since there was no Order considering the petitioner as in default. Petitioner contends that the Order of August 24, 1989 did
not state that petitioner was declared as in default but still the court allowed private respondent to present evidence ex-parte.[18]
On October 6, 1989, the trial court denied the Motion for Reconsideration and scheduled the presentation of private
respondents evidence ex-parte on October 10, 1989.
On October 10, 1989, petitioner filed an Omnibus Motion stating that the presentation of evidence ex-parte should be
suspended because there was no declaration of petitioner as in default and petitioners counsel was not absent, but merely late.
On October 18, 1989, the trial court denied the Omnibus Motion. [19]
On November 20, 1989, the petitioner received a copy of the Decision of November 10, 1989, ordering petitioner to pay
respondent P109,376.95 plus 18 percent interest per annum, 25 percent attorneys fees and costs of suit. Private respondent filed a
Motion for Execution Pending Appeal but the trial court denied the same.
The Ruling of the Court of Appeals
On December 15, 1995, the Court of Appeals rendered a decision affirming the decision of the trial court. The Court of Appeals
upheld the validity of the issuance of the writ of attachment and sustained the filing of the action in the RTC of Pasay. The Court of
Appeals also affirmed the declaration of default on petitioner and concluded that the trial court did not commit any reversible error.
Petitioner filed a Motion for Reconsideration on January 5, 1996 but the Court of Appeals denied the same in a Resolution
dated May 20, 1996.
Hence, this petition.
The Issues
The issues raised by petitioner may be re-stated as follows:
I.
WHETHER RESPONDENT COURT ERRED IN NOT HOLDING THAT THE WRIT OF ATTACHMENT WAS IMPROPERLY ISSUED AND SERVED;
II.
WHETHER THERE WAS A VALID DECLARATION OF DEFAULT;
III.
WHETHER THERE WAS IMPROPER VENUE.
IV.
WHETHER RESPONDENT COURT ERRED IN DECLARING THAT PETITIONER IS OBLIGED TO PAY P109, 376.95, PLUS ATTORNEYS
FEES.[20]
The Ruling of the Court
Improper Issuance and Service of Writ of Attachment
Petitioner ascribes several errors to the issuance and implementation of the writ of attachment. Among petitioners arguments
are: first, there was no ground for the issuance of the writ since the intent to defraud her creditors had not been established;
second, the value of the properties levied exceeded the value of private respondents claim. However, the crux of petitioners
arguments rests on the question of the validity of the writ of attachment. Because of failure to serve summons on her before or
simultaneously with the writs implementation, petitioner claims that the trial court had not acquired jurisdiction over her person
and thus the service of the writ is void.
As a preliminary note, a distinction should be made between issuance and implementation of the writ of attachment. It is
necessary to distinguish between the two to determine when jurisdiction over the person of the defendant should be acquired to
validly implement the writ. This distinction is crucial in resolving whether there is merit in petitioners argument.
This Court has long settled the issue of when jurisdiction over the person of the defendant should be acquired in cases where a
party resorts to provisional remedies. A party to a suit may, at any time after filing the complaint, avail of the provisional remedies
under the Rules of Court. Specifically, Rule 57 on preliminary attachment speaks of the grant of the remedy at the commencement
of the action or at any time thereafter.[21] This phrase refers to the date of filing of the complaint which is the moment that marks
the commencement of the action. The reference plainly is to a time before summons is served on the defendant, or even before
summons issues.
In Davao Light & Power Co., Inc. v. Court of Appeals,[22] this Court clarified the actual time when jurisdiction should be had:
It goes without saying that whatever be the acts done by the Court prior to the acquisition of jurisdiction over the person of
defendant - issuance of summons, order of attachment and writ of attachment - these do not and cannot bind and affect the
defendant until and unless jurisdiction over his person is eventually obtained by the court, either by service on him of summons or
other coercive process or his voluntary submission to the courts authority. Hence, when the sheriff or other proper officer
commences implementation of the writ of attachment, it is essential that he serve on the defendant not only a copy of the
applicants affidavit and attachment bond, and of the order of attachment, as explicitly required by Section 5 of Rule 57, but also
the summonsaddressed to said defendant as well as a copy of the complaint xxx. (Emphasis supplied.)
Furthermore, we have held that the grant of the provisional remedy of attachment involves three stages: first, the court issues the
order granting the application; second, the writ of attachment issues pursuant to the order granting the writ; and third, the writ is
implemented. For the initial two stages, it is not necessary that jurisdiction over the person of the defendant be first
obtained. However, once the implementation of the writ commences, the court must have acquired jurisdiction over the defendant
for without such jurisdiction, the court has no power and authority to act in any manner against the defendant. Any order issuing
[23]
from the Court will not bind the defendant.

In the instant case, the Writ of Preliminary Attachment was issued on September 27, 1988 and implemented on October 28,
1988. However, the alias summons was served only on January 26, 1989 or almost three months after the implementation of the
writ of attachment.
The trial court had the authority to issue the Writ of Attachment on September 27 since a motion for its issuance can be filed at
the commencement of the action. However, on the day the writ was implemented, the trial court should have, previously or
simultaneously with the implementation of the writ, acquired jurisdiction over the petitioner. Yet, as was shown in the records of
the case, the summons was actually served on petitioner several months after the writ had been implemented.
Private respondent, nevertheless, claims that the prior or contemporaneous service of summons contemplated in Section 5 of
Rule 57 provides for exceptions. Among such exceptions are where the summons could not be served personally or by substituted
service despite diligent efforts or where the defendant is a resident temporarily absent therefrom x x x. Private respondent asserts
that when she commenced this action, she tried to serve summons on petitioner but the latter could not be located at her
[24]
customary address in Kamuning, Quezon City or at her new address in Guagua, Pampanga. Furthermore, respondent claims that
petitioner was not even in Pampanga; rather, she was in Guam purportedly on a business trip.
Private respondent never showed that she effected substituted service on petitioner after her personal service failed. Likewise,
if it were true that private respondent could not ascertain the whereabouts of petitioner after a diligent inquiry, still she had some
other recourse under the Rules of Civil Procedure.
The rules provide for certain remedies in cases where personal service could not be effected on a party. Section 14, Rule 14 of
the Rules of Court provides that whenever the defendants whereabouts are unknown and cannot be ascertained by diligent inquiry,
service may, by leave of court, be effected upon him by publication in a newspaper of general circulation x x x. Thus, if petitioners
whereabouts could not be ascertained after the sheriff had served the summons at her given address, then respondent could have
immediately asked the court for service of summons by publication on petitioner. [25]
Moreover, as private respondent also claims that petitioner was abroad at the time of the service of summons, this made
petitioner a resident who is temporarily out of the country. This is the exact situation contemplated in Section 16,[26] Rule 14 of the
Rules of Civil Procedure, providing for service of summons by publication.
In conclusion, we hold that the alias summons belatedly served on petitioner cannot be deemed to have cured the fatal defect
in the enforcement of the writ. The trial court cannot enforce such a coercive process on petitioner without first obtaining
jurisdiction over her person. The preliminary writ of attachment must be served after or simultaneous with the service of summons
on the defendant whether by personal service, substituted service or by publication as warranted by the circumstances of the
case.[27] The subsequent service of summons does not confer a retroactive acquisition of jurisdiction over her person because the
law does not allow for retroactivity of a belated service.
Improper Venue
Petitioner assails the filing of this case in the RTC of Pasay and points to a provision in private respondents invoice which
contains the following:
3. If court litigation becomes necessary to enforce collection, an additional equivalent (sic) to 25% of the principal amount will be
charged. The agreed venue for such action is Makati, Metro Manila, Philippines. [28]
Based on this provision, petitioner contends that the action should have been instituted in the RTC of Makati and to do
otherwise would be a ground for the dismissal of the case.
We resolve to dismiss the case on the ground of improper venue but not for the reason stated by petitioner.
The Rules of Court provide that parties to an action may agree in writing on the venue on which an action should be
brought.[29] However, a mere stipulation on the venue of an action is not enough to preclude parties from bringing a case in other
[30]
venues. The parties must be able to show that such stipulation is exclusive. Thus, absent words that show the parties intention to
restrict the filing of a suit in a particular place, courts will allow the filing of a case in any venue, as long as jurisdictional
requirements are followed. Venue stipulations in a contract, while considered valid and enforceable, do not as a rule supersede the
general rule set forth in Rule 4 of the Revised Rules of Court. [31] In the absence of qualifying or restrictive words, they should be
[32]
considered merely as an agreement on additional forum, not as limiting venue to the specified place.
In the instant case, the stipulation does not limit the venue exclusively to Makati. There are no qualifying or restrictive words in
the invoice that would evince the intention of the parties that Makati is the only or exclusive venue where the action could be
instituted. We therefore agree with private respondent that Makati is not the only venue where this case could be filed.
Nevertheless, we hold that Pasay is not the proper venue for this case.
Under the 1997 Rules of Civil Procedure, the general rule is venue in personal actions is where the defendant or any of the
defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff.[33] The
exception to this rule is when the parties agree on an exclusive venue other than the places mentioned in the rules. But, as we have
discussed, this exception is not applicable in this case. Hence, following the general rule, the instant case may be brought in the
place of residence of the plaintiff or defendant, at the election of the plaintiff (private respondent herein).
In the instant case, the residence of private respondent (plaintiff in the lower court) was not alleged in the complaint. Rather,
what was alleged was the postal address of her sole proprietorship, Air Swift International. It was only when private respondent
testified in court, after petitioner was declared in default, that she mentioned her residence to be in Better Living Subdivision,
Paraaque City.
In the earlier case of Sy v. Tyson Enterprises, Inc.,[34] the reverse happened. The plaintiff in that case was Tyson Enterprises, Inc.,
a corporation owned and managed by Dominador Ti. The complaint, however, did not allege the office or place of business of the
corporation, which was in Binondo, Manila. What was alleged was the residence of Dominador Ti, who lived in San Juan, Rizal. The
case was filed in the Court of First Instance of Rizal, Pasig. The Court there held that the evident purpose of alleging the address of
the corporations president and manager was to justify the filing of the suit in Rizal, Pasig instead of in Manila. Thus, the Court ruled
that there was no question that venue was improperly laid in that case and held that the place of business of Tyson Enterpises, Inc. is
considered as its residence for purposes of venue. Furthermore, the Court held that the residence of its president is not the
residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders.
In the instant case, it was established in the lower court that petitioner resides in San Fernando, Pampanga[35] while private
respondent resides in Paraaque City.[36]However, this case was brought in Pasay City, where the business of private respondent is
found. This would have been permissible had private respondents business been a corporation, just like the case in Sy v. Tyson
[37]
Enterprises, Inc. However, as admitted by private respondent in her Complaint in the lower court, her business is a sole
[38]
proprietorship, and as such, does not have a separate juridical personality that could enable it to file a suit in court. In fact, there
[39]
is no law authorizing sole proprietorships to file a suit in court.
A sole proprietorship does not possess a juridical personality separate and distinct from the personality of the owner of the
[40]
enterprise. The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for
profit by a single individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay

[41]

taxes to the national government. The law does not vest a separate legal personality on the sole proprietorship or empower it to
[42]
file or defend an action in court.
Thus, not being vested with legal personality to file this case, the sole proprietorship is not the plaintiff in this case but rather
Loreta Guina in her personal capacity. In fact, the complaint in the lower court acknowledges in its caption that the plaintiff and
defendant are Loreta Guina and Anita Mangila, respectively. The title of the petition before us does not state, and rightly so, Anita
Mangila v. Air Swift International, but rather Anita Mangila v. Loreta Guina. Logically then, it is the residence of private respondent
Guina, the proprietor with the juridical personality, which should be considered as one of the proper venues for this case.
All these considered, private respondent should have filed this case either in San Fernando, Pampanga (petitioners residence)
or Paraaque (private respondents residence). Since private respondent (complainant below) filed this case in Pasay, we hold that the
case should be dismissed on the ground of improper venue.
Although petitioner filed an Urgent Motion to Discharge Attachment in the lower court, petitioner expressly stated that she
was filing the motion without submitting to the jurisdiction of the court. At that time, petitioner had not been served the summons
and a copy of the complaint.[43] Thereafter, petitioner timely filed a Motion to Dismiss[44] on the ground of improper venue. Rule 16,
Section 1 of the Rules of Court provides that a motion to dismiss may be filed [W]ithin the time for but before filing the answer to
the complaint or pleading asserting a claim. Petitioner even raised the issue of improper venue in his Answer [45] as a special and
affirmative defense. Petitioner also continued to raise the issue of improper venue in her Petition for Review [46] before this Court.
We thus hold that the dismissal of this case on the ground of improper venue is warranted.
The rules on venue, like other procedural rules, are designed to insure a just and orderly administration of justice or the
impartial and evenhanded determination of every action and proceeding. Obviously, this objective will not be attained if the plaintiff
[47]
is given unrestricted freedom to choose where to file the complaint or petition.
We find no reason to rule on the other issues raised by petitioner.
WHEREFORE, the petition is GRANTED on the grounds of improper venue and invalidity of the service of the writ of
attachment. The decision of the Court of Appeals and the order of respondent judge denying the motion to dismiss are REVERSED
and SET ASIDE. Civil Case No. 5875 is hereby dismissed without prejudice to refiling it in the proper venue. The attached properties
of petitioner are ordered returned to her immediately.
SO ORDERED.
Puno, (Chairman), and Panganiban, JJ., concur.
Sandoval-Gutierrez, J., on leave.
SECOND DIVISION

ROGER V. NAVARRO,
Petitioner,

- versus -

G.R. No. 153788

Present:
CARPIO, J., Chairperson,
LEONARDO-DE CASTRO,
BRION,
DEL CASTILLO, and
ABAD, JJ.

HON. JOSE L. ESCOBIDO, Presiding Judge, RTC Branch

37, Cagayan de Oro City, and KAREN T. GO, doing Promulgated:
business under the name KARGO ENTERPRISES,
Respondents.
November 27, 2009

x ---------------------------------------------------------------------------------------- x
DECISION
BRION, J.:
This is a petition for review on certiorari[1] that seeks to set aside the Court of Appeals (CA) Decision[2] dated October 16,
2001 and Resolution[3] dated May 29, 2002 in CA-G.R. SP. No. 64701. These CA rulings affirmed the July 26, 2000[4] and March 7,
2001[5] orders of the Regional Trial Court (RTC), Misamis Oriental, Cagayan de Oro City, denying petitioner Roger V. Navarros
(Navarro) motion to dismiss.
BACKGROUND FACTS
On September 12, 1998, respondent Karen T. Go filed two complaints, docketed as Civil Case Nos. 98-599 (first complaint)[6] and 98598 (second complaint),[7]before the RTC for replevin and/or sum of money with damages against Navarro. In these complaints, Karen
Go prayed that the RTC issue writs of replevin for the seizure of two (2) motor vehicles in Navarros possession.
The first complaint stated:
1. That plaintiff KAREN T. GO is a Filipino, of legal age, married to GLENN O. GO, a resident of Cagayan de
Oro City and doing business under the trade name KARGO ENTERPRISES, an entity duly registered and existing
under and by virtue of the laws of the Republic of the Philippines, which has its business address at Bulua, Cagayan
de Oro City; that defendant ROGER NAVARRO is a Filipino, of legal age, a resident of 62 Dolores Street, Nazareth,
Cagayan de Oro City, where he may be served with summons and other processes of the Honorable Court; that

defendant JOHN DOE whose real name and address are at present unknown to plaintiff is hereby joined as party
defendant as he may be the person in whose possession and custody the personal property subject matter of this
suit may be found if the same is not in the possession of defendant ROGER NAVARRO;
2. That KARGO ENTERPRISES is in the business of, among others, buying and selling motor vehicles,
including hauling trucks and other heavy equipment;
3. That for the cause of action against defendant ROGER NAVARRO, it is hereby stated that on August 8,
1997, the said defendant leased [from] plaintiff a certain motor vehicle which is more particularly described as
follows
Make/Type FUSO WITH MOUNTED CRANE
Serial No. FK416K-51680
Motor No. 6D15-338735
Plate No. GHK-378
as evidenced by a LEASE AGREEMENT WITH OPTION TO PURCHASE entered into by and between KARGO
ENTERPRISES, then represented by its Manager, the aforementioned GLENN O. GO, and defendant ROGER
NAVARRO xxx; that in accordance with the provisions of the above LEASE AGREEMENT WITH OPTION TO
PURCHASE, defendant ROGER NAVARRO delivered unto plaintiff six (6) post-dated checks each in the amount of
SIXTY-SIX THOUSAND THREE HUNDRED THIRTY-THREE & 33/100 PESOS (P66,333.33) which were supposedly in
payment of the agreed rentals; that when the fifth and sixth checks, i.e. PHILIPPINE BANK OF COMMUNICATIONS
CAGAYAN DE ORO BRANCH CHECKS NOS. 017112 and 017113, respectively dated January 8, 1998 and February 8,
1998, were presented for payment and/or credit, the same were dishonored and/or returned by the drawee bank
for the common reason that the current deposit account against which the said checks were issued did not have
sufficient funds to cover the amounts thereof; that the total amount of the two (2) checks, i.e. the sum of ONE
HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED SIXTY-SIX & 66/100 PESOS (P132,666.66) therefore represents
the principal liability of defendant ROGER NAVARRO unto plaintiff on the basis of the provisions of the above
LEASE AGREEMENT WITH RIGHT TO PURCHASE; that demands, written and oral, were made of defendant ROGER
NAVARRO to pay the amount of ONE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED SIXTY-SIX & 66/100 PESOS
(P132,666.66), or to return the subject motor vehicle as also provided for in the LEASE AGREEMENT WITH RIGHT
TO PURCHASE, but said demands were, and still are, in vain to the great damage and injury of herein plaintiff; xxx
4. That the aforedescribed motor vehicle has not been the subject of any tax assessment and/or fine pursuant to
law, or seized under an execution or an attachment as against herein plaintiff;
xxx
8. That plaintiff hereby respectfully applies for an order of the Honorable Court for the immediate delivery of the
above-described motor vehicle from defendants unto plaintiff pending the final determination of this case on the
merits and, for that purpose, there is attached hereto an affidavit duly executed and bond double the value of the
personal property subject matter hereof to answer for damages and costs which defendants may suffer in the
event that the order for replevin prayed for may be found out to having not been properly issued.

The second complaint contained essentially the same allegations as the first complaint, except that the Lease Agreement with
Option to Purchase involved is dated October 1, 1997 and the motor vehicle leased is described as follows:
Make/Type FUSO WITH MOUNTED CRANE
Serial No. FK416K-510528
Motor No. 6D14-423403
The second complaint also alleged that Navarro delivered three post-dated checks, each for the amount of P100,000.00, to Karen
Go in payment of the agreed rentals; however, the third check was dishonored when presented for payment.[8]
[9]

[10]

On October 12, 1998 and October 14, 1998, the RTC issued writs of replevin for both cases; as a result, the Sheriff seized the
two vehicles and delivered them to the possession of Karen Go.
In his Answers, Navarro alleged as a special affirmative defense that the two complaints stated no cause of action, since Karen
Go was not a party to the Lease Agreements with Option to Purchase (collectively, the lease agreements) the actionable
documents on which the complaints were based.
On Navarros motion, both cases were duly consolidated on December 13, 1999.
In its May 8, 2000 order, the RTC dismissed the case on the ground that the complaints did not state a cause of action.
In response to the motion for reconsideration Karen Go filed dated May 26, 2000,[11] the RTC issued another order
dated July 26, 2000 setting aside the order of dismissal. Acting on the presumption that Glenn Gos leasing business is a conjugal
property, the RTC held that Karen Go had sufficient interest in his leasing business to file the action against Navarro. However, the
RTC held that Karen Go should have included her husband, Glenn Go, in the complaint based on Section 4, Rule 3 of the Rules of
Court (Rules).[12] Thus, the lower court ordered Karen Go to file a motion for the inclusion of Glenn Go as co-plaintiff.
When the RTC denied Navarros motion for reconsideration on March 7, 2001, Navarro filed a petition for certiorari with the CA,
essentially contending that the RTC committed grave abuse of discretion when it reconsidered the dismissal of the case and
directed Karen Go to amend her complaints by including her husband Glenn Go as co-plaintiff. According to Navarro, a complaint
which failed to state a cause of action could not be converted into one with a cause of action by mere amendment or supplemental
pleading.
[13]
On October 16, 2001, the CA denied Navarros petition and affirmed the RTCs order. The CA also denied Navarros motion for
[14]
reconsideration in its resolution of May 29, 2002, leading to the filing of the present petition.

THE PETITION
Navarro alleges that even if the lease agreements were in the name of Kargo Enterprises, since it did not have the
requisite juridical personality to sue, the actual parties to the agreement are himself and Glenn Go. Since it was Karen Go who filed
the complaints and not Glenn Go, she was not a real party-in-interest and the complaints failed to state a cause of action.
Navarro posits that the RTC erred when it ordered the amendment of the complaint to include Glenn Go as a co-plaintiff,
instead of dismissing the complaint outright because a complaint which does not state a cause of action cannot be converted into
one with a cause of action by a mere amendment or a supplemental pleading. In effect, the lower court created a cause of action
for Karen Go when there was none at the time she filed the complaints.
Even worse, according to Navarro, the inclusion of Glenn Go as co-plaintiff drastically changed the theory of the
complaints, to his great prejudice. Navarro claims that the lower court gravely abused its discretion when it assumed that the
leased vehicles are part of the conjugal property of Glenn and Karen Go. Since Karen Go is the registered owner of Kargo
Enterprises, the vehicles subject of the complaint are her paraphernal properties and the RTC gravely erred when it ordered the
inclusion of Glenn Go as a co-plaintiff.
Navarro likewise faults the lower court for setting the trial of the case in the same order that required Karen Go to amend
her complaints, claiming that by issuing this order, the trial court violated Rule 10 of the Rules.
Even assuming the complaints stated a cause of action against him, Navarro maintains that the complaints were
premature because no prior demand was made on him to comply with the provisions of the lease agreements before the
complaints for replevin were filed.
Lastly, Navarro posits that since the two writs of replevin were issued based on flawed complaints, the vehicles were
illegally seized from his possession and should be returned to him immediately.
Karen Go, on the other hand, claims that it is misleading for Navarro to state that she has no real interest in the subject of
the complaint, even if the lease agreements were signed only by her husband, Glenn Go; she is the owner of Kargo Enterprises and
Glenn Go signed the lease agreements merely as the manager of Kargo Enterprises. Moreover, Karen Go maintains that Navarros
insistence that Kargo Enterprises is Karen Gos paraphernal property is without basis. Based on the law and jurisprudence on the
matter, all property acquired during the marriage is presumed to be conjugal property. Finally, Karen Go insists that her complaints
sufficiently established a cause of action against Navarro. Thus, when the RTC ordered her to include her husband as co-plaintiff,
this was merely to comply with the rule that spouses should sue jointly, and was not meant to cure the complaints lack of cause of
action.
THE COURTS RULING
We find the petition devoid of merit.
Karen Go is the real party-in-interest

The 1997 Rules of Civil Procedure requires that every action must be prosecuted or defended in the name of the real
party-in-interest, i.e., the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails
[15]
of the suit.
Interestingly, although Navarro admits that Karen Go is the registered owner of the business name Kargo Enterprises, he still insists
that Karen Go is not a real party-in-interest in the case. According to Navarro, while the lease contracts were in Kargo Enterprises
name, this was merely a trade name without a juridical personality, so the actual parties to the lease agreements were Navarro
and Glenn Go, to the exclusion of Karen Go.
As a corollary, Navarro contends that the RTC acted with grave abuse of discretion when it ordered the inclusion of Glenn
Go as co-plaintiff, since this in effect created a cause of action for the complaints when in truth, there was none.
We do not find Navarros arguments persuasive.
The central factor in appreciating the issues presented in this case is the business name Kargo Enterprises. The name
appears in the title of the Complaint where the plaintiff was identified as KAREN T. GO doing business under the name KARGO
ENTERPRISES, and this identification was repeated in the first paragraph of the Complaint. Paragraph 2 defined the business
KARGO ENTERPRISES undertakes. Paragraph 3 continued with the allegation that the defendant leased from plaintiff a certain
motor vehicle that was thereafter described. Significantly, the Complaint specifies and attaches as its integral part the Lease
Agreement that underlies the transaction between the plaintiff and the defendant. Again, the name KARGO ENTERPRISES entered
the picture as this Lease Agreement provides:
This agreement, made and entered into by and between:
GLENN O. GO, of legal age, married, with post office address at xxx, herein referred to as the LESSORSELLER; representing KARGO ENTERPRISES as its Manager,
xxx
thus, expressly pointing to KARGO ENTERPRISES as the principal that Glenn O. Go represented. In other words, by the express
terms of this Lease Agreement, Glenn Go did sign the agreement only as the manager of Kargo Enterprises and the latter is clearly
the real party to the lease agreements.

As Navarro correctly points out, Kargo Enterprises is a sole proprietorship, which is neither a natural person, nor a juridical
person, as defined by Article 44 of the Civil Code:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose, created by law; their personality
begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical
personality, separate and distinct from that of each shareholder, partner or member.
Thus, pursuant to Section 1, Rule 3 of the Rules,[16] Kargo Enterprises cannot be a party to a civil action. This legal reality
leads to the question: who then is the proper party to file an action based on a contract in the name of Kargo Enterprises?
We faced a similar question in Juasing Hardware v. Mendoza,[17] where we said:
Finally, there is no law authorizing sole proprietorships like petitioner to bring suit in court. The law
merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by
a single individual, and requires the proprietor or owner thereof to secure licenses and permits, register the
business name, and pay taxes to the national government. It does not vest juridical or legal personality upon the
sole proprietorship nor empower it to file or defend an action in court.
Thus, the complaint in the court below should have been filed in the name of the owner of Juasing
Hardware. The allegation in the body of the complaint would show that the suit is brought by such person as
proprietor or owner of the business conducted under the name and style Juasing Hardware. The descriptive
words doing business as Juasing Hardware may be added to the title of the case, as is customarily
done.[18] [Emphasis supplied.]

This conclusion should be read in relation with Section 2, Rule 3 of the Rules, which states:
SEC. 2. Parties in interest. A real party in interest is the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these
Rules, every action must be prosecuted or defended in the name of the real party in interest.
As the registered owner of Kargo Enterprises, Karen Go is the party who will directly benefit from or be injured by a
judgment in this case. Thus, contrary to Navarros contention, Karen Go is the real party-in-interest, and it is legally incorrect to say
that her Complaint does not state a cause of action because her name did not appear in the Lease Agreement that her husband
signed in behalf of Kargo Enterprises. Whether Glenn Go can legally sign the Lease Agreement in his capacity as a manager of
Kargo Enterprises, a sole proprietorship, is a question we do not decide, as this is a matter for the trial court to consider in a trial on
the merits.
Glenn Gos Role in the Case
We find it significant that the business name Kargo Enterprises is in the name of Karen T. Go, [19] who described herself in
the Complaints to be a Filipino, of legal age, married to GLENN O. GO, a resident of Cagayan de Oro City, and doing business under
the trade name KARGO ENTERPRISES.[20] That Glenn Go and Karen Go are married to each other is a fact never brought in issue in
the case. Thus, the business name KARGO ENTERPRISES is registered in the name of a married woman, a fact material to the side
issue of whether Kargo Enterprises and its properties are paraphernal or conjugal properties. To restate the parties
positions, Navarro alleges that Kargo Enterprises is Karen Gos paraphernal property, emphasizing the fact that the business is
registered solely in Karen Gos name.On the other hand, Karen Go contends that while the business is registered in her name, it is in
fact part of their conjugal property.
The registration of the trade name in the name of one person a woman does not necessarily lead to the conclusion that
the trade name as a property is hers alone, particularly when the woman is married. By law, all property acquired during the
marriage, whether the acquisition appears to have been made, contracted or registered in the name of one or both spouses, is
presumed to be conjugal unless the contrary is proved.[21] Our examination of the records of the case does not show any proof that
Kargo Enterprises and the properties or contracts in its name are conjugal. If at all, only the bare allegation of Navarro to this effect
exists in the records of the case. As we emphasized in Castro v. Miat:[22]
Petitioners also overlook Article 160 of the New Civil Code. It provides that all property of the marriage
is presumed to be conjugal partnership, unless it be prove[n] that it pertains exclusively to the husband or to the
wife. This article does not require proof that the property was acquired with funds of the partnership. The
presumption applies even when the manner in which the property was acquired does not appear. [23] [Emphasis
supplied.]
Thus, for purposes solely of this case and of resolving the issue of whether Kargo Enterprises as a sole proprietorship is conjugal or
paraphernal property, we hold that it is conjugal property.
Article 124 of the Family Code, on the administration of the conjugal property, provides:
Art. 124. The administration and enjoyment of the conjugal partnership property shall belong to both
spouses jointly. In case of disagreement, the husbands decision shall prevail, subject to recourse to the court by
the wife for proper remedy, which must be availed of within five years from the date of the contract implementing
such decision.

xxx
This provision, by its terms, allows either Karen or Glenn Go to speak and act with authority in managing their conjugal
property, i.e., Kargo Enterprises. No need exists, therefore, for one to obtain the consent of the other before performing an act of
administration or any act that does not dispose of or encumber their conjugal property.
Under Article 108 of the Family Code, the conjugal partnership is governed by the rules on the contract of partnership in
all that is not in conflict with what is expressly determined in this Chapter or by the spouses in their marriage settlements. In other
words, the property relations of the husband and wife shall be governed primarily by Chapter 4 on Conjugal Partnership of Gains of
the Family Code and, suppletorily, by the spouses marriage settlement and by the rules on partnership under the Civil Code. In the
absence of any evidence of a marriage settlement between the spouses Go, we look at the Civil Code provision on partnership for
guidance.
A rule on partnership applicable to the spouses circumstances is Article 1811 of the Civil Code, which states:
Art. 1811. A partner is a co-owner with the other partners of specific partnership property.
The incidents of this co-ownership are such that:
(1) A partner, subject to the provisions of this Title and to any agreement between the partners, has an equal
right with his partners to possess specific partnership propertyfor partnership purposes; xxx
Under this provision, Glenn and Karen Go are effectively co-owners of Kargo Enterprises and the properties registered
under this name; hence, both have an equal right to seek possession of these properties. Applying Article 484 of the Civil Code,
which states that in default of contracts, or special provisions, co-ownership shall be governed by the provisions of this Title, we find
further support in Article 487 of the Civil Code that allows any of the co-owners to bring an action in ejectment with respect to the
co-owned property.
While ejectment is normally associated with actions involving real property, we find that this rule can be applied to the
circumstances of the present case, following our ruling in Carandang v. Heirs of De Guzman.[24] In this case, one spouse filed an
action for the recovery of credit, a personal property considered conjugal property, without including the other spouse in the
action. In resolving the issue of whether the other spouse was required to be included as a co-plaintiff in the action for the
recovery of the credit, we said:

Milagros de Guzman, being presumed to be a co-owner of the credits allegedly extended to the spouses
Carandang, seems to be either an indispensable or a necessary party.If she is an indispensable party, dismissal
would be proper. If she is merely a necessary party, dismissal is not warranted, whether or not there was an order
for her inclusion in the complaint pursuant to Section 9, Rule 3.
Article 108 of the Family Code provides:
Art. 108. The conjugal partnership shall be governed by the rules on the contract of
partnership in all that is not in conflict with what is expressly determined in this Chapter or by
the spouses in their marriage settlements.
This provision is practically the same as the Civil Code provision it superseded:
Art. 147. The conjugal partnership shall be governed by the rules on the contract of
partnership in all that is not in conflict with what is expressly determined in this Chapter.
In this connection, Article 1811 of the Civil Code provides that [a] partner is a co-owner with the other
partners of specific partnership property. Taken with the presumption of the conjugal nature of the funds used to
finance the four checks used to pay for petitioners stock subscriptions, and with the presumption that the credits
themselves are part of conjugal funds, Article 1811 makes Quirino and Milagros de Guzman co-owners of the
alleged credit.
Being co-owners of the alleged credit, Quirino and Milagros de Guzman may separately bring an action
for the recovery thereof. In the fairly recent cases of Baloloy v. Hular and Adlawan v. Adlawan, we held that, in a
co-ownership, co-owners may bring actions for the recovery of co-owned property without the necessity of
joining all the other co-owners as co-plaintiffs because the suit is presumed to have been filed for the benefit
of his co-owners. In the latter case and in that of De Guia v. Court of Appeals, we also held that Article 487 of
the Civil Code, which provides that any of the co-owners may bring an action for ejectment, covers all kinds of
action for the recovery of possession.
In sum, in suits to recover properties, all co-owners are real parties in interest. However, pursuant to
Article 487 of the Civil Code and relevant jurisprudence, any one of them may bring an action, any kind of action,
for the recovery of co-owned properties. Therefore, only one of the co-owners, namely the co-owner who filed
the suit for the recovery of the co-owned property, is an indispensable party thereto. The other co-owners are
not indispensable parties. They are not even necessary parties, for a complete relief can be accorded in the suit
even without their participation, since the suit is presumed to have been filed for the benefit of all co[25]
owners. [Emphasis supplied.]
Under this ruling, either of the spouses Go may bring an action against Navarro to recover possession of the Kargo
Enterprises-leased vehicles which they co-own. This conclusion is consistent with Article 124 of the Family Code, supporting as it

does the position that either spouse may act on behalf of the conjugal partnership, so long as they do not dispose of or encumber
the property in question without the other spouses consent.
On this basis, we hold that since Glenn Go is not strictly an indispensable party in the action to recover possession of the
leased vehicles, he only needs to be impleaded as a pro-forma party to the suit, based on Section 4, Rule 4 of the Rules, which
states:
Section 4. Spouses as parties. Husband and wife shall sue or be sued jointly, except as provided by law.

Non-joinder of indispensable parties not ground to dismiss action

Even assuming that Glenn Go is an indispensable party to the action, we have held in a number of cases[26] that the
misjoinder or non-joinder of indispensable parties in a complaint is not a ground for dismissal of action. As we stated
in Macababbad v. Masirag:[27]
Rule 3, Section 11 of the Rules of Court provides that neither misjoinder nor nonjoinder of parties is a
ground for the dismissal of an action, thus:
Sec. 11. Misjoinder and non-joinder of parties. Neither misjoinder nor non-joinder of parties is
ground for dismissal of an action. Parties may be dropped or added by order of the court on
motion of any party or on its own initiative at any stage of the action and on such terms as are
just. Any claim against a misjoined party may be severed and proceeded with separately.

In Domingo v. Scheer, this Court held that the proper remedy when a party is left out is to implead the
indispensable party at any stage of the action. The court, either motu proprio or upon the motion of a party, may
order the inclusion of the indispensable party or give the plaintiff opportunity to amend his complaint in order to
include indispensable parties. If the plaintiff to whom the order to include the indispensable party is directed
refuses to comply with the order of the court, the complaint may be dismissed upon motion of the defendant or
upon the court's own motion. Only upon unjustified failure or refusal to obey the order to include or to amend is
the action dismissed.
In these lights, the RTC Order of July 26, 2000 requiring plaintiff Karen Go to join her husband as a party plaintiff is fully in order.
Demand not required prior
to filing of replevin action

In arguing that prior demand is required before an action for a writ of replevin is filed, Navarro apparently likens a replevin
action to an unlawful detainer.
For a writ of replevin to issue, all that the applicant must do is to file an affidavit and bond, pursuant to Section 2, Rule 60 of the
Rules, which states:
Sec. 2. Affidavit and bond.
The applicant must show by his own affidavit or that of some other person who personally knows the facts:
(a)

That the applicant is the owner of the property claimed, particularly describing it, or is entitled to the
possession thereof;
(b) That the property is wrongfully detained by the adverse party, alleging the cause of detention thereof
according to the best of his knowledge, information, and belief;
(c) That the property has not been distrained or taken for a tax assessment or a fine pursuant to law, or seized
under a writ of execution or preliminary attachment, or otherwise placed under custodia legis, or if so
seized, that it is exempt from such seizure or custody; and
(d) The actual market value of the property.
The applicant must also give a bond, executed to the adverse party in double the value of the property as stated
in the affidavit aforementioned, for the return of the property to the adverse party if such return be adjudged,
and for the payment to the adverse party of such sum as he may recover from the applicant in the action.
We see nothing in these provisions which requires the applicant to make a prior demand on the possessor of the property before
he can file an action for a writ of replevin. Thus, prior demand is not a condition precedent to an action for a writ of replevin.
More importantly, Navarro is no longer in the position to claim that a prior demand is necessary, as he has already admitted in his
Answers that he had received the letters that Karen Go sent him, demanding that he either pay his unpaid obligations or return the
leased motor vehicles. Navarros position that a demand is necessary and has not been made is therefore totally unmeritorious.
WHEREFORE, premises considered, we DENY the petition for review for lack of merit. Costs against petitioner Roger V.
Navarro.
SO ORDERED.
Duval v. Midwest Auto City, Inc., 425 F. Supp. 1381 (D. Neb. 1977)
U.S.
District
Court
for
the
District
of
Nebraska
February 11, 1977
425 F. Supp. 1381 (1977)

425

F.

Supp.

1381

(D.

Neb.

1977)

Kenneth
L.
DUVAL
et
al.,
Plaintiffs,
v.
MIDWEST AUTO CITY, INC., a corporation, et al., Defendants.
No. CV75-L-138.
United States District Court, D. Nebraska.
February 11, 1977.
*1382 Leroy P. Shuster, Lincoln, Neb., for plaintiffs.
Herbert J. Friedman, Lincoln, Neb., for defendants Midwest Auto City, Inc., Ervin Delp, and Tecumseh Motors.
David R. Gilman, Overland Park, Kan., for defendants Dave Studna and Dave Studna d/b/a E & J Motor Sales and E. Studna Auto
Sales.
J. Michael Rierden, and W. Michael Morrow, Lincoln, Neb., for defendant Bernard Flaherty.

MEMORANDUM OF DECISION
URBOM, Chief Judge.
Since 1972, the federal law has been designed to prohibit tampering with odometers on motor vehicles and to compensate persons
victimized by the tampering. This lawsuit is one in which purchasers of two automobiles ask monetary damages for violation of that
law.
Four violations are asserted: The defendants with intent to defraud disconnected, reset and altered the odometers on the vehicles
the plaintiffs purchased; they with intent to defraud operated the vehicles on streets and highways knowing that the odometers
were disconnected or nonfunctional; they conspired to violate the law with an intent to defraud; and they failed to furnish accurate
odometer certifications.
The key statutory sections are:
15 U.S.C. 1984:
"It is unlawful for any person or his agent to disconnect, reset, or alter the odometer of any motor vehicle with the intent to change
the number of miles indicated thereon."
15 U.S.C. 1985:
"It is unlawful for any person with the intent to defraud to operate a motor vehicle on any street or highway knowing that the
odometer of such vehicle is disconnected or nonfunctional."
15 U.S.C. 1986:
"No person shall conspire with any other person to violate section 1983, 1984, 1985, 1987, or 1988 of this title."
15 U.S.C. 1988:
"(b) It shall be a violation of this section for any transferor to violate any rules [prescribed by the Secretary of
Transportation *1383 requiring a transferor to give to a transferee disclosure of the cumulative mileage registered on the odometer
and disclosure that the actual mileage is unknown, if the odometer reading is known to be different from the number of miles the
vehicle has actually traveled] or to knowingly give a false statement to a transferee in making any disclosure required by such rules."
15 U.S.C. 1989:
"(a) Any person who, with intent to defraud, violates any requirement imposed under this subchapter shall be liable in an amount
equal to the sum of
(1) three times the amount of actual damages sustained or $1,500, whichever is the greater; and
(2) in the case of any successful action to enforce the foregoing liability, the costs of the action together with reasonable attorney
fees as determined by the court."
The facts as I find them from conflicting evidence after a five-day trial are set out in this memorandum of decision, acknowledging
that the plaintiffs have the burden of establishing by a preponderance of the evidence that each defendant with intent to defraud
violated one or more requirements of the above-quoted statutory sections and the amount of damages.

THE DUVAL VEHICLE

On July 3, 1975, the plaintiffs Kenneth L. Duval and Cheryl J. Duval purchased a 1973 Plymouth Fury III automobile, bearing motor
vehicle identification number PH23P3D217571, from the defendant Midwest Auto City, Inc. in Lincoln, Nebraska. The odometer
reading was approximately 25,800 miles at the time of purchase.
Ervin Delp, the president of Midwest Auto City, Inc., had talked by telephone with David Studna, a wholesale automobile dealer who
did business under the names of E & J Motor Sales and E. Studna Auto Sales in Overland Park, Kansas, about buying the 1973
Plymouth Fury III before either Midwest or Studna bought it. Studna knew and told Delp that the car, as well as three others he
proposed to buy, was a sheriff's patrol car and had high mileage on it. After the conversation, Studna, in the name of E. Studna Auto
Sales, bought the car from Bud Brown Chevrolet-Plymouth, Inc., whose certificate of title showed the odometer mileage to be
83,572. Joe Studna, on behalf of E. Studna Auto Sales, reassigned the title to Bennie Motors, a used car dealership in Kansas City,
Missouri, owned by Bennie Studna, the brother of David Studna. Bennie Motors then obtained a Missouri title which, in accord with
Missouri law, did not reflect any odometer reading. Bennie Motors then transferred the car to Tecumseh Motors, which is one of the
names under which Midwest Auto City, Inc. did business, the accompanying odometer certificate dated October 2, 1974, showing
Bennie Motors as transferor and being signed "David Studna" on behalf of the transferor. The odometer certificate showed 25,628
miles.
Although the defendant Dave Studna, whose correct name is David Studna, has raised some question of the authority of Joe Studna,
who is David Studna's son, to sign a certificate of title on behalf of E. Studna Auto Sales, the fact that the certificate of title from E.
Studna Auto Sales to Bennie Motors shows that Joe Studna's signature was notarized by David Studna ends the argument.
Thus, sometime between the car's arrival at E. Studna Auto Sales and its receipt by Midwest, the odometer reading was altered.
Midwest then advertised the car in the Sunday Journal and Star with the following words:
"This like new car has been driven only 25,544 miles and is priced to sell fast at only $2187."

The Duvals saw the advertisement and bought the car without being told by Midwest or anyone else that the odometer reading was
incorrect. By the time the Duvals purchased the car they suspected and had reason to believe that the car had been a patrol car,
although not because of anything told to them by any Midwest employee. *1384 Not only was nothing said to the Duvals to the
effect that it had been a patrol car, but Midwest had removed from the frame a tag and had put on a vinyl top, each of which tended
to disguise the car's use as a patrol car. The Duvals did not know that the car had more than 25,800 miles of actual use. A purchase
price of $2,197.00, including a trade-in of a 1973 Hornet for $1,800.00, was paid by the Duvals.
Midwest had purchased the car for $1,750.00 and incurred expenses on it while it had it sufficient to bring its investment in it to
$2,097.82. The wholesale value the reasonable market value to a dealer of an automobile of this car's make and model was
$1,375.00 if the mileage were 83,572, and $2,100.00 if the the mileage were 25,800. The retail value the fair market value to an
individual buyer from a dealer of such an automobile was $1,950.00 if the mileage were 83,572, and $2,675.00 if the mileage were
25,800.

THE MASON VEHICLE

On July 25, 1975, the plaintiffs Jerry K. Mason and Linda L. Mason bought in Lincoln, Nebraska, a 1973 Ford Country Sedan station
wagon, bearing motor vehicle identification number 3P74S138762, from the defendant Midwest Auto City, Inc. The odometer
reading was approximately 29,570 miles.
Midwest, under the name of Tecumseh Ford-Mercury, which was one of the names under which it regularly did business, obtained
the Ford station wagon from E & J Motor Sales by virtue of a reassignment of the certificate of title from Joe Studna on behalf of E &
J Motor Sales on June 19, 1975. David Studna notarized the signature of Joe Studna. The reassignment showed no odometer
reading.
E & J Motor Sales on June 12, 1975, had received a reassignment of the certificate of title from Pat Patterson Motor Co., Inc.,
Topeka, Kansas. The mileage on the reassignment, whether placed there at the time of the reassignment or later, was 29,486. Pat
Patterson Motor Co., Inc. on June 7, 1975, received title from Robert E. and Lorene Powell and a certificate of title showing the
mileage to be 68,901. That figure was obliterated on the copy of the certificate of title which thereafter went to Midwest and which
was presented by Midwest to the County Clerk of Johnson County, Nebraska, for the obtaining of a certificate of title in the name of
Tecumseh Ford-Mercury. Despite the obliteration, a certificate of title was issued. No satisfactory explanation has been made for
why a certificate of title was issued. Evidently on the strength of an odometer certificate by Joe Studna and Colleen J. Miller, the
odometer reading was shown on that certificate of title to be 29,486 miles.
It appears that, either immediately before the car came into the possession of E & J Motor Sales or while it was in E & J Motor Sales'
possession, the odometer was altered.
Midwest paid E & J Motor Sales $2,150.00, and its expenses on the automobile brought the investment in the car to $2,426.44. The
wholesale value of that make and model was $1,775.00 if the mileage were 68,901, and $2,300.00 if the mileage were
approximately 29,500. The Masons paid $3,195.00, including a trade-in of a 1973 Ford LTD for $2,830.00. The fair market retail value
of such an automobile was $2,375.00 if the mileage were 68,901, and $2,900.00 if the mileage were 29,500.

CONSPIRACY
The two foregoing transactions, standing alone, do not establish a conspiracy. When amplified by substantial evidence of many
other similar transactions, however, a conspiracy to violate the law with an intent to defraud is established by clear and convincing
evidence.
Midwest, through the person of Ervin Delp, has done business for several years with David Studna, who has operated his wholesale
business under various names, including E. Studna Auto Sales and E & J Motor Sales. During the two years immediately before the
two sales to the Duvals and Masons, Midwest bought about 96 cars *1385 that originated with David Studna. Many of them were
high-mileage cars and a substantial number of them had had the odometers turned back. The frequency with which transactions
occurred similar to those involving the Duvals and Masons makes a compelling case for the conclusion that Midwest and David
Studna and Bennie Studna were knowingly conducting an operation of acquiring cars, altering the odometers, and selling them with
an intent to defraud.
Two paths predominated. One would begin with the purchase of a car in Kansas, the certificate of title showing high mileage,
whereupon the car would be sent to Bennie Motors in Missouri and titled there, where the state law does not require a mileage
certification, and then the car would be transported to Nebraska for sale. The presence of the Missouri titles would tend to
discourage the tracing of the mileage back to the Kansas title. The other path consisted of the purchase of an automobile in Kansas
and sending the car to Nebraska for sale with a copy of the certificate of title sufficiently mutilated by erasure or ink smudge to
render the high-mileage odometer reading illegible, thus obscuring to a potential purchaser the fact that the odometer itself had
been turned back.
Midwest's policy was to decline to reveal to a purchaser the name of a previous owner, even when requested.
When a buyer would complain after a sale that the actual mileage must be higher than the odometer showed, Delp would tell him
that all he, Delp, knew was that the car had been certified to Delp when he bought it as having the mileage as shown on the
odometer.
Almost always, the automobiles were purchased by Midwest at a price commensurate with high mileage, rather than the low
mileage shown on the odometers. This was true, for example with the purchase of a 1973 Chevrolet Monte Carlo in February, 1975,
as shown in plaintiffs' Exhibit 3; a 1974 Plymouth Satellite Custom four-door sedan on June 11, 1975, plaintiffs' Exhibit 6; a 1972
Plymouth Satellite Custom eight-cylinder, four-door station wagon on March 27, 1975, plaintiffs' Exhibit 8; a 1973 Dodge Charger,
eight cylinder, two-door hardtop on March 21, 1975, plaintiffs' Exhibit 13; a 1971 Dodge Coronet four-door sedan on March 1, 1975,
plaintiffs' Exhibit 19; a 1973 Plymouth Fury III, eight cylinder, four-door hardtop on February 19, 1975, plaintiffs' Exhibit 27; a 1973
Plymouth Custom, eight cylinder station wagon on March 7, 1975, plaintiffs' Exhibit 28; a 1971 Ford LTD Broughm, eight cylinder,
four-door hardtop on February 20, 1975, plaintiffs' Exhibit 51; a 1970 Ford Maverick, six cylinder, two-door sedan on March 1, 1975,
plaintiffs' Exhibit 52; a 1973 Ford Galaxie 500, eight cylinder, four-door sedan on February 4, 1975, plaintiffs' Exhibit 57; a 1974
Plymouth Fury III, eight cylinder, four-door hardtop on June 20, 1975, plaintiffs' Exhibit 186; and a 1973 Plymouth Satellite four-door
custom sedan on May 12, 1975, plaintiffs' Exhibit 187. The only exceptions in evidence appear to be those involving the Duvals and
the Masons. In both of those sales Midwest paid an amount well above the high-mileage wholesale value, although still below the
low-mileage wholesale value.
The sales by Midwest to purchasers at retail of these numerous high-mileage automobiles, as far as the evidence shows, were for
prices sometimes reflecting a high mileage or moderately high mileage, such as in plaintiffs' Exhibits 3, 8, 52, 183 (Duval) and 187,
and sometimes reflecting a low or moderately low mileage, such as in plaintiffs' Exhibits 13, 19, 27, 28, 34 (Masons) and 57.
Sometimes the profit to Midwest was nominal, sometimes considerable, but in the absence of explanation, there can reasonably be

only one conclusion as to the motivation for selling automobiles with odometer readings adjusted downward: To sell cars more
quickly or at higher prices or to cause purchasers to think they were getting better deals than otherwise would be true, all on the
falsely induced belief that they were getting low-mileage cars.

APPLICATION OF FACTS TO STATUTE

Of the four bases for liability, the first is that the defendants disconnected, *1386 reset and altered the odometers on the plaintiffs'
vehicles. David Studna, either personally or through his employees, did so with respect to the Duval automobile with intent to
defraud, because where there has been a reduction in the odometer reading while the vehicle is in the possession of a transferor,
fraud is implied, in the absence of an explanation. Delay v. Hearn Ford, 373 F. Supp. 791 (U.S.D.C.S.C.1974); Klein v. Pincus, 397 F.
Supp. 847(U.S.D.C.E.D.N. Y.1975). The evidence is inconclusive with respect to the Mason automobile, because the disconnecting,
resetting and altering may have occurred immediately before Studna obtained the Mason automobile. There is nothing to suggest
that the other defendants disconnected, reset or altered the odometer of either of the automobiles of the plaintiffs. Liability
attached to David Studna on this ground to the Duvals, but not to the Masons.
The second ground for recovery is that the defendants operated the plaintiffs' vehicles on streets and highways, knowing that the
odometers were disconnected or nonfunctional. There is no evidence to support this allegation.
The third basis for recovery is conspiracy. The evidence supports that allegation against David Studna, who does business as E & J
Motor Sales and has done business as E. Studna Auto Sales, and against the defendant Midwest Auto City, Inc., which does business
in its own name and in the names of Tecumseh Motors and Tecumseh Ford-Mercury. The evidence also supports the allegation
against Ervin Delp, the president of Midwest. There is not enough strength in the evidence to carry a finding that Bernard Flaherty
was a member of the conspiracy.
Key features of the conspiracy were the altering of odometers, the giving of false odometer certifications by both Studna and
Midwest, the smudging of copies of Kansas certificates of title, the registering of vehicles in Missouri in the name of Bennie Motors,
and the selling of cars without revealing the fact of the higher mileage.
Paragraph 22 C of the second amended complaint describes the conspiracy as "a plan whereby high mileage . . . motor vehicles were
purchased in Missouri . . ." but that unnecessarily limited description does not mean that the Mason transaction, which did not
originate, as far as the defendants were concerned, with a purchase in Missouri, was not in the conspiracy. The conspiracy,
accurately described as far as the description goes, was broader in scope than the description implies. But it remained the same
conspiracy. The sales to the Duvals and the Masons were within the conspiracy and liability to all plaintiffs ensues.
The fourth ground alleged is that the defendants failed to furnish the plaintiffs with odometer mileage statements, stating that the
actual mileage on the vehicles was unknown. This allegation is supported by the evidence as to the defendants David Studna,
Midwest Auto City, Inc., and Ervin Delp. Section 1988 of the Act authorizes the Secretary of Transportation to prescribe rules in
certain respects. The rules which he has prescribed, insofar as they are significant in this action, are shown in 49 C.F.R. 580.4, as
follows:
"(a) Before executing any transfer of ownership document, each transferor of a motor vehicle shall furnish to the transferee a
written statement signed by the transferor, containing the following information:
(1) The odometer reading at the time of transfer . . .
******
"(c) In addition to the information provided under paragraph (a) of this section, if the transferor knows that the odometer reading
differs from the number of miles the vehicle has actually traveled, and that the difference is greater than that caused by odometer
calibration error, he shall include a statement that the actual mileage is unknown."
This rule was knowingly violated by David Studna, Delp and Midwest as to both automobiles purchased by the plaintiffs. Studna gave
false odometer certificates, *1387 which enabled Midwest to obtain certificates of title containing the false mileage figures. That the
statute contemplates liability on Studna, as well as Midwest and Delp, in such circumstances arises from the fact that a transferee
who obtains a false odometer certificate from another can use it, as Midwest usually did when someone complained that actual
mileage must be larger than that shown on the odometer, as a basis for telling the customer that he only knows that his transferor
certified the low mileage to him. That would tend to discourage the purchaser from backtracking to find someone who could be
liable. To eliminate that buffer, liability is placed on each transferor who makes no certification or a false certification knowingly.
The legislative history of the applicable portion of the statute, as related in 3 U.S.Code Congressional and Administrative News p.
3971 (92nd Congress, Second Session, 1972), is this:
"Section 408 makes it a violation of the title for any person `knowingly' to give a false statement to a transferee. This section
originally allowed a person to rely completely on the representations of the previous owner. This original provision created a
potential loophole, however. For example, a person could have purchased a vehicle knowing that the mileage was false but received
a statement from the transferor verifying the odometer reading. Suppose an auto dealer bought a car with a 20,000 mile odometer
verification but any mechanic employed by that auto dealer could ascertain that the vehicle had at least 60,000 miles on it. The bill
as introduced would have permitted the dealer to resell the vehicle with a 20,000 mile verification. In order to eliminate this
potential loophole the test of `knowingly' was incorporated so that the auto dealer with expertise now would have an affirmative
duty to mark `true mileage unknown' if, in the exercise of reasonable care, he would have reason to know that the mileage was
more than that which the odometer had recorded or which the previous owner had certified."
Claiming ignorance, even truthfully, is not enough to avoid liability for giving a certification showing an odometer figure, rather than
"unknown." Care must be taken to learn and reveal the facts, rather than care to avoid or hide them. A precise statement of the
degree of care that must be used is unnecessary for resolution of the present case, because David Studna, Joe Studna and Colleen
Miller, the secretary and bookkeeper for Midwest, as to both cars, either knew directly of the falseness of the odometer readings on
these particular cars or were reckless in their disregard of obvious red flags, such as the undecipherable odometer reading on the
Kansas certificate of title to the Mason car. A "knowing" violation is therefore chargeable to them. The evidence does not show that
Delp personally knew of the falseness of the Mason car's odometer reading, but he knew of and approved the practice, employed
often by Colleen J. Miller, of getting certificates of title in Johnson County, Nebraska, with the use of illegible Kansas certificates of
title. He was the president and chief executive officer of Midwest. He, too, must be considered to have known that the mileage on
the Mason vehicle was not as registered on the odometer.
The second amended complaint lists the defendants as "Midwest Auto City, Inc., A Corporation; . . . Dave Studna, Individually, Dave
Studna d/b/a E & J Motor Sales and E. Studna Auto Sales; Ervin Delp, Individually; Midwest Auto City, Inc., and Ervin Delp d/b/a

Tecumseh Motors; and Bernard Flaherty." Under the evidence there are four entities only Midwest Auto City, Inc., David Studna,
Ervin Delp, and Bernard Flaherty. The designation "d/b/a" means "doing business as" but is merely descriptive of the person or
corporation who does business under some other name. Doing business under another name does not create an entity distinct from
the person operating the business. The individual who does business as a sole proprietor under one or several names remains one
person, personally liable for all his obligations. So also with a corporation which uses more than one name.

*1388 DAMAGES
The statute declares that the liability is for "three times the amount of actual damages sustained or $1,500, whichever is greater."
Although "actual damages" is not defined in the statute, it seems reasonable to give it the meaning commonly applied to fraud
cases. This is the difference between the amount paid by the plaintiffs not the value of the car if it had been as represented and the
fair market retail value of a vehicle of the type purchased with the number of miles actually traveled by the car, plus such outlays as
are legitimately attributable to the acts of the defendants. See Smith v. Bolles, 132 U.S. 125, 10 S. Ct. 39, 33 L. Ed. 279 (1889); Towle
v. Maxwell Motor Sales Corp., 26 F.2d 209 (C.A. 8th Cir. 1928).
Here, no expenses were shown to have been attributable to the acts of the defendants. To be sure, substantial repairs were
reasonably done on the cars, but what amount represented repairs that would not have been necessary had the cars been the
lower-mileage vehicles the odometers indicated they were, was not established or even attempted.
The actual damages, then, of the Duvals are the difference between $2,197.00 and $1,950.00, or $247.00. Tripled, this amount is
less than $1,500.00, so the statutory minimum of $1,500.00 is applicable. As to the Masons, the damages are the difference
between $3,195.00 and $2,375.00, or $820.00. Tripled, the amount is $2,460.00, to which the Masons are entitled under the statute.
Liability of David Studna, Midwest Auto City, Inc. and Ervin Delp is joint and several; each is liable for the whole judgment of each
plaintiff. Restatement of the Law, Torts, 875, p. 434.
On October 25, 1976, a settlement was reached which recited that "Bennie Studna, Individually" and "Bennie Studna d/b/a Bennie
Motors" had paid to the Duvals $2,500.00 and to the Duvals' counsel $500.00, in return for which the Duvals and the Masons
released "Bennie Studna and Bennie Studna d/b/a Bennie Motors" from liability, while reserving all claims against all other
defendants. An order of dismissal has been entered as to the releasees.
The reservation in the release of the claims against the other defendants prevented the release of the present
defendants. Restatement of the Law, Torts, 885(1), p. 460.
The general rule is that:
"Payments made by one tortfeasor on account of a harm for which he and another are each liable, diminish the amount of the claim
against the other whether or not it was so agreed at the time of payment and whether the payment was made before or after
judgment; the extent of the diminution is the amount of the payment made, or a greater amount if so agreed between the payor
and the injured person."
Restatement of the Law, Torts, 885(3), p. 460.
The policy of the odometer statute is both to "prohibit tampering with odometers on motor vehicles and to establish certain
safeguards for the protection of purchasers . . ." 15 U.S.C. 1981. The goal of deterring those tempted to turn back odometers,
which is encompassed within the purpose of prohibiting tampering, is effected in several ways: Having a minimum civil liability of
$1,500.00 payable to a victim; tripling the actual damages if that results in more than $1,500.00; allowing of civil penalties payable
to the United States of up to $1,000.00 for each violation of the Act on suit by the Attorney General (15 U.S.C. 1990b); providing
for criminal penalties (15 U.S.C. 1990c); authorizing inspections, investigations and administrative proceedings by the Secretary of
Transportation for the enforcement of the statute (15 U.S.C. 1990d and 1990e); and injunctive relief (15 U.S.C. 1990).
The array of techniques for controlling violators or potential violators militates against a holding that each violator should be
required to pay the full judgment and not receive a diminution of his liability by reason of payment by another. If the
statute *1389 depended entirely or primarily upon the civil liability provision to deter incipient violators, or if the civil liability
provision were not itself punitive, the argument for requiring each violator to pay without benefit of credit for payment by another
would be stronger.
All in all, I am unable to find that legislative history or policy would justify a judicially declared exception to the rule quoted from the
Restatement that payment by one tortfeasor diminishes the amount of the claim against another tortfeasor on account of the harm
for which each is liable.
The Duvals have already received $2,500.00, which exceeds the amount of recovery in this case, and they are therefore entitled to
no more, except for court costs and attorney fees.
The Masons are entitled to a judgment of $2,460.00 plus court costs and attorney fees.
Because evidence has not been taken on the amount of attorney fees to be awarded, entry of a judgment will be withheld until
evidence is received. Counsel shall have fifteen days from the date of this memorandum of decision to submit affidavits. If a hearing
for presentation of testimony is desired, request for it should be made within the same fifteen days.
Republic
SUPREME COURT

of

the

Philippines

SECOND DIVISION
G.R. No. 126881

October 3, 2000

HEIRS
OF
TAN
ENG
KEE, petitioners,
vs.
COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG LAY,respondents.
DE LEON, JR., J.:
In this petition for review on certiorari, petitioners pray for the reversal of the Decision 1 dated March 13, 1996 of the former Fifth
Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of which states:
THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.

The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the decedent, joined by
their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as herein petitioners HEIRS OF TAN ENG KEE,
filed suit against the decedent's brother TAN ENG LAY on February 19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in
the Regional Trial Court of Baguio City was for accounting, liquidation and winding up of the alleged partnership formed after World
War II between Tan Eng Kee and Tan Eng Lay. On March 18, 1991, the petitioners filed an amended complaint4 impleading private
respondent herein BENGUET LUMBER COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by the trial
court in its Order dated May 3, 1991.5
The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay, pooling their resources
and industry together, entered into a partnership engaged in the business of selling lumber and hardware and construction supplies.
They named their enterprise "Benguet Lumber" which they jointly managed until Tan Eng Kee's death. Petitioners herein averred
that the business prospered due to the hard work and thrift of the alleged partners. However, they claimed that in 1981, Tan Eng Lay
and his children caused the conversion of the partnership "Benguet Lumber" into a corporation called "Benguet Lumber Company."
The incorporation was purportedly a ruse to deprive Tan Eng Kee and his heirs of their rightful participation in the profits of the
business. Petitioners prayed for accounting of the partnership assets, and the dissolution, winding up and liquidation thereof, and
the equal division of the net assets of Benguet Lumber.
After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment 6 on April 12, 1995, to wit:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;
b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a business venture
and/or particular partnership called Benguet Lumber and as such should share in the profits and/or losses of the business
venture or particular partnership;
c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co. Inc. and as such the
heirs or legal representatives of the deceased Tan Eng Kee have a legal right to share in said assets;
d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a particular
partnership have descended to the plaintiffs who are his legal heirs.
e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber Company Inc. to
render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs know their proper share in the
business;
f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber Company, Inc. until
such time that said corporation is finally liquidated are directed to submit the name of any person they want to be
appointed as receiver failing in which this Court will appoint the Branch Clerk of Court or another one who is qualified to act
as such.
g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant case.
h) Dismissing the counter-claim of the defendant for lack of merit.
SO ORDERED.
Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the assailed decision reversing the
judgment of the trial court. Petitioners' motion for reconsideration 7 was denied by the Court of Appeals in a Resolution8 dated
October 11, 1996.
Hence, the present petition.
As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn Tan for the use of
allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by the defendants
before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere employee of Benguet Lumber, were fake, based
on the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870 against Gloria, Julia, Juliano,
Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged falsification of commercial documents by a private individual.
On March 20, 1999, the Municipal Trial Court of Baguio City, Branch 1, wherein the charges were filed, rendered
judgment9 dismissing the cases for insufficiency of evidence.
In their assignment of errors, petitioners claim that:
I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG
KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS
SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO
PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).

II
THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING TESTIMONY OF RESPONDENT TAN
ENG LAY THAT BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE
THEREOF.
III
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH WERE DULY SUPPORTED BY
EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES
OF PARTNERSHIP DULY RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:
a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE BENGUET LUMBER
COMPOUND;
b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES OF BENGUET LUMBER;
c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES THEREIN;
d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF STOCKS TO BE SOLD TO
THE PUBLIC; AND
e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE SUPPLIERS (PAGE 18,
DECISION).
IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP JUST BECAUSE THE
CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER WITH THEIR WITNESS BEATRIZ
TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET
LUMBER WAS STARTED AS A PARTNERSHIP (PAGE 16-17, DECISION).
V
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG
KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY
MORE THAN P3,000.00 AND AS SUCH THE EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE
BEEN MADE AND NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).
As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be disturbed on appeal if such
10
are supported by the evidence. Our jurisdiction, it must be emphasized, does not include review of factual issues. Thus:
Filing of petition with Supreme Court. A party desiring to appeal by certiorari from a judgment or final order or resolution
of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may file
with the Supreme Court a verified petition for review on certiorari. The petition shall raise only questions of law which must
be distinctly set forth.11 [emphasis supplied]
Admitted exceptions have been recognized, though, and when present, may compel us to analyze the evidentiary basis on which the
lower court rendered judgment. Review of factual issues is therefore warranted:
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;
(2) when the findings are grounded entirely on speculation, surmises, or conjectures;
(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or impossible;
(4) when there is grave abuse of discretion in the appreciation of facts;
(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings are contrary to
the admissions of both appellant and appellee;
(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;
(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a different
conclusion;
(8) when the findings of fact are themselves conflicting;
(9) when the findings of fact are conclusions without citation of the specific evidence on which they are based; and
(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such findings are
contradicted by the evidence on record.12

In reversing the trial court, the Court of Appeals ruled, to wit:

We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the existence of a
partnership, the Court in turn went beyond that by justifying the existence of a joint venture.
When mention is made of a joint venture, it would presuppose parity of standing between the parties, equal proprietary
interest and the exercise by the parties equally of the conduct of the business, thus:
xxx

xxx

xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the war. The
appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the entire stocks of the pre-war
Benguet Lumber were confiscated if not burned by the Japanese. After the war, because of the absence of capital to start a
lumber and hardware business, Lay and Kee pooled the proceeds of their individual businesses earned from buying and
selling military supplies, so that the common fund would be enough to form a partnership, both in the lumber and
hardware business. That Lay and Kee actually established the Benguet Lumber in Baguio City, was even testified to by
witnesses. Because of the pooling of resources, the post-war Benguet Lumber was eventually established. That the father of
the plaintiffs and Lay were partners, is obvious from the fact that: (1) they conducted the affairs of the business during
Kee's lifetime, jointly, (2) they were the ones giving orders to the employees, (3) they were the ones preparing orders from
the suppliers, (4) their families stayed together at the Benguet Lumber compound, and (5) all their children were employed
in the business in different capacities.
xxx

xxx

xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account, no firm
letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and losses, and no time fixed
for the duration of the partnership. There was even no attempt to submit an accounting corresponding to the period after
the war until Kee's death in 1984. It had no business book, no written account nor any memorandum for that matter and no
license mentioning the existence of a partnership [citation omitted].
Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971, Exhibit "2",
mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and Hardware. His application for
registration, effective 1954, in fact mentioned that his business started in 1945 until 1985 (thereafter, the incorporation).
The deceased, Kee, on the other hand, was merely an employee of the Benguet Lumber Company, on the basis of his SSS
coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to "4-U", inclusive, for the years 1982 to 1983, Kee was
similarly listed only as an employee; precisely, he was on the payroll listing. In the Termination Notice, Exhibit "5", Lay was
mentioned also as the proprietor.
xxx

xxx

xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but when an
immovable is constituted, the execution of a public instrument becomes necessary. This is equally true if the capitalization
exceeds P3,000.00, in which case a public instrument is also necessary, and which is to be recorded with the Securities and
Exchange Commission. In this case at bar, we can easily assume that the business establishment, which from the language
of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded P3,000.00, in addition to the accumulation of real
properties and to the fact that it is now a compound. The execution of a public instrument, on the other hand, was never
established by the appellees.
And then in 1981, the business was incorporated and the incorporators were only Lay and the members of his family. There
is no proof either that the capital assets of the partnership, assuming them to be in existence, were maliciously assigned or
transferred by Lay, supposedly to the corporation and since then have been treated as a part of the latter's capital assets,
contrary to the allegations in pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the existence of a partnership:
1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house in Trinidad, but
within the compound of the lumber establishment, as testified to by Tandoc; 2) that both Lay and Kee were seated on a
table and were "commanding people" as testified to by the son, Elpidio Tan; 3) that both were supervising the laborers, as
testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being told by Kee that the proceeds of the 80
pieces of the G.I. sheets were added to the business.
Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written. However, if it
involves real property or where the capital is P3,000.00 or more, the execution of a contract is necessary; 2) the capacity of
the parties to execute the contract; 3) money property or industry contribution; 4) community of funds and interest,
mentioning equality of the partners or one having a proportionate share in the benefits; and 5) intention to divide the
profits, being the true test of the partnership. The intention to join in the business venture for the purpose of obtaining
profits thereafter to be divided, must be established. We cannot see these elements from the testimonial evidence of the
appellees.
As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN ENG KEE and TAN ENG
LAY had allegedly entered into a joint venture. In this connection, we have held that whether a partnership exists is a factual matter;
consequently, since the appeal is brought to us under Rule 45, we cannot entertain inquiries relative to the correctness of the
assessment of the evidence by the court a quo.13 Inasmuch as the Court of Appeals and the trial court had reached conflicting
conclusions, perforce we must examine the record to determine if the reversal was justified.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A contract of partnership is
defined by law as one where:
. . . two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.14
Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound themselves to
contribute money, property, or industry to a common fund, and (2) they intend to divide the profits among
15
themselves. The agreement need not be formally reduced into writing, since statute allows the oral constitution of a
partnership, save in two instances: (1) when immovable property or real rights are contributed, 16 and (2) when the
partnership has a capital of three thousand pesos or more.17 In both cases, a public instrument is required. 18 An inventory
to be signed by the parties and attached to the public instrument is also indispensable to the validity of the partnership
whenever immovable property is contributed to the partnership.19
The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said is akin to a particular
20
partnership. A particular partnership is distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no firm
name and no legal personality. In a joint account, the participating merchants can transact business under their own name,
and can be individually liable therefor.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing to
a successful termination may continue for a number of years; a partnership generally relates to a continuing business of
various transactions of a certain kind.21
A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in which each party has an
equal proprietary interest in the capital or property contributed, and where each party exercises equal rights in the conduct of the
22
23
business." Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing Corporation, et. al., we expressed the view that a
joint venture may be likened to a particular partnership, thus:
The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been generally
understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is
hardly distinguishable from the partnership, since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176 F. 2d. 498, [1949]; Carboneau v.
Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The main
distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a
temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74
[1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this jurisdiction, since under the
Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held that although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v. Bolaos, 95 Phil. 906 [1954]) (Campos
and Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership but there is none.
The alleged partnership, though, was never formally organized. In addition, petitioners point out that the New Civil Code was not yet
in effect when the partnership was allegedly formed sometime in 1945, although the contrary may well be argued that nothing
prevented the parties from complying with the provisions of the New Civil Code when it took effect on August 30, 1950. But all that
is in the past. The net effect, however, is that we are asked to determine whether a partnership existed based purely on
circumstantial evidence. A review of the record persuades us that the Court of Appeals correctly reversed the decision of the trial
court. The evidence presented by petitioners falls short of the quantum of proof required to establish a partnership.
Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have expounded on the precise
nature of the business relationship between them. In the absence of evidence, we cannot accept as an established fact that Tan Eng
Kee allegedly contributed his resources to a common fund for the purpose of establishing a partnership. The testimonies to that
effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should be noted that it is not with the number of witnesses
24
wherein preponderance lies; the quality of their testimonies is to be considered. None of petitioners' witnesses could suitably
account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife was related to
Matilde Abubo.25 He stated that when he met Tan Eng Kee after the liberation, the latter asked the former to accompany him to get
80 pieces of G.I. sheets supposedly owned by both brothers. 26Tan Eng Lay, however, denied knowledge of this meeting or of the
conversation between Peralta and his brother.27 Tan Eng Lay consistently testified that he had his business and his brother had his,
that it was only later on that his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession
(specifically here, of the G.I. sheets) is not an indicium of the existence of a partnership.28
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng Kee never
asked for an accounting. The essence of a partnership is that the partners share in the profits and losses. 29 Each has the right to
demand an accounting as long as the partnership exists.30 We have allowed a scenario wherein "[i]f excellent relations exist among
the partners at the start of the business and all the partners are more interested in seeing the firm grow rather than get immediate
returns, a deferment of sharing in the profits is perfectly plausible." 31 But in the situation in the case at bar, the deferment, if any,
had gone on too long to be plausible. A person is presumed to take ordinary care of his concerns. 32 As we explained in another case:

In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not furnish any help
or intervention in the management of the theatre. In the third place, it does not appear that she has even demanded from
defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should
have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were
correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was to
receive her share of P3,000.00 a month, which cannot be interpreted in any manner than a payment for the use of the
premises which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of
defendant of June 17, 1945 (Exh. "A"), which shows that both parties considered this offer as the real contract between
them.33 [emphasis supplied]
34

A demand for periodic accounting is evidence of a partnership. During his lifetime, Tan Eng Kee appeared never to have made any
such demand for accounting from his brother, Tang Eng Lay.
This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting to show that Tan Eng
Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of these documents was questioned by
petitioners, to the extent that they filed criminal charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal
cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact shows that Tan Eng Kee received sums as wages of an
employee. In connection therewith, Article 1769 of the Civil Code provides:
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or
do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in the
business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.
In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a partner. Even if the
payrolls as evidence were discarded, petitioners would still be back to square one, so to speak, since they did not present and offer
evidence that would show that Tan Eng Kee received amounts of money allegedly representing his share in the profits of the
enterprise. Petitioners failed to show how much their father, Tan Eng Kee, received, if any, as his share in the profits of Benguet
Lumber Company for any particular period. Hence, they failed to prove that Tan Eng Kee and Tan Eng Lay intended to divide the
profits of the business between themselves, which is one of the essential features of a partnership.
Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from this set of circumstances:
that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were supervising the employees; that both were the
ones who determined the price at which the stocks were to be sold; and that both placed orders to the suppliers of the Benguet
Lumber Company. They also point out that the families of the brothers Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber
Company compound, a privilege not extended to its ordinary employees.
However, private respondent counters that:
Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges granted in favor of
Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following reasons:
(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates. So long, therefore,
that an employee's position is higher in rank, it is not unusual that he orders around those lower in rank.
(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order materials from
suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does not necessarily have to perform this
particular task. It is, thus, not an indication that Tan Eng Kee was a partner.
(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not accorded to
other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan Eng Lay. Naturally, close personal
relations existed between them. Whatever privileges Tan Eng Lay gave his brother, and which were not given the other
employees, only proves the kindness and generosity of Tan Eng Lay towards a blood relative.

(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the pricing of stocks, this
does not adequately prove the existence of a partnership relation between them. Even highly confidential employees and
the owners of a company sometimes argue with respect to certain matters which, in no way indicates that they are
35
partners as to each other.
In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly may be inadequate
to prove the intent to form a partnership, nevertheless, the collective effect of these circumstances may be such as to support a
finding of the existence of the parties' intent. 36 Yet, in the case at bench, even the aforesaid circumstances when taken together are
not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in the operations of Benguet Lumber,
but in what capacity is unclear. We cannot discount the likelihood that as a member of the family, he occupied a niche above the
rank-and-file employees. He would have enjoyed liberties otherwise unavailable were he not kin, such as his residence in the
Benguet Lumber Company compound. He would have moral, if not actual, superiority over his fellow employees, thereby entitling
him to exercise powers of supervision. It may even be that among his duties is to place orders with suppliers. Again, the
circumstances proffered by petitioners do not provide a logical nexus to the conclusion desired; these are not inconsistent with the
powers and duties of a manager, even in a business organized and run as informally as Benguet Lumber Company.
There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the petition must
fail.
WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is hereby AFFIRMED in toto. No
pronouncement as to costs.
SO ORDERED.
Bellosillo, Mendoza, Quisumbing and Buena, JJ ., concur.

Republic
of
SUPREME
Manila
EN BANC
G.R. No. L-2880 December 4, 1906
FRANK
vs.
D. M. CARMAN, ET AL., defendants-appellants.
W. A. Kincaid for appellants.
J. N. Wolfson for appellee.

the

S.

Philippines
COURT

BOURNS, plaintiff-appellee,

MAPA, J.:
The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency, balance due on a contract for the sawing of
lumber for the lumber yard of Lo-Chim-Lim. the contract relating to the said work was entered into by the said Lo-Chim-Lim, acting
as in his own name with the plaintiff, and it appears that the said Lo-Chim-Lim personally agreed to pay for the work himself. The
plaintiff, however, has brought this action against Lo-Chim-Lim and his codefendants jointly, alleging that, at the time the contract
was made, they were the joint proprietors and operators of the said lumber yard engaged in the purchase and sale of lumber under
the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to show by the words above italicized that the other defendants
were the partners of Lo-Chim-Lim in the said lumber-yard business.lawphil.net
The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-Tongco on the ground that they were
not the partners of Lo-Chim-Lim, and rendered judgment against the other defendants for the amount claimed in the complaint with
the costs of proceedings. Vicente Palanca and Go-Tauco only excepted to the said judgment, moved for a new trial, and have
brought the case to this court by bill of exceptions.
The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim had a certain lumber yard in Calle Lemery
of the city of Manila, and that he was the manager of the same, having ordered the plaintiff to do some work for him at his sawmill
in the city of Manila; and that Vicente Palanca was his partner, and had an interest in the said business as well as in the profits and
losses thereof . . .," and that Go-Tuaco received part of the earnings of the lumber yard in the management of which he was
interested.
The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a lumber yard in Calle Lemmery of the city of
Manila in the year 1904, and participated in the profits and losses of business and that Lo-Chim-Lim was managing partner of the
said lumber yard." In other words, coparticipants with the said Lo-Chim-Lim in the business in question.
Although the evidence upon this point as stated by the by the however, that is plainly and manifestly in conflict with the above
finding of that court. Such finding should therefore be sustained. lawphil.net
The question thus raised is, therefore, purely one of law and reduces itself to determining the real legal nature of the participation
which the appellants had in Lo-Chim-Lim's lumber yard, and consequently their liability toward the plaintiff, in connection with the
transaction which gave rise to the present suit.
It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal agreement only. At least there
is no evidence tending to show that the said agreement was reduced to writing, or that it was ever recorded in a public instrument.

Moreover, that partnership had no corporate name. The plaintiff himself alleges in his complaint that the partnership was engaged
in business under the name and style of Lo-Chim-Lim only, which according to the evidence was the name of one of the defendants.
On the other hand, and this is very important, it does not appear that there was any mutual agreement, between the parties, and if
there were any, it has not been shown what the agreement was. As far as the evidence shows it seems that the business was
conducted by Lo-Chim-Lim in his own name, although he gave to the appellants a share was has been shown with certainty. The
contracts made with the plaintiff were made by Lo-Chim-Lim individually in his own name, and there is no evidence that the
partnership over contracted in any other form. Under such circumstances we find nothing upon which to consider this partnership
other than as a partnership of cuentas en participacion. It may be that, as a matter of fact, it is something different, but a simple
business and scant evidence introduced by the partnership We see nothing, according to the evidence, but a simple business
conducted by Lo-Chim-Lim exclusively, in his own name, the names of other persons interested in the profits and losses of the
business nowhere appearing. A partnership constituted in such a manner, the existence of which was only known to those who had
an interest in the same, being no mutual agreements between the partners and without a corporate name indicating to the public in
some way that there were other people besides the one who ostensibly managed and conducted the business, is exactly the
accidental partnership of cuentas en participacion defined in article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted,
shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand,
shall have no right of action against the third person who contracted with the manager unless such manager formally transfers his
right to them. (Art 242 of the code Of Commerce.) It follows, therefore that the plaintiff has no right to demand from the appellants
the payment of the amount claimed in the complaint, as Lo-Chim-Lim was the only one who contracted with him. the action of the
plaintiff lacks, therefore, a legal foundation and should be accordingly dismissed.
The judgment appealed from this hereby reversed and the appellants are absolved of the complaint without express provisions as to
the costs of both instances. After the expiration of twenty days let judgment be entered in accordance herewith, and ten days
thereafter the cause be remanded to the court below for execution. So ordered.
Arellano, C.J., Torres, Johnson, Carson, Willard and Tracey, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-10040
January 31, 1916
EUGENIA LICHAUCO, ET AL., plaintiffs-appellants,
vs.
FAUSTINO LICHAUCO, defendant-appellant.
Haussermann, Cohn and Fisher for plaintiffs.
Gibbs, McDonough and Blanco for defendant.
CARSON, J.:
This action was brought by two of the partners of an enterprise of which the defendant was manager (gestor), to secure an
accounting of its affairs, and the payment to the plaintiffs of their respective shares of capital and profits.
The defendant admitted the allegations of the complaint as to the organization of the enterprise and the participation of the
plaintiffs therein, but he contended that the plaintiffs could not maintain this action under the terms of the written contract by
virtue of which the enterprise was organized. This contention having been overruled, an account of the affairs of the enterprise was
submitted, and the parties having been given an opportunity to offer evidence for and against certain dispute items of the account,
judgment was rendered for the balance shown to be due the plaintiffs, after allowing some of these disputed items and disallowing
the rest. To this judgment, both plaintiffs and defendant excepted, and the record is now before us on their respective bills of
exceptions.
In October, 1901, a notarial instrument was executed in Manila, by the terms of which a partnership was duly organized for the
purpose of carrying on a rice-cleaning business at Dagupan, and for the purchase and sale of "palay" and rice. The articles of
association, which were not recorded in the mercantile registry, contain, among others, the following provisions:
2. The association will be named F. Lichauco Hermanos and will be domiciled in the center of its operations, that is, in the
pueblo of Dagupan, Province of Pangasinan.
3. The association cannot be dissolved except by the consent and agreement of two-thirds of its partners and in the event
of the death of any of the latter, the heirs of the deceased, if they be minors or otherwise incapacitated, shall be
represented in the association by their legal representatives or if two-thirds of the surviving partners agree thereto, the
participation of the deceased partner may be liquidated.
4. The management and direction of the association shall be in charged of Don Faustino Lichauco y Santos, who shall be
domiciled in this city of Manila, with ample powers to direct and manage the business; to carry out all manner of purchases
and sales of "palay," rice, chattels, machinery and whatsoever may be necessary and proper for the business of the
association; to make all contracts of every kind related to said business, either orally, in private documents or in public
instruments, as he deems fit; to appoint subordinates and other employees such as may be necessary; and finally to
perform whatever acts and things he may deem suitable to the interest of the association; and to appear before the courts
of justice and other authorities and public offices in such matters as may concern the association and to appoint agents for
those matters to which he cannot attend personally.

The articles disclose that the capital invested in the enterprise was fixed at P100,000, of which amount P60,000 was contributed by
the defendant and his brothers in the form of machinery in a mill at Dagupan and the good will of the milling business formerly
conducted at the place, the balance of the capital being contributed by the plaintiffs and others in cash, in the following proportions:
Eugenia Lichauco, P13,000; Catalino Arevalo, P8,000; Mariano Nable Jose, P5,000; Tomas Roux, P4,000; Julita Lichauco, P10,000.
The business thus organized was carried on until May, 1904, when it was found to be unprofitable and discontinued by the
defendant manager (gestor); and thereafter, the machinery of the rice mil was dismantled by his orders, and offered for sale. No
accounting ever was made to his associates by the defendant until this action was instituted in October, 1912, although it appears
that in the year 1905, Mariano Limjap, one of the participants in the venture, demanded a rendition of accounts; and that Eugenia
Lichauco, one of the plaintiffs in this action, made repeated unsuccessful demands for the return of her share of the capital invested
in the enterprise. And yet it further appears that during all that time the defendant manager of the defunct enterprise had in his
possession not less than P20,000, the cash balance on hand, over and above all claims of indebtedness after suspending operations
in 1904; and that since that time he received or should have received substantial sums of money from the sale of the machinery of
the dismantled mill.
There is evidence in the record tending to show that the defendant informed some of his associates, about the year 1906 or 1907,
that the whole enterprise was bankrupt; and it appears that some months prior to the institution of this action, he rendered upon
demand of counsel, a so-called account showing a balance to the credit of the enterprise of only P643.64; although at the trial, some
six months afterwards, he expressly admitted the existence of a cash balance of some P23,131.53, and the amount by the trial judge
as due by him on account of the venture was P29,549.99. The defendant explained that the account rendered to counsel for the
plaintiffs showing a balance of P634.64 was mailed by one of his employees without his knowledge, and that it was a stupid blunder
which he greatly regretted; and it would seem that his statement as to the bankruptcy of the enterprise were not intended to be
understood as an assertion that there was no balance due the partners, but merely that the enterprise had not paid, and that the
losses of operation had exceeded the profits.
Giving the defendant the benefit of the doubt, we are inclined to accept these explanations of these incidents, as it is hardly possible
that he could have hoped to escape indefinitely the necessity of accounting for his management of the enterprise, and thus
permanently retain in his own possession the substantial balance due to his associates. But it is to be observed that, viewed for
many standpoint, these statements, made and rendered by the defendant as to the affairs of the association, taken together with
the other evidence in the record, leave no room for doubt that from the time he concluded the operations of the business in 1904
until the date of the institution of this action in 1912 he made no attempt to account to his associates or to turn over to them the
amount due them on a proper accounting.
The assignments of error made by counsel for the defendant, as appellant, are as follows:
Error No. 1. The trial court erred in rendering judgment in favor of the plaintiffs and against the defendant for any sum,
without first decreeing a dissolution of the association and final liquidation of its assets in accordance with paragraph 10 of
the articles of association, and because such judgment is not within the issues joined.
Error No. 2. The trial court erred in charging the defendant with P5,500, the price of certain boilers and machinery sold to
one Marciano Rivera by Crisanto Lichauco, which amount never came into the possession of defendant.
Error No. 3. The trial court erred in disallowing the credit of P60.36, taken by defendant for that amount expended in an
attempt to make good the sale and delivery to Marciano Rivera of the boilers and machinery mentioned in the second
assignment of error.
Error No. 4. The court erred in charging the defendant with the P1,820, covered by stipulation of December 10, 1913, for
the reason that the defendant's liability under that stipulation can only accrue on the final dissolution and liquidation of the
association.
Error No. 5. The court erred in rendering judgment against the defendant for the costs of the action.
The assignments of error made by refusing to condemn the defendant to the payment of interest at the legal rate from May 30,
1904, to date of payment.
Error No. 1 The court erred in refusing to condemn the defendant to the payment of interest at the legal rate of 6 per
cent upon the credit balance of the joint venture from May 30, 1904, to date of payment.
Error No. 2. The court erred in refusing to allow interest at the legal rate of 6 per cent upon the sum of P1,147.44 from
May 30, 1904, to date of payment, said credit balance of the joint venture was unduly diminished by error in the conversion
of gold currency.
Error No. 3. The court erred in refusing to allow the joint venture account the sum of P17, 746, being the value of 3,736
cavanes of rice at P4.75 per cavan, for which the defendant has wholly failed to account.
Error No. 4. The court erred in declining to allow the joint venture account the sum of P8,943.98 as interest upon said
last-mentioned sum at the legal rate.
Error No. 5. The court erred in declining to allow the joint venture account the sum of P564.34, as interest at the legal
rate upon the sum of P5,500, for which the defendant has failed and refused to account.
Error No. 6. The court erred in declining to credit the joint venture account with the sum of P2,498.46 as the amount due
said account from Mariano Nable Jose, together with interest thereon at the legal rate, amounting to P1,259.22.

We shall first examine the contentions of counsel for the defendant in support of his principal assignment of error, as a ruling in this
regard is necessary to the proper disposition of all the other assignments of error by both plaintiffs and defendant.
Counsel for defendant says in his brief:
It is our contention, and we believe it to be unanswerable, that the dissolution and liquidation, either in whole or in part, of
the association is absolutely prohibited by paragraph 10 of the articles of association, except by and with the conformity
and agreement of two-thirds of the partners, and that as a consequence thereof the court, without allegations or proof of
compliance with that paragraph and without making the other partners parties to the action, had no power to decree a
distribution either in whole or in part of the capital or assets of the association.
It certainly cannot be seriously contended that part of the capital and assets of this association can be lawfully returned to
and distributed between the plaintiffs who constitute one-fifth of the total number of partners, as required by paragraph
10 of the articles of association.
It is elementary that no lawful liquidation and distribution of capital and assets of any company or association can ever take
place except upon dissolution thereof.
These contentions of counsels for the defendant take no account of the provisions of both the Civil and Commercial Codes for the
dissolution and liquidation of the different classes of partnerships and mercantile associations upon the occurrence of certain
contingencies not within the control of the partners. The provisions of paragraph 10 of the articles of partnership prohibiting the
dissolution of the association under review, except by the consent and agreement of two-thirds of its partners, denied the right to a
less number of the partners to effect a dissolution of the partnership through judicial intervention or otherwise; but in no wise
limited or restricted the rights of the individual partners in the event the dissolution of the association was effected, not by any act
of theirs, but by the express mandate of statutory law. It would be absurd and unreasonable to hold that such an association could
never be dissolved and liquidated without the consent and agreement of two-thirds of its partners notwithstanding that it had lost
all its capital, or had become bankrupt, or that the enterprise for which it had been organized had been concluded or utterly
abandoned.
Chapter 3 of Title VIII [Book IV,] of the Civil Code prescribes the means by which partnership (sociedades) as defined in that code,
may be terminated. The first article of that chapter is as follows:
1700. Partnership is extinguished:
(1) When the term for which it was constituted expires.
(2) When the thing is lost, or the business for which it was constituted ends.
(3) By the natural death, civil interdiction, or insolvency of any of the partners, and in the case provided for in article 1699.
(4) By the will of any of the partners, subject to the provisions of articles 1705 and 1707.
Partnerships, to which article 1670 refers, are excepted from the provisions of Nos. 3 and 4 of this article, in the cases in
which they should exist, according to the Code of Commerce.
1670. Civil partnerships, on account of the objects for which they are destined, may adopt all the forms accepted by the
Code of Commerce. In this case, the provisions of the same shall be applicable, in so far as they are not in conflict with
those of the present Code.
Articles 221 and 222 of the Code of Commerce are as follows:
221. Associations of any kind whatsoever shall be completely dissolved for the following reasons:
(1) The termination of the period fixed in the articles of association of the conclusion of the enterprise which constitutes its
purpose.
(2) The entire loss of the capital.
(3) The failure of the association.
222. General and limited copartnerships shall furthermore be totally dissolved for the following reasons:
(1) The death of one of the general partners if the articles of copartnership do not contain an express agreement that the
heirs of deceased partner are to continue in the copartnership, or an agreement to the effect that said copartnership will
continue between the surviving partners.
(2) The insanity of a managing partner or any other cause which renders him incapable of administering his property.
(3) The failure of any of the general partners.
It cannot be doubted that under these provisions of law the association of which the defendant was nominated manager (gestor)
was totally dissolved in the year 1904, when the rice mill for the operation of which it was organized was dismantled, the machinery
offered for sale and the whole enterprise concluded and abandoned.

Upon the dissolution of the association in 1904 it became the duty of the defendant to liquidate its affairs and account to his
associates for their respective shares in the capital invested this not merely from the very nature of his relation to the enterprise
and of his duties to those associated with him as partners, but also by the express mandate of the law. The association having been
dissolved by the termination and abandonment of the enterprise for which it was organized, he owed this duty to liquidate and
account to all and to each of his associates, and upon his failure to perform that duty, all or any of them had a clear legal right to
compel him to fulfill it. Each of his associates had a perfect right to demand for himself a full, complete and satisfactory accounting,
and in the event that he conceived himself aggrieved in this regard, to institute the appropriate judicial proceedings to secure relief.
Doubtless, in order to avoid a multiplicity of actions, the defendant in such an action could require all the associates to be made
parties, but the right of an individual member of the association to recover his share in the enterprise and to assert his individual
claim for redress, wholly independent of the action or attitudes of his associates, could be in no wise affected thereby. The other
associates would be proper, but not necessary, parties to an action of this kind; and when, as in the case at bar, the defendant
proceeds to trial without objection on the express ground that all the associates in the enterprise have not been made parties to the
action, he cannot thereafter be heard to raise such an objection for the purpose of challenging any judgment which may be
rendered therein.
Although the enterprise was organized in the year 1901 for the purpose of conducting mercantile operations, including the buying
and selling of "palay" and rice, the articles of partnership or association were not registered in the mercantile registry in accordance
with the provisions of articles 17 and 119 of the Commercial Code. It was therefore a mere unregistered commercial partnership,
and the association never became in the legal sense a juridical person, nor did it attain the dignity, rights or privileges accorded the
different classes of compaias mercantiles (mercantile partnerships), discussed in Title 1 of Book 2 of the Commercial Code. Still,
under the provisions of the above-cited article 1670 of the Civil Code, if it be found that the association is clothed with the forms of
any of the commercial association or partnerships recognized in the Commercial Code, the provisions of that code, in so far as they
are not in conflict with those of the Civil Code, may be relied upon in an attempt to define the legal relations of the association and
its members. Though the unregistered articles of partnership gave the association a form of organization closely assimilated to that
of a regular "compaia en comandita," as prescribed in the Commercial Code, except that the name designated in the articles did
not include the words "y compaia" (and company) and the additional words "sociedad en comandita," it appears to have been
organized and conducted in substantially the manner and form prescribed for "cuentas en participacion" (joint accounts) in articles
239-243 of that Code.
The plaintiffs alleged in their complaint and the defendant admitted in his answer that the contract was one of a "sociedad de
cuentas en participacion" (joint account partnership) of which the defendant was gestor (manager). In his brief on appeal, however,
counsel for defendant intimates that under article 241 of the Commercial Code, the adoption in the articles of partnership of a firm
name deprived the parties of the rights and privileges secured to those interested in cuentas en participacion under the provisions of
the Commercial Code.
But whatever effect the inclusion or omission of a firm name in the articles of partnership may have had as to third persons dealing
with the partnership, we are of opinion that as between the associates themselves, their mutual rights, duties and obligations may
properly be determined upon the authority of article 1670 of the Civil Code by the provisions of the Commercial Code touching
partnerships, the form of which in all other respects, the partners have adopted in their articles of partnership.
The duty of the defendant to liquidate the affairs of the enterprise and to account to his associates promptly upon the dissolution of
the association in the year 1904 is expressly prescribed in the Commercial Code, whether we regard the association, so far as it
affects the mutual rights and obligations of the partners, as clothed with the forms of a "sociedad de cuentas en participacion" (joint
account partnership) or a "sociedad en comindata."
Article 243 of the Code of Commerce prescribes with reference to "cuentas en participacion" (joint accounts) that:
243. The liquidation shall be effected by the manager, and after the transactions have been concluded he shall render a
proper account of its results.
Articles 229 and 230 of the same Code are as follows:
229. In general or limited copartnerships, should there be no opposition on the part of any of the partners, the persons who
managed the common funds shall continue in charge of the liquidation; but should all the partners not agree thereto a
general meeting shall be called without delay, and the decision adopted at the same shall be enforced with regard to the
appointment of liquidators from among the members of the association or not, as well as in all that refers to the form and
proceedings of the liquidation and the management of the common funds.
230. Under the penalty of removal the liquidators shall
(1) Draw up and communicate to the members, within the period of twenty days, an inventory of the common property,
with a balance of the association in liquidation according to its books.
(2) Communicate in the same manner to the members every month the condition of the liquidation.
We conclude that an express statutory obligation imposed upon the defendant an imperative obligation to proceed without delay to
the liquidation of the association in the year 1904 and the further duty to account to his associates for the result of that liquidation.
While he appears to have gone forward with the liquidation far enough to collect all the cash resources of the association into his
own hands, how utterly failed neglected to account therefor to his associates or to make any attempt so to do, and we are of
opinion that the plaintiffs were clearly entitled to bring this action to compel an accounting, and the payment of their respective
shares of the capital invested, together with damages resulting from the failure of the defendant to perform the duty expressly
imposed upon him by statute. The damages arising from the failure to account consisted of the loss of the use of the money to
which they would have been entitled upon a proper accounting, from the date at which it should have been turned over by the
defendant until it is actually paid by him, that is to say, interest on that amount at the rate of six per centum per annum until paid.

What has been said disposes adversely of the contentions of the defendant in support of his assignments of errors Nos. 1 and 5; and
sustains the contentions of the plaintiffs in their assignments of errors Nos. 1 and 2, to the extent that interest at the rate of six per
centum per annum should have been allowed upon the credit balance of the enterprise from May 30, 1904, the date when it should
have been distributed among his associates by the defendant had he performed his statutory duty in that regard. This balance
(including the item mentioned in plaintiff's assignment of error No. 2) we fix at P23, 131.53, adopting as a basis for our finding in this
regard, the findings and conclusions of the trial judge, and disregarding the possibility that had defendant accounted promptly to his
associates, interest might not have been chargeable on some of the smaller items in included in the account until some little time
after the date just mentioned.
As to the other assignments of error it must suffice to say that we have carefully examined the record and have arrived at the
following conclusions:
With relation to the item of account referred to in defendant's assignment of error No. 2 and plaintiff's assignment No. 5, we hold
that the defendant's account was properly charged by the trial judge with the sum of P5,500, the purchase price of certain
machinery sold by him and for which, under all the circumstances, he must account, together with interest at the rate of six per
centum per annum from January 8, 1912, the date of sale to Marciano Rivera.
With relation to the items mentioned in plaintiff's assignments of errors Nos. 3 and 4, we hold that the trial judge properly declines
to charge the defendant's account with the amounts mentioned therein, the evidence of record not being sufficient to establish his
liability therefor as manager or gestor of the enterprise.
With relation to the matter referred to in plaintiff's assignment of error number 6 and defendant's assignment No. 4, we are of
opinion that the trial judge properly disposed of the issues between the parties in this regard, as they were submitted to him and as
they are disclosed by the record brought here on appeal.
We find no merit in defendant's assignment of error numbered 3.
Twenty days hereafter let judgment be entered reversing the judgment of the lower court, without special condemnation of the
costs in this instance, and directing the return of the record to the trial court, wherein judgment will be entered in accordance
herewith, and ten days thereafter let the record be remanded in confirmity therewith. So ordered.
Arellano, C.J., Torres and Trent, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5242

August 6, 1910

ALDECOA & CO., plaintiff-appellant,

vs.
WARNER, BARNES & CO., LTD., defendant-appellee.
Rosado, Sanz and Opisso, for appellant.
Haussermann, Ortigas, Cohn and Fisher, for appellee.
TORRES, J.:
By a complaint filed on September 26, 1907, the legal representative of Aldecoa and Co., in liquidation, filed suit in the Court of First
Instance of Manila against Warner, Barnes and Co., Ltd., alleging in the first three paragraphs of their complaint, as a cause of action,
that the plaintiff is a regular collective mercantile association organized in accordance with the laws of these islands, duly registered
in the mercantile registry, and at present in liquidation; that the defendant is a joint stock mercantile firm organized in accordance
with the laws of England, registered in the mercantile registry of Manila, and has done and is still doing business in these Islands
under the name of Warner, Barnes and Co., Ltd., which required the business that was conducted in these Islands by Warner, Barnes
and Co., the assets, liabilities, and all the obligations of which were assumed by the defendant.
In other paragraphs of the complaint, from the fourth to the twelfth, the plaintiff set forth that, prior to December 1, 1898, Warner,
Barnes and Co. were conducting a business in Albay, the principal object of which was the purchase of hemp in the pueblos of
Legaspi and Tobacco for the purpose of bringing it to Manila, here to sell if for exportation, and that on the said date of December 1,
1898, the plaintiff company became interested in the said business of Warner, Barnes and Co., in Albay and formed therewith a
joint-account partnership whereby Aldecoa and Co., were to share equally in the gains and losses of the business in Albay; that the
defendant is the successor to all the rights and obligations of Warner, Barnes and Co., among which is that of being manager of the
said joint-account partnership with Aldecoa and Co.; that the defendant acted, and continues to act as such manager, and is obliged
to render accounts supported by proofs, and to liquidate the business, which defendant not only has not done, in spite of the
demand made upon it, but it has expressly denied the right of plaintiff to examine the vouchers, contenting itself with forwarding
copies of the entries in its books, which entries contain errors and omissions that hereinafter will be mentioned.
Said entries moreover, whereas its operations should have commenced and did commence on December 1, 1898, on which date the
joint-account partnership commenced; that, with respect to the liquidation of the business, the operations having been closed on
December 31, 1903, Warner, Barnes and Co., Ltd., the defendant, has not realized upon the assets of the firm by selling the property
which constitutes its capital; that the persons who were the managers and general partners of Warner, Barnes and Co., Ltd., and are
the managers and directors of that firm in the Philippine Islands and are the ones who, under the previous firm name of Warner,

Barnes and Co., admitted Aldecoa and Co. as a participant in one-half of the said business, on the 1st day of December, 1898; that
the said directors of the defendant company, unlawfully, maliciously, and criminally conspired with the persons who were managing
the commercial firm of Aldecoa and Co. during the years 1899, 1900, 1901, 1902, and 1903, to defraud the latter of its interest in the
said joint-account partnership, buying the silence of the said managers with respect to the operations of the joint-account
partnership during the time comprised between the 1st of December, 1898, and the 30th of June, 1899, and also with respect to the
errors and omission in the accounts relating to the second semester of 1899, and those relating to 1900, 1901, 1902, and 1903.
That the said fraudulent acts were not known to the partners of the plaintiff firm until the managers, in collusion with the managers
of the defendant firm to defraud and injure the plaintiff firm, had ceased to hold their positions, to wit, until after the 31st of
December, 1906, and that by reason of this conspiracy to defraud the plaintiffs, the defendants have been benefited; that the errors
and omissions found in the entries of the books kept by the defendant firm as manager of the joint-account partnership are those
expressed in details here below:
(a) It appears that between the 10th of July and the 26th of December, 1899, 43,934 piculs of hemp arrived in Manila for the jointaccount partnership, which were purchased in Legaspi and Tobacco at 13 pesos per picul, and, after charging against this hemp
excessive expenses for collection, storage, freight, fire, marine, and war insurance, personnel, etc., the defendants, Warner, Barnes
and Co., as managers of the joint-account partnership and commission agents of their joint-account partners, claim that they
purchased the said hemp for themselves, but do not give the price received from the sale thereof and merely credit it at 13 pesos a
picul, when the average market price at that time was 16.50 pesos a picul; said defendants thereby injuring plaintiffs to the amount
of P76,884.50.
(b) Striking a balance from the amount of hemp debited and that credited, there results a difference of 4,332.96 piculs not credited
which, at 24 pesos a picul, the market price at the time, represents an injury to plaintiffs to the extent of P51,995.52, the said deficit,
with respect to the hemp, pertaining to the period beginning with December 31, 1899, in the manner shown by the following table:
Invoices & Cr. Dr.
Piculs Piculs
1899 Dec. 31 ....................................... 86,534.18 43,934
1900 Apr. 30 ...................................... 13,069.97 50,261.78
1900 Dec. 31 ...................................... 67,892.56 71,277
1901 Dec. 31 ...................................... 101,253.31 100,342
1902 Dec. 31 ...................................... 98,074.52 94,279.20
1903 Dec. 31 ...................................... 66,482.49 68,880.09 433,307.03 428,974.07 4,332.96
Lacking .............................................. 433,307.03 433,307.03
(c) In 1900, on April 30, Messrs. Warner, Barnes and Co. Ltd., give credit for 5,485 piculs of hemp, at 16 pesos a picul, when the
market price at that time, according to themselves, was P23.78; thereby injuring plaintiffs in the sum of P21,350.36.
(d) In 1901, on the date of January 31, Messrs. Warner, Barnes and Co., Ltd give credit for 4,600 piculs of hemp, at 8.93 pesos a picul,
when, according to themselves, the market price at that time was 11.50 pesos a picul; thereby injuring plaintiffs in the sum of
P5,911.
(e) One of the sources of profit of the joint-account partnership between Aldecoa and Co. and Warner, Barnes and Co., Ltd., was
from the pressing of hemp, which profit is to be credited to the partnership joint-accounts, when the hemp is realized in Manila, and
from this source there are due to the plaintiffs P149,084.12, in which sum they have been injured by the defendants. The said credit
for pressing is omitted from the books of Warner, Barnes and Co., Ltd., and should be entered as follows:
1899 ............................................. 21,968 bales, at P1.25 ................................. P27,460 1900 to April 30 .........................
25,130 bales, at P1.25 ................................. 31,412.50 1900 May 10 to Dec. 31 ............ 35,639 bales, at P1.25
................................. 44,548.75 1901.............................................. 50,151 bales, at P1.25 ................................. 62,688.75
1902 to July 31 ........................... 26,825 bales, at P1.25 ................................. 33,531.25
Aug. 1 to Dec. 31 ............. 20,314 bales, at P1.75 ................................. 35,549.50 1903 ............................................. 34,440
bales, at P1.75 ................................. 60,270
214,467 bales ................................................. 295,460.75 2,166 bales, lacking, at P1.25 2,707.50
216,633 bales .................................................. 298,168.25 20 loose.

216,653 bales.
(f) Another error found in the books of Warner, Barnes, and Co., Ltd., is in connection with the outstanding accounts, which are
debited in the sum of P52,510.36, while only P2,769.24 are credited in the manner set out in the following statement:
DR.

1899 July 31. W.B. and Co., Tobacco, transferred to net

account their account sale 92.25 piculs hides
by Kongsee ............................................................................. P1,149.46
1899 Dec. 31. For transfer account to cover business this
semester without statement .................................................. 16,100.57
1900 Feb. 28. As transferred account items noted page
114 day-book .......................................................................... 18,635.08
1900 Feb. 28. To cover war insurance, January ................................................. 4,000
1900 Feb. 28. To cover outstanding accounts ................................................... 2,625.25 52,510.36
CR.
1900 Feb. 28. As transferred account items noted page
113 day-book .......................................................................... 2,769.24
There remain, therefore ......................................................... 49,741.12 of which one-half, that is
...................................................... 24,870.56 belongs to the plaintiffs.
(g) In 1900, there is unduly included an item of net account which should be stricken out, as it does not pertain to this business. This
item is the following:
1900
June 30. To Miguel Estela. For transfer made to his account
of 5 per cent commission on his hemp, which should
not be paid according to agreement ..................................... P870.75
Half of this sum, P435.37, must be credited to the plaintiffs.
(h) On the date of December 26, 1899, Messrs. Warner, Barnes and Co., Ltd., deduct from the profits which they show as belonging
to Aldecoa and Co., the sum of P7,400, under the appearance of the insurance premium, and they delivered that sum to the
plaintiffs' managers with whom they conspired, for the purposes of the collusion alleged in Paragraph VII of the complaint, in the
manner failing to observe the truth in their statement of the facts. Aldecoa and Co., therefore, claim for themselves this amount,
P7,400.
(i) On December 31, 1903, on a capital of P50,000 brought in by Aldecoa and Co., and to whom it should bear 5 per cent interest
from the 8th of June, 1900, the interest is unduly credited to the joint-account, thereby injuring the plaintiffs in the sum of P8,750.
(j) On December 31, 1902, Aldecoa and Co. are charged with six months' interest, amounting to P736.46, on a balance debited
against them for alleged losses, and on June 30, 1903, they are charged with P1,818.58 for a like reason. These two items should be
stricken out, because the accounts when correctly made to show no losses, but profits. By such debits the plaintiffs have been
injured in the sum of P1,277.52.
(k) In the entries corresponding to the years 1902 and 1903, Warner, Barnes and Co., Ltd., give the price of "corriente buena"
(currect good), to the grade which, according to the mark, was classified as "abaca superior" (superior hemp); the price of "corriente
ordinario" (current ordinary), to the hemp marked under the classification of "corriente buena" (current good); the price of "segunda
superior" (second superior), to what is "corriente" or "current," and so on successively; whence results a difference of price to the
value of P233,102.18, in 1902, and P74,274.90, in 1903, one-half of which differences should be credited to Aldecoa and Co., that is
P153,688.54.
(l) The value of the properties brought in by Warner, Barnes and Co., Ltd., to the joint-account, instead of cash capital, is omitted
from the accounts. These properties are the following:
Those purchased from Mariano Roisa, consisting of one galvanized-iron-roofed warehouse, with hemp press; one house of strong
materials and the lot on which it stands, in Tobacco, P12,000.
That purchased from Juana Roisa, which is one small warehouse of strong materials, in Tobacco, worth about P2,500.
Those purchased from D. Manuel Zalvidea situated in Tobacco, which are: One warehouse of strong materials, with press; another
warehouse of strong materials; and two houses of strong materials, together with the lots on which they are built, P22,000.

Those purchased from D. Marcos Zubeldia, in Legaspi, which are: Four warehouses with three hemp presses, and one house of
strong materials, with their corresponding lots, P50,000.
Total cost, P86,500.
The complaint further sets forth that if the entries made by the defendant in its books show in themselves the foregoing errors and
omissions, the plaintiff has good grounds for believing that, if the vouchers were examined, still greater errors would be found, as to
which the plaintiff can not formulate its claims with exactness until the defendant renders it an account, accompanied by vouchers;
that the defendant, as manager of the joint-account partnership with Alcodea & Co., neglected to comply with what is especially
prescribed in article 243 of the Code of Commerce, as a duty to inherent to its position as manager of the joint-account partnership,
which is that of rendering an account with vouchers, and that of liquidating the said business, for it refuses to furnish the plaintiff
the documents required for their examination and verification, and also refuses to realize the firm assets by selling the warehouses,
houses, and other property which constitute the capital; that, as the defendant refuses to do the things above related, the plaintiff
has no other easy, expeditious and suitable remedy than to petition the court for a writ of mandamus, wherefore it prays the court
to protect it in its rights and to issue the said mandamus against the defendant, ordering it, within a date set for this purpose, to
render to the court an account, accompanied by invoices, receipts, and vouchers of the Albay business, beginning the said account
as of December 1, 1898, the date on which the partnership was formed, and correcting in it errors and omissions related in
paragraph 9 of this complaint; that the defendant credit and pay to the plaintiff the sums alleged in that paragraph to be due to the
plaintiff, with interest at the legal rate upon the sums of omitted for the difference between the amounts incorrectly debited and
credited, from the respective dates on which they should appear, if correctly entered; that after the said accounts have been
rendered and discussed, judgment be entered for any balance which may appear in favor of the plaintiff, including the sums claimed,
and legal interest thereon. The plaintiff also prays that the writ of mandamus fix a term within which the defendant is to liquidate
the business, selling the properties aforementioned and distributing the proceeds between both the litigants, and that the
defendant be adjudged liable for costs of suit, and plaintiff be granted such other and further relief as may be found just and
equitable.
On November 11, 1907, the defendant filed a written answer an counterclaim against the defendant, and, notwithstanding the
overruling of the demurrer filed by the latter to the counterclaim, the court by writ of December 4, 1907, ordered that the
defendant should, within a period of five days, make its allegations more specific with respect to certain particulars mentioned in
the order of the court, and both parties being notified thereof, the defendant, on January 24, 1908 prayed the court to authorize it
to file the attached amended answer instead of the original one.
In the said amended answer the firm of Warner, Barnes & Co. Ltd., the defendant, states that it denies each and every one of the
allegations of the complaint, with the exception of those which are expressly admitted in its answer, and admit the allegations of
paragraphs 1, 2, and 3 of the complaint. In answer to the allegations of paragraphs 4 to 12 of the complaint, it admits that on June
30, 1899, a joint-account partnership was formed between the plaintiff and the defendant transactions of which were the purchase
of hemp in Legaspi and Tobacco, of which business one-half of the results, whether losses or gains, appertained to the plaintiff.
Defendant also admits that the said business continued under the management of the defendant company, as manager of the said
joint-account partnership, until December 31, 1903; but it denies all the other allegations contained in the said paragraphs. For its
first special defense, the defendant alleges that during the period that the said joint-account partnership existed, the manager
thereof, the defendant, rendered to the plaintiff just and true accounts of its transaction as manager of the said partnership, which
accounts have been approved by the plaintiff, with the exception of those relating to the year 1903, and as to the latter, that the
same were objected to by plaintiff firm solely upon the grounds mentioned in clause (k) of paragraph 9 of the complaint, which
objections are wholly unfounded. As its second special defense, the defendant alleges that more than four years have expired
between the time the alleged right of action accrued to the plaintiff and the date of the filing of the complaint. For all the reasons
set forth in this amended answer, the defendant prayed that it be absolved from the complaint, with the costs against the plaintiff.
On the subsequent to the 14th of August, 1908, the trial of this cause was held and oral evidence was introduced by the plaintiff, but
no witnesses were offered by the defendant, which finally moved for a dismissal of the case, and the court, on December 26 of the
same year, 1908, rendered judgment, dismissing the complaint with respect to the petition for the rendering of an account, verified
by invoices, receipts and vouchers, of the said Albay business, pertaining to the period comprised from the beginning of the business
to the 31st of December, 1902, inclusive, assessing the costs against the plaintiff, and opening the second period of the trial with
respect to the account for the whole year 1903, in accordance with the ruling of the court made at the commencement of the
hearing. The plaintiff on being notified of this judgment filed a written exception thereto and announced his intention to forward
through regular channels a bill of exceptions, and by another writing moved for a new trial on the ground that the evidence did not
justify the judgment rendered, which it alleged it was openly and manifestly contrary to the weight of the evidence and to law. This
motion being denied, to which exception was taken by the plaintiff, the latter duly filed a proper bill of exceptions which was
certified to and forwarded to this court, together with all the documentary and oral evidence produced at the trial.
This litigation concerns the rendering of accounts pertaining to the management of the business of a joint-account partnership
formed between the two litigants companies.
Both the plaintiff and the defendant are in accord that, through verbal agreement, the said partnership was established, whereby
they should share equally the profits and losses of the business of gathering and storing hemp in Albay and selling it in Manila for
exportation, and that the commercial firm of Warner, Barnes and Co., Ltd., was the manager of the said joint-account partnership.
The disagreement between the parties consists in the following points: First, as to the date when the partnership was formed and
began business in the province mentioned; second, whether the managing firm did render accounts, duly verified by vouchers, of its
management from the date of the organization of the partnership; third, whether errors and omission, prejudicial to the plaintiff,
Aldecoa and Co., exist in the partnership books and in its accounts, and whether, in the management of the said business, fraudulent
acts were committed also to the plaintiff's injury; and, fourth, whether the partnership property should be included in the
liquidation of the said business and in the accounts appertaining to the year 1903, when the existence of the partnership came to an
end.

With respect to the date on which the said partnership began, the plaintiff, Aldecoa and Co., submitted evidence unrebutted by that
of the defendant, Warner, Barnes and Co., Ltd., and although the latter averred that the joint-account partnership began on June 30,
1899, denying that it was commenced, or was formed, on December 1, 1898, as the plaintiff says that it was, it is certain that the
defendant has not proved its averment; and if, on the opening of this case de novo it shall not have done so within such period as
the court may see fit to determine, it will be proper to find in accordance with the value of the evidence adduced by the plaintiff and
to advise the defendant to render, within a fixed period, accounts, verified by vouchers, of the management of the partnership
business and pertaining to the seven months from December 1, 1898, to June 29, 1899; and, in view of the evidence adduced by the
plaintiff in proof of the aforesaid first point, if the defendant does not produce other evidence in rebuttal, they must, for some
reason, be expressly rejected in the judgment, if they are not to be taken into account in reaching the conclusions or in considering
the case upon the merits.
As regards the second point, we agree with the opinion expressed by the lower court and find that the firm of Warner, Barnes and
Co., Ltd., did render accounts from June 30, 1899, to December 31, 1902, inasmuch as the very evidence introduced by the plaintiff
showed that the said accounts had been rendered and were approved by it, according to the context of its own letters of the dates
of July 27, 1907, and February 19, 1903. Therefore, the plaintiff is in nowise entitled, and has no right of action to compel the
defendant to render the accounts pertaining to that period, they having already been rendered and duly approved.
It is a rule of law generally observed that he who takes charge of the management of another's property is bound immediately
thereafter to render accounts covering his transactions; and that it is always to be understood that all accounts rendered must be
duly substantiated by vouchers.
It is a fact admitted by both litigating parties that Warner, Barnes and Co., Ltd., was the manager of the business of the joint-account
partnership formed between it and Aldecoa and Co., it is unquestionable that it was and is the defendant's duty to render accounts
of the management of the business, as it partially has done. Although the defendant has not proved, as it should have done, that it
complied with its duty of rendering accounts of its management, since the letters themselves exhibited by the plaintiff, and duly
authenticated as being written by the latter, prove that the defendant did render accounts from June 30, 1899, to December 31,
1902, no legal reason whatever exists for not accepting the finding of the lower court which decided that it had been proved that
accounts were rendered pertaining to the period mentioned and that the said accounts were approved by the plaintiff.
The procedure of the plaintiff is truly inexplicable in accepting and approving accounts that were rendered to it, and which only
begin with June 30, 1899, inasmuch as such approval would appear to indicate that it agreed to the claim made by the defendant
that the partnership commenced on the said date; but even so, once that it is proved that the actual date on which the partnership
was formed was December 1, 1898, and that it is not shown that the defendant has rendered accounts corresponding to the seven
months subsequent to the said date of December 1, the acceptation and approval of accounts rendered since the 30th of June 1899,
does not excuse nor release the manager of the partnership, the defendant, from complying with its unquestionable duty of
rendering accounts covering the aforesaid seven months. The presumption must be sustained until proof to the contrary is
presented.
Moreover, the approval of accounts corresponding to the years from June 30, 1899, to December 31, 1902, does not imply that the
said approved accounts comprise those pertaining that the seven months mentioned, December 1, 1899, to June 29, 1899, because
the defendant, the accountant, denied that the partnership commenced on the aforesaid date of December 1st, asserting it began
on June 30, 1899; wherefore, on defendant's rendering those accounts, it is to be presumed that it did so from the date which it
avers was that of the information of the partnership and the beginning of the business, and it is therefore evident that it has not
rendered accounts pertaining to the seven months mentioned.
With respect to the third point relative to whether errors and omissions prejudicial to the plaintiff, Aldecoa & Co., exist in the
partnership books and in its accounts, and whether, in the management of the said business, fraudulent acts were committed to
plaintiff's injury, it must be borne in mind that once accounts have been approved which were rendered by the managing firm of
Warner, Barnes & Co., Ltd., the plaintiff, Aldecoa & Co., is not entitled afterwards to claim a revision of the same, unless it shows
that there was fraud, deceit, error, or mistake in the approval of the said accounts.
Under these hypothesis, Alcodea & Co. are strictly obliged to prove the errors, omissions, and fraudulent acts attributed to the
defendant, in connection with the accounts already rendered, and approved by them, in order that the same may be revised in
accordance with law and the jurisprudence of the courts. (Pastor vs. Nicasio, 6 Phil. Rep., 152.)
The approval of an account does not prevent its subsequent revision, or at least its correction, if it is proved in a satisfactory manner
that there was deceit and fraud or error and omission in it. (Arts. 1265, 1266, Civil Code.)
Law 30, title 11, 5th Partida, provides, among other things, the following:
That is precisely what we say should be observed, in all other accounts that men make among themselves, in connection
with the things which belong to them. Notwithstanding that they may acknowledge the settlement of the accounts
between them and promise never to bring them up again, if it had be known in truth that he who gave the account or had
the things in his keeping, concealed anything deceitfully, or committed other fraud against those who have a share in such
thing, then neither the suit, nor such previous status and promise shall avail; on the contrary, we say that they may sue him
to compel him to remedy the deceit he committed against them, and to pay all the damages and losses that have accrued
to them by reason thereof; provided, however, he especially shall not have repaired the deceit that he committed.
So that it does not matter that the accounts pertaining to the years comprised between the 30th of June, 1899, and the 31st of
December, 1902, may have been approved by Aldecoa & Co. Whenever this firm shall succeed in proving that there was error,
omission, fraud, or deceit in these accounts, they may be duly revised, according to the law.
With regard to the last point in controversy, the defendant agrees that the plaintiff has not yet approved the accounts that the
former rendered, pertaining to 1903, the last years of the existence of the joint-account partnership; and, for this reason, it was

provided in the judgment appealed from that the trial should continue with respect to the said accounts corresponding to the year
1903, in order that the plaintiff might take such objections and statements in regard to the same as he deemed proper, and adduce
the evidence conducive to prove his claim, in accordance with law.
It is one of the duties of the manager of a joint-account partnership, to liquidate the assets that form the common property, and to
state the result obtained therefrom in the final rendering of the accounts which he is to present at the conclusion of the partnership.
Article 243 of the Code of Commerce says;
The liquidation shall be effected by the manager, and after the transactions have been concluded he shall render a proper
account of its results.
It is a recognized fact, and one admitted by both parties that the partnership herein concerned concluded its transactions on
December 31, 1903; wherefore the firm of Warner, Barnes & Co. Ltd., the manager of the partnership, in declaring the latter's
transactions concluded and in rendering duly verified accounts of its results, owes the duty to include therein the property and
effects belonging to the partnership in common. This rule was established by the supreme court of Spain in applying a similar
precept of the mercantile code, in its decision on an appeal in causation of the 1st of July, 1870, setting up the following doctrine:
In case of the liquidation of a company of this kind (denominated joint-account partnership), inasmuch as the sale of the
firm assets is necessarily uncertain and eventual, considering the greater or lesser selling price that may be obtained from
the property and effects which comprise such assets, the price received should be alloted in the same proportion as that
fixed in the contract for the division of the profits and losses, for otherwise one of the partners would be benefited to the
detriment and loss of his copartners.
This doctrine is perfectly legal and in accord with justice, as no person should enrich himself wrongfully at the expense of another;
and, in the case under review, should it be duly and fully proved that the managing firm acquired realty in the name and at the
expense of the joint-account partnership with the plaintiff firm, it is just that, in liquidating the property of common ownership, such
realty should be divided between the partners in the same manner as were the profits and losses during the existence of the
business, from the beginning of the partnership to the date of its dissolution.
By the facts herein above set forth, it has been shown that in the present state of this cause resulting from the rendering of the
judgment appealed from, it has not been possible to decide in a final manner the various issues brought up and controverted by the
litigants, for, though it be granted as proved that the defendant firm, the manager of the said partnership, has in fact rendered
accounts pertaining to the years from June 30, 1899, to December 31, 1902, as found in the said judgment, there still remain to be
decided the four points or questions of fact before specified. Wherefore, and in accordance with section 496 of the Code of Civil
Procedure, a new trial should be held For the purpose of a final decision of all the questions involved in this litigation, and
accordingly the judgment appealed from is set aside and this cause shall be returned to the court below, accompanied by a certified
copy of this decision, for the holding of a new trial, for which purpose, first, the defendant shall be advised that it must, within a
fixed period, render an account, verified by vouchers, of its management of the business of the joint-account partnership with the
plaintiff, pertaining to the months from December 1, 1898, to June 29, 1899, and to the twelve months of the year 1903, unless it
shall prove in a satisfactory manner that the said partnership began on June 30, 1899, contrary to the averment of the plaintiff
supported by evidence that it commenced on December 1, 1898, in which case the said rendering of account shall be restricted to
the twelve months of the year 1903, in the accounts of which last period must be included all the property that is found to belong to
the said partnership; second, in the examination of the accounts that may be found to have been rendered, the parties may allege
and prove facts conducive to their revision or approval besides availing themselves of the evidence already adduced at trial; and,
third, with respect to the accounts corresponding to the period from June 30, 1899, to December 31, 1902, already approved, the
trial court shall be proceed in accordance with law, duly considering the errors, omissions, mistakes and fraudulent or deceitful acts
that have been alleged or may specifically be alleged in rejecting the said approved accounts, as well as the evidence introduced by
both parties, and it shall be careful to decide in its final judgment all the issues raised between the parties in the course of this
litigation and to provide such remedies as are proper in regard to their respective claims. So ordered.
Johnson, Moreland and Trent, JJ., concur.
THIRD DIVISION

ADVENT CAPITAL AND G.R. No. 183050

FINANCE CORPORATION,
Petitioner, Present:
VELASCO, JR., J., Chairperson,
- versus - PERALTA,
ABAD,
*

VILLARAMA, JR., and

MENDOZA, JJ.
NICASIO I. ALCANTARA and
EDITHA I. ALCANTARA, Promulgated:
Respondents.

January 25, 2012

x --------------------------------------------------------------------------------------- x

DECISION
ABAD, J.:

This case is about the validity of a rehabilitation courts order that compelled a third party, in possession of money allegedly
belonging to the debtor of a company under rehabilitation, to deliver such money to its court-appointed receiver over the debtors
objection.

The Facts and the Case

On July 16, 2001 petitioner Advent Capital and Finance Corporation (Advent Capital) filed a petition for rehabilitation [1] with the
[2]
Regional Trial Court (RTC) of Makati City. Subsequently, the RTC named Atty. Danilo L. Concepcion as rehabilitation
[3]
receiver. Upon audit of Advent Capitals books, Atty. Concepcion found that respondents Nicasio and Editha Alcantara (collectively,
the Alcantaras) owed Advent Capital P27,398,026.59, representing trust fees that it supposedly earned for managing their several
trust accounts.[4]

Prompted by this finding, Atty. Concepcion requested Belson Securities, Inc. (Belson) to deliver to him, as Advent Capitals
rehabilitation receiver, the P7,635,597.50 in cash dividends that Belson held under the Alcantaras Trust Account 95-013. Atty.
Concepcion claimed that the dividends, as trust fees, formed part of Advent Capitals assets. Belson refused, however, citing the
[5]
Alcantaras objections as well as the absence of an appropriate order from the rehabilitation court.

Thus, Atty. Concepcion filed a motion before the rehabilitation court to direct Belson to release the money to him. He said that, as
rehabilitation receiver, he had the duty to take custody and control of Advent Capitals assets, such as the sum of money that Belson
held on behalf of Advent Capitals Trust Department.[6]

[7]

The Alcantaras made a special appearance before the rehabilitation court to oppose Atty. Concepcions motion. They claimed that
[8]
the money in the trust account belonged to them under their Trust Agreement with Advent Capital. The latter, they said, could not
claim any right or interest in the dividends generated by their investments since Advent Capital merely held these in trust for the
Alcantaras, the trustors-beneficiaries. For this reason, Atty. Concepcion had no right to compel the delivery of the dividends to him
as receiver. The Alcantaras concluded that, under the circumstances, the rehabilitation court had no jurisdiction over the subject
dividends.
[9]

On February 5, 2007 the rehabilitation court granted Atty. Concepcions motion. It held that, under Rule 59, Section 6 of the Rules
of Court, a receiver has the duty to immediately take possession of all of the corporations assets and administer the same for the
benefit of corporate creditors. He has the duty to collect debts owing to the corporation, which debts form part of its
assets. Complying with the rehabilitation courts order and Atty. Concepcions demand letter, Belson turned over the subject
dividends to him.

Meanwhile, the Alcantaras filed a special civil action of certiorari before the Court of Appeals (CA), seeking to annul the
[10]
rehabilitation courts order. On January 30, 2008 the CA rendered a decision, granting the petition and directing Atty. Concepcion
to account for the dividends and deliver them to the Alcantaras. The CA ruled that the Alcantaras owned those dividends. They did
not form part of Advent Capitals assets as contemplated under the Interim Rules of Procedure on Corporate Rehabilitation (Interim
Rules).

The CA pointed out that the rehabilitation proceedings in this case referred only to the assets and liabilities of the company
proper, not to those of its Trust Department which held assets belonging to other people. Moreover, even if the Trust Agreement
provided that Advent Capital, as trustee, shall have first lien on the Alcantaras financial portfolio for the payment of its trust fees,
the cash dividends in Belsons care cannot be summarily applied to the payment of such charges. To enforce its lien, Advent Capital
has to file a collection suit. The rehabilitation court cannot simply enforce the latters claim by ordering Belson to deliver the money
[11]
to it.

The CA denied Atty. Concepcion and Advent Capitals motion for reconsideration,[12] prompting the filing of the present petition for
review under Rule 45.

The Issue Presented

The sole issue in this case is whether or not the cash dividends held by Belson and claimed by both the Alcantaras and
Advent Capital constitute corporate assets of the latter that the rehabilitation court may, upon motion, require to be conveyed to
the rehabilitation receiver for his disposition.

Ruling of the Court

Advent Capital asserts that the cash dividends in Belsons possession formed part of its assets based on paragraph 9 of its
Trust Agreement with the Alcantaras, which states:

9. Trust Fee: Other Expenses As compensation for its services hereunder, the TRUSTEE shall be entitled
to a trust or management fee of 1 (one) % per annum based on the quarterly average market value of the
Portfolio or a minimum annual fee of P5,000.00, whichever is higher. The said trust or management fee shall
automatically be deducted from the Portfolio at the end of each calendar quarter. The TRUSTEE shall likewise be
reimbursed for all reasonable and necessary expenses incurred by it in the discharge of its powers and duties
under this Agreement, and in all cases, the TRUSTEE shall have a first lien on the Portfolio for the payment of the
trust fees and other reimbursable expenses.

According to Advent Capital, it could automatically deduct its management fees from the Alcantaras portfolio that they entrusted to
it. Paragraph 9 of the Trust Agreement provides that Advent Capital could automatically deduct its trust fees from the Alcantaras
portfolio, at the end of each calendar quarter, with the corresponding duty to submit to the Alcantaras a quarterly accounting report
within 20 days after.[13]

But the problem is that the trust fees that Advent Capitals receiver was claiming were for past quarters. Based on the
stipulation, these should have been deducted as they became due. As it happened, at the time Advent Capital made its move to
collect its supposed management fees, it neither had possession nor control of the money it wanted to apply to its claim. Belson, a
third party, held the money in the Alcantaras names. Whether it should deliver the same to Advent Capital or to the Alcantaras is not
clear. What is clear is that the issue as to who should get the same has been seriously contested.

The practice in the case of banks is that they automatically collect their management fees from the funds that their clients
entrust to them for investment or lending to others. But the banks can freely do this since it holds or has control of their clients
money and since their trust agreement authorized the automatic collection. If the depositor contests the deduction, his remedy is to
bring an action to recover the amount he claims to have been illegally deducted from his account.

Here, Advent Capital does not allege that Belson had already deducted the management fees owing to it from the
Alcantaras portfolio at the end of each calendar quarter. Had this been done, it may be said that the money in Belsons possession
would technically be that of Advent Capital. Belson would be holding such amount in trust for the latter. And it would be for the
Alcantaras to institute an action in the proper court against Advent Capital and Belson for misuse of its funds.

But the above did not happen. Advent Capital did not exercise its right to cause the automatic deduction at the end of every
quarter of its supposed management fee when it had full control of the dividends. That was its fault. For their part, the Alcantaras
had the right to presume that Advent Capital had deducted its fees in the manner stated in the contract. The burden of proving that
the fees were not in fact collected lies with Advent Capital.

Further, Advent Capital or its rehabilitation receiver cannot unilaterally decide to apply the entire amount of cash dividends
retroactively to cover the accumulated trust fees. Advent Capital merely managed in trust for the benefit of the Alcantaras the
latters portfolio, which under Paragraph 2[14] of the Trust Agreement, includes not only the principal but also its income or
proceeds. The trust property is only fictitiously attributed by law to the trustee to the extent that the rights and powers vested in a
nominal owner shall be used by him on behalf of the real owner.[15]

The real owner of the trust property is the trustor-beneficiary. In this case, the trustors-beneficiaries are the
Alcantaras. Thus, Advent Capital could not dispose of the Alcantaras portfolio on its own. The income and principal of the portfolio
could only be withdrawn upon the Alcantaras written instruction or order to Advent Capital. [16] The latter could not also assign or
encumber the portfolio or its income without the written consent of the Alcantaras.[17] All these are stipulated in the Trust
Agreement.

Ultimately, the issue is what court has jurisdiction to hear and adjudicate the conflicting claims of the parties over the
dividends that Belson held in trust for their owners. Certainly, not the rehabilitation court which has not been given the power to
resolve ownership disputes between Advent Capital and third parties.Neither Belson nor the Alcantaras are its debtors or creditors
with interest in the rehabilitation.

Advent Capital must file a separate action for collection to recover the trust fees that it allegedly earned and, with the trial
courts authorization if warranted, put the money in escrow for payment to whoever it rightly belongs. Having failed to collect the
trust fees at the end of each calendar quarter as stated in the contract, all it had against the Alcantaras was a claim for payment
which is a proper subject for an ordinary action for collection. It cannot enforce its money claim by simply filing a motion in the
rehabilitation case for delivery of money belonging to the Alcantaras but in the possession of a third party.

Rehabilitation proceedings are summary and non-adversarial in nature, and do not contemplate adjudication of claims that
must be threshed out in ordinary court proceedings. Adversarial proceedings similar to that in ordinary courts are inconsistent with
the commercial nature of a rehabilitation case. The latter must be resolved quickly and expeditiously for the sake of the corporate
debtor, its creditors and other interested parties. Thus, the Interim Rules incorporate the concept of prohibited pleadings, affidavit
evidence in lieu of oral testimony, clarificatory hearings instead of the traditional approach of receiving evidence, and the grant of
authority to the court to decide the case, or any incident, on the basis of affidavits and documentary evidence. [18]

Here, Advent Capitals claim is disputed and requires a full trial on the merits. It must be resolved in a separate action where
the Alcantaras claim and defenses may also be presented and heard. Advent Capital cannot say that the filing of a separate action
would defeat the purpose of corporate rehabilitation. In the first place, the Interim Rules do not exempt a company under
rehabilitation from availing of proper legal procedure for collecting debt that may be due it. Secondly, Court records show that
Advent Capital had in fact sought to recover one of its assets by filing a separate action for replevin involving a car that was
[19]
registered in its name.

WHEREFORE, the petition is DENIED for lack of merit and the assailed decision and resolution of the Court of Appeals in CA-G.R. SP
98692 are AFFIRMED, without prejudice to any action that petitioner Advent Capital and Finance Corp. or its rehabilitation receiver
might institute regarding the trust fees subject of this case.

SO ORDERED.

ROBERTO A. ABAD

Republic of the Philippines

SUPREME COURT
Baguio City
THIRD DIVISION
G.R. No. 195580

April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR MINING,
INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010
Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation organized and
existing under Philippine laws, took interest in mining and exploring certain areas of the province of Palawan. After inquiring with
the Department of Environment and Natural Resources (DENR), it learned that the areas where it wanted to undertake exploration
and mining activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra,
Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an MPSA and
Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of Environment and
Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay Sumbiling, Municipality of
Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan.
The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner
McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development
Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992.
Through the said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San
Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred and/or assigned its rights and interests over the
MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over
3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently
conveyed, transferred and assigned its rights and interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of
petitioners applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and controlled by
MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder of
petitioners, it was the driving force behind petitioners filing of the MPSAs over the areas covered by applications since it knows that
it can only participate in mining activities through corporations which are deemed Filipino citizens. Redmont argued that given that
petitioners capital stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through
MPSAs, which are reserved only for Filipino citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA) 7942 or the
Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation, partnership, association, or
cooperative organized or authorized for the purpose of engaging in mining, with technical and financial capability to undertake
mineral resources development and duly registered in accordance with law at least sixty per cent (60%) of the capital of which is
owned by citizens of the Philippines: Provided, That a legally organized foreign-owned corporation shall be deemed a qualified
person for purposes of granting an exploration permit, financial or technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or Technical
Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which
are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on nationality should not be raised since
McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines. They
asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC (which
4
5
owns 5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro), the shares of MBMI
will not make it the owner of at least 60% of the capital stock of each of petitioners. They added that the best tool used in
determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of
1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmonts petition since they are not
enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue them because it has no pending
claim or application over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other hand, [Redmont]
having filed its own applications for an EPA over the areas earlier covered by the MPSA application of respondents may be
considered if and when they are qualified under the law. The violation of the requirements for the issuance and/or grant of permits
over mining areas is clearly established thus, there is reason to believe that the cancellation and/or revocation of permits already
issued under the premises is in order and open the areas covered to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and Development, Inc., and Narra
Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production
Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID. 6
The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian company and
declared their MPSAs null and void. In the same Resolution, it gave due course to Redmonts EPAs. Thereafter, on February 7, 2008,
the POA issued an Order7 denying the Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal 8 and Memorandum of
Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also, through a letter, they
informed the MAB that they had their individual MPSA applications converted to FTAAs. McArthurs FTAA was denominated as
12
13
AFTA-IVB-09 on May 2007, while Tesoros MPSA application was converted to AFTA-IVB-08 on May 28, 2007, and Narras FTAA
14
was converted to AFTA-IVB-07 on March 30, 2006.
15

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint with the Securities and
Exchange Commission (SEC), seeking the revocation of the certificates for registration of petitioners on the ground that they are
foreign-owned or controlled corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on September
1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying for the suspension of the proceedings on the
appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92 (RTC) a
Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction,
docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB proceedings pending the resolution of the
Complaint before the SEC.
But before the RTC can resolve Redmonts Complaint and applications for injunctive reliefs, the MAB issued an Order on September
10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the Resolution dated 14
December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and
its Order dated 07 February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by Redmont
Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED. 17
18

Belatedly, on September 16, 2008, the RTC issued an Order granting Redmonts application for a TRO and setting the case for
hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration 19 of the September 10, 2008 Order of the MAB.
20
Subsequently, it filed a Supplemental Motion for Reconsideration on September 29, 2008.
Before the MAB could resolve Redmonts Motion for Reconsideration and Supplemental Motion for Reconsideration, Redmont filed
21
before the RTC a Supplemental Complaint in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order 22 granting the issuance of a writ of preliminary injunction enjoining the MAB from
finally disposing of the appeals of petitioners and from resolving Redmonts Motion for Reconsideration and Supplement Motion for
Reconsideration of the MABs September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmonts Motion for Reconsideration and Supplemental Motion
for Reconsideration and resolving the appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On October 1, 2010, the CA
rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1, 2009 of the Mining
Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the Department of Environment and
Natural Resources that respondents McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of
their applications for Mineral Product Sharing Agreement should be recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance Agreement (FTAA)
or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left for determination by the Secretary of
the DENR and the President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when it realized that
petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians. Pursuant to the first sentence of
paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the exploitation of natural resources, the CA used the "grandfather
rule" to determine the nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are
registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging
to aliens.24 (emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding common
shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned majority of the common stocks of the
petitioners as well as at least 60% equity interest of other majority shareholders of petitioners through joint venture agreements.
The CA found that through a "web of corporate layering, it is clear that one common controlling investor in all mining corporations

25

involved x x x is MBMI." Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-ininterest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious in nature and,
as a consequence, it recommended the rejection of petitioners MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has jurisdiction over them
and that it also has the power to determine the of nationality of petitioners as a prerequisite of the Constitution prior the conferring
of rights to "co-production, joint venture or production-sharing agreements" of the state to mining rights. However, it also stated
that the POAs jurisdiction is limited only to the resolution of the dispute and not on the approval or rejection of the MPSAs. It
stipulated that only the Secretary of the DENR is vested with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners McArthur, Tesoro
and Narra as foreign corporations. Nevertheless, the CA determined that the POAs declaration that the MPSAs of McArthur, Tesoro
and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated May 7, 2010
seeking the cancellation of petitioners FTAAs. The OP rendered a Decision 26 on April 6, 2011, wherein it canceled and revoked
petitioners FTAAs for violating and circumventing the "Constitution x x x*,+ the Small Scale Mining Law and Environmental
27
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." The OP, in affirming the
cancellation of the issued FTAAs, agreed with Redmont stating that petitioners committed violations against the abovementioned
laws and failed to submit evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA focusing
on the alleged misrepresentation and claims made by petitioners of being domestic or Filipino corporations and the admitted
continued mining operation of PMDC using their locally secured Small Scale Mining Permit inside the area earlier applied for an
MPSA application which was eventually transferred to Narra. It also agreed with the POAs estimation that the filing of the FTAA
applications by petitioners is a clear admission that they are "not capable of conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign entity in their operation, that is why they sought the participation of MBMI
Resources, Inc."28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of
qualification of the respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed
foreign corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign nationality
who is disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head office in
29
Canada suggest that they are conducting operation only through their local counterparts.
The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30 dated July 6, 2011. Petitioners then
filed a Petition for Review on Certiorari of the OPs Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the
CA Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP. Thereafter, petitioners appealed the
same CA decision to this Court which is now pending with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the following errors of the
CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the subject matter of the
controversy, the MPSA Applications, have already been converted into FTAA applications and that the same have already
been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the Panel of Arbitrators
has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of Redmonts willful forum shopping.
IV.
The Court of Appeals ruling that Narra, Tesoro and McArthur are foreign corporations based on the "Grandfather Rule" is
contrary to law, particularly the express mandate of the Foreign Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA Applications were of
"suspicious nature" as the same is based on mere conjectures and surmises without any shred of evidence to show the
31
same.

We find the petition to be without merit.

This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue of supervening
events, so that a declaration thereon would be of no practical use or value." 32 Thus, the courts "generally decline jurisdiction over
the case or dismiss it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of "mootness" will not deter the
courts from trying a case when there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court provided four
instances where courts can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the
public; and
4.) The case is capable of repetition yet evading review. 34
All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of the Constitution,
specifically Section 2 of Article XII, is being committed by a foreign corporation right under our countrys nose through a myriad of
corporate layering under different, allegedly, Filipino corporations. The intricate corporate layering utilized by the Canadian
company, MBMI, is of exceptional character and involves paramount public interest since it undeniably affects the exploitation of
our Countrys natural resources. The corresponding actions of petitioners during the lifetime and existence of the instant case raise
questions as what principle is to be applied to cases with similar issues. No definite ruling on such principle has been pronounced by
the Court; hence, the disposition of the issues or errors in the instant case will serve as a guide "to the bench, the bar and the
public."35 Finally, the instant case is capable of repetition yet evading review, since the Canadian company, MBMI, can keep on
utilizing dummy Filipino corporations through various schemes of corporate layering and conversion of applications to skirt the
constitutional prohibition against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the conversion of
MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against them since the questioned MPSA
applications were already converted into FTAA applications; thus, the issue on the prohibition relating to MPSA applications of
foreign mining corporations is academic. Also, petitioners would want us to correct the CAs finding which deemed the
aforementioned conversions of applications as suspicious in nature, since it is based on mere conjectures and surmises and not
supported with evidence.
We disagree.
The CAs analysis of the actions of petitioners after the case was filed against them by respondent is on point. The changing of
applications by petitioners from one type to another just because a case was filed against them, in truth, would raise not a few
sceptics eyebrows. What is the reason for such conversion? Did the said conversion not stem from the case challenging their
citizenship and to have the case dismissed against them for being "moot"? It is quite obvious that it is petitioners strategy to have
the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the court or appropriate government
agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA applications of petitioners before the
POA. On June 15, 2007, petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its December 14, 2007
Resolution, observed this suspect change of applications while the case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents are not capable of
conducting a large scale mining operation and that they need the financial and technical assistance of a foreign entity in their
operation that is why they sought the participation of MBMI Resources, Inc. The participation of MBMI in the corporation only
proves the fact that it is the Canadian company that will provide the finances and the resources to operate the mining areas for the
greater benefit and interest of the same and not the Filipino stockholders who only have a less substantial financial stake in the
corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations and lack of
qualification of the respondent corporations to engage in mining. The filing of the FTAA application conversion which is allowed
foreign corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign nationality
who is disqualified under the laws. Corporate documents of MBMI Resources, Inc. furnished its stockholders in their head office in
36
Canada suggest that they are conducting operation only through their local counterparts.
On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside the September 10,
2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of the POA of the DENR that the herein
petitioners are in fact foreign corporations thus a recommendation of the rejection of their MPSA applications were recommended

to the Secretary of the DENR. With respect to the FTAA applications or conversion of the MPSA applications to FTAAs, the CA
37
deferred the matter for the determination of the Secretary of the DENR and the President of the Republic of the Philippines.
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition asserting that on
April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which rendered the
petition moot and academic. However, the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere
"rehash of their claims and defenses."38 Standing firm on its Decision, the CA affirmed the ruling that petitioners are, in fact, foreign
corporations. On April 5, 2011, petitioners elevated the case to us via a Petition for Review on Certiorari under Rule 45, questioning
the Decision of the CA. Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review was filed,
cancelling and revoking the FTAAs, quoting the Order of the POA and stating that petitioners are foreign corporations since they
needed the financial strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the
cancellation on the misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 39 On July 6, 2011, the OP issued a Resolution,
denying the Motion for Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OPs Decision and
Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their old arguments claiming that they
were granted FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and Submission dated October 19,
40
2012, wherein they asserted that the present petition is moot since, in a remarkable turn of events, MBMI was able to sell/assign
all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect, making
their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final act, wherein
MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding companies" to DMCI, only proves that
they were in fact not Filipino corporations from the start. The recent divesting of interest by MBMI will not change the stand of this
Court with respect to the nationality of petitioners prior the suspicious change in their corporate structures. The new documents
filed by petitioners are factual evidence that this Court has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have violated several
mining laws and made misrepresentations and falsehood in their applications for FTAA which lead to the revocation of the said
FTAAs, demonstrating that petitioners are not beyond going against or around the law using shifty actions and strategies. Thus, in
this instance, we can say that their claim of mootness is moot in itself because their defense of conversion of MPSAs to FTAAs has
been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners nationality, whether Filipino or foreign. In their previous petitions,
they had been adamant in insisting that they were Filipino corporations, until they submitted their Manifestation and Submission
dated October 19, 2012 where they stated the alleged change of corporate ownership to reflect their Filipino ownership. Thus, there
is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather
rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources
owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are
registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by
Filipinos and the other 50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control test or the
liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in
the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as
Philippine nationality," pertains to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under RA 7042, as
amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using the stricter grandfather rule. The
pertinent provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by the
citizens of the Philippines; a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to
vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a "Philippine National"
under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule "has been abandoned and is no longer
41
the applicable rule." They also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and unambiguous wordings of the statute preclude the court from
construing it and prevent the courts use of discretion in applying the law. They said that the plain, literal meaning of the statute
meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent
laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule has already been abandoned must
be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture or production-sharing agreements with Filipino citizens, or corporations or associations at
least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five
years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either technical or financial assistance for
large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the exploration,
development, and utilization of natural resources with entities who are deemed Filipino due to 60 percent ownership of capital is
pertinent to this case, since the issues are centered on the utilization of our countrys natural resources or specifically, mining. Thus,
there is a need to ascertain the nationality of petitioners since, as the Constitution so provides, such agreements are only allowed
corporations or associations "at least 60 percent of such capital is owned by such citizens." The deliberations in the Records of the
1986 Constitutional Commission shed light on how a citizenship of a corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairmans interpretation of an independent national economy is freedom from undue
foreign control? What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of the Filipino in the
economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from foreign control? I think
that is the meaning of independence, because as phrased, it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in the cultivation of
natural resources, 40 percent involves some control; not total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3,
60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation? Will the Committee
please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who provided us with a
draft. The phrase that is contained here which we adopted from the UP draft is 60 percent of the voting stock.
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
42

MR. VILLEGAS: Yes. (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where corporate
layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution will prevail. In
this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of
the FIA will have no place of application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and
must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes, among others,
of determining compliance with nationality requirements (the Investee Corporation). Such manner of computation is necessary
since the shares in the Investee Corporation may be owned both by individual stockholders (Investing Individuals) and by
corporations and partnerships (Investing Corporation). The said rules thus provide for the determination of nationality depending
on the ownership of the Investee Corporation and, in certain instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The first case is
the liberal rule, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph
7 of the 1967 SEC Rules which states, (s)hares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality. Under the liberal Control Test, there is no need to further
trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least
60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC
Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number
of shares corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to
determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to
the shares directly owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only
when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and
foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 6040% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the
Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather rule since,
as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate ownership of petitioners. Also, as found by
the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common
investor, the 100% Canadian corporationMBMI, funded them. However, petitioners also claim that there is "doubt" only when the
stockholdings of Filipinos are less than 60%. 43
The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this Court. DOJ
Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where "doubt" as to the ownership
of the corporation exists. It would be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The corporations
interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value. It would be senseless for
these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino stockholders
since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the
application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law, creating a
cloud of doubt in the Courts mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather
rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners corporate structure, they have to be
"grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from SMMI. McArthur
has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000) per
share, subscribed to by the following:44
Name

Nationality

Number of Shares

Amount Subscribed

Amount Paid

Filipino

5,997

PhP 5,997,000.00

PhP 825,000.00

Canadian

3,998

PhP 3,998,000.0

PhP 1,878,174.60

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B. Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP 10,000,000.00

PhP 2,708,174.60
(emphasis supplied)

Madridejos Mining
Corporation
MBMI Resources, Inc.

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition as McArthur.
45
In fact, it would seem that MBMI is also a major investor and "controls" MBMI and also, similar nominal shareholders were
present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
Name

Nationality

Number of Shares

Amount Subscribed

Amount Paid

Filipino

6,663

PhP 6,663,000.00

PhP 0

Canadian

3,331

PhP 3,331,000.00

PhP 2,803,900.00

Amanti Limson

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Emmanuel G.

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP 10,000,000.00

PhP 2,809,900.00

Olympic Mines &

Development
Corp.
MBMI Resources,
Inc.

Esguerra

Hernando

(emphasis supplied)
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number of shares
they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder in MMC. MBMIs 2006 Annual
Report sheds light on why Olympic failed to pay any amount with respect to the number of shares it subscribed to. It states that
Olympic entered into joint venture agreements with several Philippine companies, wherein it holds directly and indirectly a 60%
46
effective equity interest in the Olympic Properties. Quoting the said Annual report:
On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a series of
agreements including a Property Purchase and Development Agreement (the Transaction Documents) with respect to three nickel
laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction Documents effectively establish a joint
venture between the Company and Olympic for purposes of developing the Olympic Properties. The Company holds directly and
indirectly an initial 60% interest in the joint venture. Under certain circumstances and upon achieving certain milestones, the
Company may earn up to a 100% interest, subject to a 2.5% net revenue royalty. 47 (emphasis supplied)
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized by MBMI to
gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur, making the latter a
foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000) divided into ten
thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:
Name

Nationality

Amount Paid

Number of

Amount

Shares

Subscribed

Filipino

5,997

PhP 5,997,000.00

PhP 825,000.00

Canadian

3,998

PhP 3,998,000.00

PhP 1,878,174.60

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP 10,000,000.00

PhP 2,708,174.60

Sara Marie
Mining, Inc.
MBMI
Resources, Inc.

Esguerra
Manuel A.
Agcaoili

(emphasis supplied)
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate structure of
petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason
and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same.
Delving deeper, we scrutinize SMMIs corporate structure:
Sara Marie Mining, Inc.
Name

Nationality

Amount Paid

Number of

Amount

Shares

Subscribed

Filipino

6,663

PhP 6,663,000.00

PhP 0

Canadian

3,331

PhP 3,331,000.00

PhP 2,794,000.00

Amanti Limson

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B.

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Emmanuel G.

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP 10,000,000.00

PhP 2,809,900.00

Olympic Mines &

Development
Corp.
MBMI Resources,
Inc.

Esguerra

Hernando

(emphasis supplied)
After subsequently studying SMMIs corporate structure, it is not farfetched for us to spot the glaring similarity between SMMI and
MMCs corporate structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson),
Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two
million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight
hundred nine thousand nine hundred pesos (PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympics participation in SMMIs corporate structure, it is
clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino
corporation and, thus, disqualifies it to participate in the exploitation, utilization and development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDCs MPSA application, whose corporate
structures arrangement is similar to that of the first two petitioners discussed. The capital stock of Narra is ten million pesos (PhP
10,000,000), which is divided into ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as
follows:
Name

Nationality

Amount Paid

Number of

Amount

Shares

Subscribed

Filipino

5,997

PhP 5,997,000.00

PhP 1,677,000.00

Canadian

3,998

PhP 3,996,000.00

PhP 1,116,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Filipino

PhP 1,000.00

PhP 1,000.00

Bayani H. Agabin

Filipino

PhP 1,000.00

PhP 1,000.00

Robert L.

American

PhP 1,000.00

PhP 1,000.00

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP 10,000,000.00

PhP 2,800,000.00
(emphasis supplied)

Patricia Louise
Mining &
Development
Corp.
MBMI
Resources, Inc.
Higinio C.
Mendoza, Jr.
Henry E.
Fernandez
Manuel A.
Agcaoili
Ma. Elena A.
Bocalan

McCurdy
Kenneth Cawkell

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDCs corporate structure:
Name

Nationality

Number of
Shares

Amount
Subscribed

Amount Paid

Palawan Alpha South Resources

Development Corporation

Filipino

6,596

PhP 6,596,000.00

PhP 0

Canadian

3,396

PhP 3,396,000.00

PhP
2,796,000.00

Higinio C. Mendoza, Jr.

Filipino

PhP 1,000.00

PhP 1,000.00

Fernando B. Esguerra

Filipino

PhP 1,000.00

PhP 1,000.00

Henry E. Fernandez

Filipino

PhP 1,000.00

PhP 1,000.00

Lauro L. Salazar

Filipino

PhP 1,000.00

PhP 1,000.00

Manuel A. Agcaoili

Filipino

PhP 1,000.00

PhP 1,000.00

Bayani H. Agabin

Filipino

PhP 1,000.00

PhP 1,000.00

Michael T. Mason

American

PhP 1,000.00

PhP 1,000.00

Kenneth Cawkell

Canadian

PhP 1,000.00

PhP 1,000.00

Total

10,000

PhP
10,000,000.00

PhP
2,708,174.60
(emphasis
supplied)

MBMI Resources,
Inc.

Yet again, the usual players in petitioners corporate structures are present. Similarly, the amount of money paid by the 2nd tier
majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.
Studying MBMIs Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the intricate
corporate layering that MBMI immersed itself in:
JOINT VENTURES The Companys ownership interests in various mining ventures engaged in the acquisition, exploration and
development of mineral properties in the Philippines is described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity interest in the
Olympic Property of 60.0%. Pursuant to a shareholders agreement, the Company exercises joint control over the companies in the
Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha Property of
60.4%. Pursuant to a shareholders agreement, the Company exercises joint control over the companies in the Alpha
48
Group. (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino since
MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering
petitioners corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMIs Summary of
Significant Accounting Policies statement regarding the "joint venture" agreements that it entered into with the "Olympic" and
"Alpha" groupsinvolves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered" corporations boils down to
MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising
majority control over the corporations mentioned. In effect, whether looking at the capital structure or the underlying relationships
between and among the corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of
their capital stocks or equity interests are owned by MBMI.
Application of the res inter alios acta rule

Petitioners question the CAs use of the exception of the res inter alios acta or the "admission by co-partner or agent" rule and
"admission by privies" under the Rules of Court in the instant case, by pointing out that statements made by MBMI should not be
admitted in this case since it is not a party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the scope of his authority
and during the existence of the partnership or agency, may be given in evidence against such party after the partnership or agency is
shown by evidence other than such act or declaration itself. The same rule applies to the act or declaration of a joint owner, joint
debtor, or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission of the latter, while
holding the title, in relation to the property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must be shown, and that
proof of the fact must be made by evidence other than the admission itself."49 Thus, petitioners assert that the CA erred in finding
that a partnership relationship exists between them and MBMI because, in fact, no such partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI
have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the CA which pertains to the close
characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can be formed, it
should have been formally reduced into writing since the capital involved is more than three thousand pesos (PhP 3,000). Being that
there is no evidence of written agreement to form a partnership between petitioners and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a common fund
with the intention of dividing the profits among themselves. 50 On the other hand, joint ventures have been deemed to be "akin" to
partnerships since it is difficult to distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership
that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are closely analogous to and
substantially the same, if not exactly the same, as those which govern partnership. In fact, it has been said that the trend in the law
has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does
51
not apply to the other.
Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that differentiate one
from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint venture agreements, rules and
legal incidents governing partnerships are applied. 52
Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered between and among
petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are prohibited from entering into
partnership agreements; consequently, corporations enter into joint venture agreements with other corporations or partnerships
for certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to circumvent the legal
prohibition against corporations entering into partnerships, then the relationship created should be deemed as "partnerships," and
the laws on partnership should be applied. Thus, a joint venture agreement between and among corporations may be seen as similar
to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then the CA is justified in
applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have a joint interest" with Narra,
Tesoro and McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has jurisdiction to settle
disputes over rights to mining areas which definitely involve the petitions filed by Redmont against petitioners Narra, McArthur and
Tesoro. Redmont, by filing its petition against petitioners, is asserting the right of Filipinos over mining areas in the Philippines
against alleged foreign-owned mining corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original
jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:

53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an application for
mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest, or opposition to a pending
application for a mineral agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the
DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized officer(s) of the
concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement have been complied with. Any
adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any concerned PENRO or CENRO for filing
in the concerned Regional Office for purposes of its resolution by the Panel of Arbitrators pursuant to the provisions of this Act and
these implementing rules and regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel of Arbitrators
shall likewise issue a certification to that effect within five (5) working days from the date of finality of resolution thereof. Where
there is no adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that effect within five
working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and any adverse
claim/protest/opposition is finally resolved by the Panel of Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided in Section 38
hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications in areas outside Mineral
reservations. He/She shall thereafter endorse his/her findings to the Bureau for further evaluation by the Director within fifteen (15)
working days from receipt of forwarded documents. Thereafter, the Director shall endorse the same to the secretary for
consideration/approval within fifteen working days from receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days from receipt of the
Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same shall be evaluated and endorsed by the
Director to the Secretary for consideration/approval within fifteen days from receipt of such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs.
219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any
adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of Arbitrators within the
concerned periods for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the
Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished the barangays where
the proposed contract area is located once a week for two (2) consecutive weeks in a language generally understood in the locality.
After forty-five (45) days from the last date of publication/posting has been made and no adverse claim, protest or opposition was
filed within the said forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any adverse claim,
protest or opposition, the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional
Offices concerned, or through the Departments Community Environment and Natural Resources Officers (CENRO) or Provincial
Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators.
However previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a)
specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated by Secs.
219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57 above, any
adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of Arbitrators within the
concerned periods for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin boards of the
Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy furnished the barangays where
the proposed contract area is located once a week for two (2) consecutive weeks in a language generally understood in the locality.
After forty-five (45) days from the last date of publication/posting has been made and no adverse claim, protest or opposition was
filed within the said forty-five (45) days, the concerned offices shall issue a certification that publication/posting has been made and
that no adverse claim, protest or opposition of whatever nature has been filed. On the other hand, if there be any adverse claim,
protest or opposition, the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional
offices concerned, or through the Departments Community Environment and Natural Resources Officers (CENRO) or Provincial
Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of the Panel of Arbitrators.
However, previously published valid and subsisting mining claims are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or protest relative to
mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and oppositions relating to applications for the
grant of mineral rights.
POAs jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no authority to approve
or reject said applications. Such power is vested in the DENR Secretary upon recommendation of the MGB Director. Clearly, POAs
jurisdiction over "disputes involving rights to mining areas" has nothing to do with the cancellation of existing mineral agreements.
(emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over MPSA applications
subject of Redmonts petitions. However, said jurisdiction does not include either the approval or rejection of the MPSA
applications, which is vested only upon the Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of
petitioners MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has jurisdiction over the
MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts shall exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive
and original jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining areas. One such dispute
is an MPSA application to which an adverse claim, protest or opposition is filed by another interested applicant.1wphi1 In the case
at bar, the dispute arose or originated from MPSA applications where petitioners are asserting their rights to mining areas subject of
their respective MPSA applications. Since respondent filed 3 separate petitions for the denial of said applications, then a controversy
has developed between the parties and it is POAs jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional Office or any
concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction. Euro-med Laboratories
55
v. Province of Batangas elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise, specialized training and
knowledge of an administrative body, relief must first be obtained in an administrative proceeding before resort to the courts is had
even if the matter may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this Court as a last
recourse.
Selling of MBMIs shares to DMCI
As stated before, petitioners Manifestation and Submission dated October 19, 2012 would want us to declare the instant petition
moot and academic due to the transfer and conveyance of all the shareholdings and interests of MBMI to DMCI, a corporation duly
organized and existing under Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now cannot be
considered as foreign-owned; the transfer of their shares supposedly cured the "defect" of their previous nationality. They claimed
that their current FTAA contract with the State should stand since "even wholly-owned foreign corporations can enter into an FTAA
57
with the State." Petitioners stress that there should no longer be any issue left as regards their qualification to enter into FTAA
contracts since they are qualified to engage in mining activities in the Philippines. Thus, whether the "grandfather rule" or the
"control test" is used, the nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should be disregarded. The
manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877 pending before this Court.1wphi1 Thus,
the question of whether petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's shareholdings to DMCI, are
allowed to enter into FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within
the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural
resources of the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated October 1, 2010 and
Resolution dated February 15, 2011 are hereby AFFIRMED.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
THIRD DIVISION

[G.R. No. 125704. August 28, 1998]

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF
TAX APPEALS, respondents.
DECISION
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No.
36975[1] affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995[2] ordering it to pay the amount
of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th
quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
------------------- ----------------- ----------------- --------------------47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52
========== ========== =========== ===========

[3]

[4]

In a letter dated August 20, 1992, Philex protested the demand for payment of the tax liabilities stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest. Therefore, these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling in Commissioner
[5]
of Internal Revenue v. Itogon-Suyoc Mines, Inc.
In reply, the BIR, in a letter dated September 7, 1992,[6] found no merit in Philexs position. Since these pending claims have not
yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, he BIR reiterated its
demand that Philex settle the amount plus interest within 30 days from the receipt of the letter.
In view of the BIRs denial of the offsetting of Philexs claim for VAT input credit/refund against its exercise tax obligation, Philex
[7]
raised the issue to the Court of Tax Appeals on November 6, 1992. In the course of the proceedings, the BIR issued a Tax Credit
Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52;
effectively lowered the latters tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus
interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and demandable. Liquidated debts are those where
the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In
the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court
(C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against
the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French and Unson, No.
[8]
14027, November 8, 1918, 39 Phil. 34).
Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on compensation since claim for taxes is not a
debt or contract.[9] The dispositive portion of the CTA decision[10] provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the
Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the
2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code,
as amended.
Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-G.R. CV No.
[11]
36975. Nonetheless, on April 8, 1996, the Court of Appeals affirmed the Court of Tax Appeals observation. The pertinent portion
[12]
of which reads:
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. [13]
However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not
only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows:[14]
Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax
[15]
[16]
liabilities since both had already become due and demandable, as well as fully liquidated; hence, legal compensation can
properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. [17] There is a
material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
[18]
Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.

[19]

Prescinding from this premise, in Francia v. Intermediate Appellate Court,

to set-off or compensation, thus:

we categorically held that taxes cannot be subject

We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than
the tax being collected. The collection of tax cannot await the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit,[20] which
reiterated that:
x x x a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgment as is allowed to be set-off.
Further, Philexs reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc., wherein we ruled that
a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the
[21]
Commissioner, is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case was anchored on Section 51(d) of the National
Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which
[22]
the Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be
invoked by Philex.
Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the imposition of surcharge and interest for the
non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay
the excise liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR.[23]
We fail to see the logic of Philexs claim for this is an outright disregard of the basic principle in tax law that taxes are the
lifeblood of the government and so should be collected without unnecessary hindrance. [24] Evidently, to countenance Philexs
whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is
[25]
[26]
that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any
payer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely
affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim
against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the
government.[27] Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can
easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset
their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the
imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is
[28]
mandatory and the BIR is not vested with any authority to waive the collection thereof. The same cannot be condoned for flimsy
[29]
reasons, similar to the one advanced by Philex in justifying its non-payment of its tax liabilities.
[30]

Finally, Philex asserts that the BIR violated Section 106(e) of the National Internal Revenue Code of 1977, which requires the
refund of input taxes within 60 days,[31]when it took five years for the latter to grant its tax claim for VAT input credit/refund. [32]
In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit or refund,[33] however, once the claimant has submitted all the required documents, it is the
function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honesty to government it is
but just that government render fair service to the taxpayers. [34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was
only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund
[35]
earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. Fair dealing and nothing
less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax
Appeals:[36]
"The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot kill the 'hen that
lays the golden egg.' And, in the order to maintain the general public's trust and confidence in the Government this power must be
used justly and not treacherously."
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the
performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true
[37]
than in the field of taxation. Again, while we understand Philex's predicament, it must be stressed that the same is not valid
reason for the non- payment of its tax liabilities.
To be sure, this is not state that the taxpayer is devoid of remedy against public servants or employees especially BIR examiners
who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claims
[38]
for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. Second, if the
inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of.
Article 27 of the Civil Code provides:

"Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to
perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary
action that may be taken."
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
"xxx xxx xxx
(c) wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to
perform, any other duties enjoined by law."
[39]

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties. In
no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost
diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm,
must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true
to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception
towards the BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify
Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's
action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals
dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
Narvasa, C.J., (Chairman), Kapunan and Purisima, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY and LUCIANO
SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP Nos. 05604 and 05617
which set aside the earlier decision dated June 5, 1986, of the then Intermediate Appellate Court and directed that in all subsequent
elections for directors of Sanitary Wares Manufacturing Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate
more than three (3) directors; that the Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the
other hand, the Filipino stockholders can nominate only six (6) candidates and in the event they cannot agree on the six (6)
nominees, they shall vote only among themselves to determine who the six (6) nominees will be, with cumulative voting to be
allowed but without interference from ASI.
The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and marketing sanitary
wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners, European or American who could help
in its expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United States entered into an
Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership
of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling here and abroad
vitreous china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination and election of the directors of
the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed hereto as Exhibit A
and, insofar as permitted under Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine
individuals. As long as American-Standard shall own at least 30% of the outstanding stock of the Corporation, three
of the nine directors shall be designated by American-Standard, and the other six shall be designated by the other
stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including the grant of veto
powers over a number of corporate acts and the right to designate certain officers, such as a member of the Executive Committee
whose vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board of Investments for
availment of incentives with the condition that at least 60% of the capital stock of the corporation shall be owned by Philippine
nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation prospered. Unfortunately, with the
business successes, there came a deterioration of the initially harmonious relations between the two groups. According to the
Filipino group, a basic disagreement was due to their desire to expand the export operations of the company to which ASI objected
as it apparently had other subsidiaries of joint joint venture groups in the countries where Philippine exports were contemplated. On
March 8, 1983, the annual stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes were taken by
the Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders then proceeded to the election
of the members of the board of directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin and
David P. Whittingham. The Philippine investors nominated six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo,
Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr.
Charles Chamsay. The chairman, Baldwin Young ruled the last two nominations out of order on the basis of section 5 (a) of the
Agreement, the consistent practice of the parties during the past annual stockholders' meetings to nominate only nine persons as
nominees for the nine-member board of directors, and the legal advice of Saniwares' legal counsel. The following events then,
transpired:
... There were protests against the action of the Chairman and heated arguments ensued. An appeal was made by
the ASI representative to the body of stockholders present that a vote be taken on the ruling of the Chairman. The
Chairman, Baldwin Young, declared the appeal out of order and no vote on the ruling was taken. The Chairman
then instructed the Corporate Secretary to cast all the votes present and represented by proxy equally for the 6
nominees of the Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2 additional persons
nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua protested the
decision of the Chairman and announced that all votes accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, ACG.R. SP No. 05617) were being cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed
the Secretary to so vote. Luciano E. Salazar and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in favor of
Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless instructed the Secretary to cast all votes equally in
favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin and David Whittingham and the six
originally nominated by Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary then certified for the election of the following
Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The representative of ASI then moved to recess the
meeting which was duly seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This
motion to adjourn was accepted by the Chairman, Baldwin Young, who announced that the motion was carried
and declared the meeting adjourned. Protests against the adjournment were registered and having been ignored,
Mr. Jaqua the ASI representative, stated that the meeting was not adjourned but only recessed and that the
meeting would be reconvened in the next room. The Chairman then threatened to have the stockholders who did
not agree to the decision of the Chairman on the casting of votes bodily thrown out. The ASI Group, Luciano E.
Salazar and other stockholders, allegedly representing 53 or 54% of the shares of Saniwares, decided to continue
the meeting at the elevator lobby of the American Standard Building. The continued meeting was presided by
Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the cumulative votes cast earlier in
the meeting, the ASI Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David Whittingham and

Charles Chamsay. Luciano E. Salazar voted for himself, thus the said five directors were certified as elected
directors by the Acting Secretary, Andres Gatmaitan, with the explanation that there was a tie among the other six
(6) nominees for the four (4) remaining positions of directors and that the body decided not to break the tie. (pp.
37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange Commission (SEC). The
first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R.
Lagdameo, Jr., Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay. The case was denominated as SEC
Case No. 2417. The second petition was for quo warranto and application for receivership by Wolfgang Aurbach, John Griffin, David
Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No. 2417)
and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the
legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding the election of the
Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The ASI Group and Salazar appealed the
decision to the SEC en banc which affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang Aurbach, John Griffin,
David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No.
05617). The petitions were consolidated and the appellate court in its decision ordered the remand of the case to the Securities and
Exchange Commission with the directive that a new stockholders' meeting of Saniwares be ordered convoked as soon as possible,
under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of Appeals) rendered the
questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and Charles Chamsay in G.R. No.
75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE RESPONDENTS AS MEMBERS
OF THE BOARD OF DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING THEIR FULL VOTING RIGHTS
REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS AND THE
CORPORATION THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO THE AGREEMENT OF THE
PARTIES WHICH WERE NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements entered into by
stockholders and the replacement of the conditions of such agreements with terms never contemplated by the
stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the property rights of stockholders without
due process of law in order that a favored group of stockholders may be illegally benefitted and guaranteed a
continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT THE STOCKHOLDERS OF
SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT
AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE PETITIONERS HEREIN WERE THE DULY
ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24,
Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its annual stockholders' meeting
held on March 8, 1983. To answer this question the following factors should be determined: (1) the nature of the business
established by the parties whether it was a joint venture or a corporation and (2) whether or not the ASI Group may vote their
additional 10% equity during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among themselves a joint venture or some
other relation depends upon their actual intention which is determined in accordance with the rules governing the interpretation
and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v.
California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties should be viewed strictly
on the "Agreement" dated August 15,1962 wherein it is clearly stated that the parties' intention was to form a corporation and not a
joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto partners or joint venturers in
respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was to establish a joint venture
presented by the Lagdameo and Young Group on the ground that it contravenes the parol evidence rule under section 7, Rule 130 of
the Revised Rules of Court. According to them, the Lagdameo and Young Group never pleaded in their pleading that the
"Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been reduced to writing, it is to be
considered as containing all such terms, and therefore, there can be, between the parties and their successors in
interest, no evidence of the terms of the agreement other than the contents of the writing, except in the following
cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the
parties or the validity of the agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to Counterclaim in SEC Case No.
2417 that the Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties thereto disclaim being partners
or joint venturers such disclaimer is directed at third parties and is not inconsistent with, and does not preclude,
the existence of two distinct groups of stockholders in Saniwares one of which (the Philippine Investors) shall
constitute the majority, and the other ASI shall constitute the minority stockholder. In any event, the evident
intention of the Philippine Investors and ASI in entering into the Agreement is to enter into ajoint venture
enterprise, and if some words in the Agreement appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former (Art. 1370, New Civil Code). The various stipulations of a contract shall be
interpreted together attributing to the doubtful ones that sense which may result from all of them taken jointly
(Art. 1374, New Civil Code). Moreover, in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. (Art. 1371, New Civil Code). (Part I, Original
Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined their efforts in furtherance of
an enterprise for their joint profit, the question whether they intended by their agreement to create a joint
adventure, or to assume some other relation is a question of fact for the jury. (Binder v. Kessler v 200 App. Div.
40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p.
871)
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial evidence presented by the
Lagdameo and Young Group shows that the parties agreed to establish a joint venture and not a corporation. The history of the
organization of Saniwares and the unusual arrangements which govern its policy making body are all consistent with a joint venture
and not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement with ASI in behalf of
the Philippine nationals. He testified that ASI agreed to accept the role of minority vis-a-vis the Philippine National
group of investors, on the condition that the Agreement should contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included to protect the interests of ASI as
the minority. For example, the vote of 7 out of 9 directors is required in certain enumerated corporate acts [Sec. 3
(b) (ii) (a) of the Agreement]. ASI is contractually entitled to designate a member of the Executive Committee and
the vote of this member is required for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of the articles and by-laws of
Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the president and plant manager [Sec.
5 (6)]. The Agreement further provides that the sales policy of Saniwares shall be that which is normally followed
by ASI [Sec. 13 (a)] and that Saniwares should not export "Standard" products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide technology and know-how to
Saniwares and the latter paid royalties for the same. (At p. 2).

xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the board of directors for
certain actions, in effect gave ASI (which designates 3 directors under the Agreement) an effective veto power.
Furthermore, the grant to ASI of the right to designate certain officers of the corporation; the super-majority
voting requirements for amendments of the articles and by-laws; and most significantly to the issues of tms case,
the provision that ASI shall designate 3 out of the 9 directors and the other stockholders shall designate the other
6, clearly indicate that there are two distinct groups in Saniwares, namely ASI, which owns 40% of the capital stock
and the Philippine National stockholders who own the balance of 60%, and that 2) ASI is given certain protections
as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of stockholders who established
a corporation with provisions for a special contractual relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of the nine directors
on a six to three ratio. Each group is assured of a fixed number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified that Section 16(c) of
the Agreement that "Nothing herein contained shall be construed to constitute any of the parties hereto partners or joint venturers
in respect of any transaction hereunder" was merely to obviate the possibility of the enterprise being treated as partnership for tax
purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a local firm are
constrained to seek the technology and marketing assistance of huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However, there is always a danger from such arrangements. The
foreign group may, from the start, intend to establish its own sole or monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine
firm enlarges its operations and becomes profitable, the foreign group undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company. This undermining of joint ventures is not consistent with fair dealing to
say the least. To the extent that such subversive actions can be lawfully prevented, the courts should extend protection especially in
industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into agreements
regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide
that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may
agree, or as determined in accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's chapter on close corporations
and Saniwares cannot be a close corporation because it has 95 stockholders. Firstly, although Saniwares had 95
stockholders at the time of the disputed stockholders meeting, these 95 stockholders are not separate from each
other but are divisible into groups representing a single Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for another 13 stockholders, the
Chamsay family for 8 stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders, etc. If the
members of one family and/or business or interest group are considered as one (which, it is respectfully
submitted, they should be for purposes of determining how closely held Saniwares is there were as of 8 March
1983, practically only 17 stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder
Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation because it has more than 20
stockholders, the undeniable fact is that it is a close-held corporation. Surely, appellants cannot honestly claim that
Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture corporations and have not rigidly
applied principles of corporation law designed primarily for public issue corporations. These courts have indicated
that express arrangements between corporate joint ventures should be construed with less emphasis on the
ordinary rules of law usually applied to corporate entities and with more consideration given to the nature of the
agreement between the joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335;
Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line
Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc.,
296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt with legal questions as to the extent to
which the requirements arising from the corporate form of joint venture corporations should control, and the
courts ruled that substantial justice lay with those litigants who relied on the joint venture agreement rather than
the litigants who relied on the orthodox principles of corporation law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture deviate from the traditional pattern of
corporation management. A noted authority has pointed out that just as in close corporations, shareholders'
agreements in joint venture corporations often contain provisions which do one or more of the following: (1)
require greater than majority vote for shareholder and director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3) give to the shareholders control over the
selection and retention of employees; and (4) set up a procedure for the settlement of disputes by arbitration (See
I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that agreements regarding the
exercise of voting rights are allowed only in close corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision necessarily imply that these
agreements can be valid only in close corporations as defined by the Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify as a close corporation under section 96, can some of them enter
into an agreement to vote as a unit in the election of directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter into not voting or pooling agreements to
protect their interests, as long as they do not intend to commit any wrong, or fraud on the other stockholders not
parties to the agreement. Of course, voting or pooling agreements are perhaps more useful and more often
resorted to in close corporations. But they may also be found necessary even in widely held corporations.
Moreover, since the Code limits the legal meaning of close corporations to those which comply with the requisites
laid down by section 96, it is entirely possible that a corporation which is in fact a close corporation will not come
within the definition. In such case, its stockholders should not be precluded from entering into contracts like voting
agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or nomination of directors
restricts the right of the Agreement's signatories to vote for directors, such contractual provision, as correctly held
by the SEC, is valid and binding upon the signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during elections of Saniwares' board of
directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the management of the corporation is
spelled out in the Agreement. Section 5(a) hereof says that three of the nine directors shall be designated by ASI
and the remaining six by the other stockholders, i.e., the Filipino stockholders. This allocation of board seats is
obviously in consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the parties should honor and
adhere to their respective rights and obligations thereunder. Appellants seem to contend that any allocation of
board seats, even in joint venture corporations, are null and void to the extent that such may interfere with the
stockholder's rights to cumulative voting as provided in Section 24 of the Corporation Code. This Court should not
be prepared to hold that any agreement which curtails in any way cumulative voting should be struck down, even
if such agreement has been freely entered into by experienced businessmen and do not prejudice those who are
not parties thereto. It may well be that it would be more cogent to hold, as the Securities and Exchange
Commission has held in the decision appealed from, that cumulative voting rights may be voluntarily waived by
stockholders who enter into special relationships with each other to pursue and implement specific purposes, as in
joint venture relationships between foreign and local stockholders, so long as such agreements do not adversely
affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on this question. Rather, all that
needs to be done is to give life and effect to the particular contractual rights and obligations which the parties
have assumed for themselves.
On the one hand, the clearly established minority position of ASI and the contractual allocation of board seats
Cannot be disregarded. On the other hand, the rights of the stockholders to cumulative voting should also be
protected.
In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon further reflection,
we feel that the proper and just solution to give due consideration to both factors suggests itself quite clearly. This
Court should recognize and uphold the division of the stockholders into two groups, and at the same time uphold
the right of the stockholders within each group to cumulative voting in the process of determining who the group's
nominees would be. In practical terms, as suggested by appellant Luciano E. Salazar himself, this means that if the
Filipino stockholders cannot agree who their six nominees will be, a vote would have to be taken among the
Filipino stockholders only. During this voting, each Filipino stockholder can cumulate his votes. ASI, however,
should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed to designate under the Agreement, and may even be able to
get a majority of the board seats, a result which is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to cumulative
voting. Moreover, this ruling will also give due consideration to the issue raised by the appellees on possible
violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than three directors. (Rollo75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote their additional equity
pursuant to Section 24 of the Corporation Code which gives the stockholders of a corporation the right to cumulate their votes in
electing directors. Petitioner Salazar adds that this right if granted to the ASI Group would not necessarily mean a violation of the
Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors or governing body of
corporations or associations engaging in partially nationalized activities shall be allowed in proportion to their
allowable participation or share in the capital of such entities. (amendments introduced by Presidential Decree
715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of query, however, is
whether or not that provision is applicable to a joint venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal definition but it has been
generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed.
811 [1920]) It is in fact hardly distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F.
2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12
289 P. 2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of continuity, while the joint venture is formed for
the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d.
500 [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular
or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It
would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be
governed by the law of partnerships. The Supreme Court has however recognized a distinction between these two
business forms, and has held that although a corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and LopezCampos Comments, Notes and Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract of joint venture. (O'
Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the question of whether or not the ASI Group may
vote their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation of director seats
under Section 5 (a) of the "Agreement," and the right of each group of stockholders to cumulative voting in the process of
determining who the group's nominees would be under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5 (a) of
the Agreement relates to the manner of nominating the members of the board of directors while Section 3 (a) (1) relates to the
manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be beholden to them would
obliterate their minority status as agreed upon by the parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be
able to designate more than the three directors it is allowed to designate under the Agreement, and may even be
able to get a majority of the board seats, a result which is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's right to cumulative
voting. Moreover, this ruling will also give due consideration to the issue raised by the appellees on possible
violation or circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to nominate more than three directors. (At p. 39,
Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the consideration as regards the possible
domination by the foreign investors of the enterprise in violation of the nationalization requirements enshrined in the Constitution
and circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position is that the Anti-Dummy Act allows the ASI
group to elect board directors in proportion to their share in the capital of the entity. It is to be noted, however, that the same law
also limits the election of aliens as members of the board of directors in proportion to their allowance participation of said entity. In
the instant case, the foreign Group ASI was limited to designate three directors. This is the allowable participation of the ASI Group.
Hence, in future dealings, this limitation of six to three board seats should always be maintained as long as the joint venture
agreement exists considering that in limiting 3 board seats in the 9-man board of directors there are provisions already agreed upon
and embodied in the parties' Agreement to protect the interests arising from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by the appellate court
declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan,
Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of Saniwares at the March 8,1983
annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative voting during the election
of the board of directors of the enterprise as ruled by the appellate court and submits that the six (6) directors allotted the Filipino

stockholders should be selected by consensus pursuant to section 5 (a) of the Agreement which uses the word "designate" meaning
"nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino stockholders are allowed to
select their nominees separately and not as a common slot determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not be interpreted in
isolation. This should be construed in relation to section 3 (a) (1) of the Agreement. As we stated earlier, section 3(a) (1) relates to
the manner of voting for these nominees which is cumulative voting while section 5(a) relates to the manner of nominating the
members of the board of directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its
legality.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting procedure cannot, however,
be ignored. The validity of the cumulative voting procedure is dependent on the directors thus elected being genuine members of
the Filipino group, not voters whose interest is to increase the ASI share in the management of Saniwares. The joint venture
character of the enterprise must always be taken into account, so long as the company exists under its original agreement.
Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish openly.
There are substantial safeguards in the Agreement which are intended to preserve the majority status of the Filipino investors as
well as to maintain the minority status of the foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in G.R. No. 75951 is partly
GRANTED. The amended decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David
Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee
are declared as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.
FIRST DIVISION

[G.R. Nos. 155217 & 156393. July 30, 2003]

GATEWAY ELECTRONICS CORPORATION, petitioner, vs. LAND BANK OF THE PHILIPPINES, respondent.
DECISION
YNARES-SANTIAGO, J.:
Before the Court are consolidated petitions (1) for review of the decision of the Court of Appeals in CA-G.R. SP No.
62658,[1] which set aside the Order dated October 18, 2000 of the Regional Trial Court of Makati City, Branch 133, in Civil Case No.
98-782;[2] and (2) to cite Landbank President Margarito Teves, and Landbanks counsel, in contempt of Court.
The undisputed facts are as follows: In 1995, petitioner Gateway Electronics Corporation applied for a loan in the amount of
one billion pesos with respondent Landbank to finance the construction and acquisition of machineries and equipment for a semiconductor plant at Gateway Business Park in Javalera, General Trias, Cavite. However, Landbank was only able to extend petitioner a
loan in the amount of six hundred million pesos (P600,000,000.00). Hence, it offered to assist petitioner in securing additional
funding through its investment banking services, which offer petitioner accepted. Thereafter, Landbank released to petitioner the
initial amount of P250,000,000.00, with the balance of P350,000,000.00 to be released in June 1996. As security for the said loans,
petitioner mortgaged in favor of Landbank two parcels of land[3] located in Barangay Jalavera, General Trias, Cavite, the movable
properties as well as the machineries to be installed therein.[4]
After petitioners acceptance of Landbanks financial banking services, the latter prepared an Information Memorandum which it
disseminated to various banks to attract them into providing additional funding for petitioner. The Information Memorandum stated
that the security for the proposed loan syndication will be the Mortgage Trust Indenture (MTI) on the project assets including land,
building and equipment.[5] In a letter dated July 30, 1996, Landbank informed petitioner of its willingness to share the loan collateral
which the latter constituted in its favor as part of the collateral for the syndicated loan from the other banks.[6] On August 20, 1996,
Landbank confirmed its undertaking to share the said collateral with the other creditor banks, to wit:
In case of failure of syndication of the loan, allow the banks that have granted loans to GEC [Gateway Electronics Corporation] in
anticipation of the loan syndication to have a registered pari passu mortgage with you over the property, the intention being that all
banks, including Landbank, shall be on equal footing where the aforesaid collateral is concerned. [7]
Consequently, Philippine Commercial International Bank (PCIB), Union Bank of the Philippines, (UBP), Rizal Commercial Banking
Corporation-Trust Investment Division (RCBC), and Asia Trust Bank (Asia Trust) joined the loan syndication and released various
[8]
loans to petitioner. On October 10, 1996, a Memorandum of Understanding (MOU) was executed by Landbank, PCIB, UBP, RCBC,
Asiatrust and the petitioner, with RCBC as the trustee of the loan syndication. Under the Memorandum of Understanding, the said
signatories agreed to

enter into a Mortgage Trust Indenture (herein, the MTI), under which GEC will constitute a mortgage over the land, building, other
land improvements, machinery and equipment of GEC located within Gateway Business Park, Crisanto de Los Reyes Avenue,
Javalera, General Trias, Cavite as well as the assets to be acquired by GEC under the Project (as hereinafter defined) in favor of RCBC[9]
TID as trustee, for the benefit of the Creditors (as defined in the MTI), to secure the payment by GEC of its loan obligations.
Meanwhile, the negotiations for the execution of an MTI failed because Landbank and the petitioner were unable to agree on
the valuation of the equipment and machineries to be acquired by the latter. The petitioner insisted on a 70% valuation, while the
former wanted a 50% valuation. To break the impasse, PCIB, RCBC, UBP, and Asiatrust proposed, subject to the approval of their
respective Executive Committees or Board of Directors, to execute a Joint Real Estate Mortgage (JREM) [10] as the new mode to
secure [their] respective loan vis--vis [petitioners] collaterals.[11] Under the proposed JREM, the six hundred million peso-loan
granted by Land Bank shall be secured up to 94.42%, while the loans granted by PCIB, RCBC, and UBP would be similarly secured up
to 75.22%.[12] Land Bank, however, refused to agree to the said proposal unless 100% of its loan exposure is secured, pursuant to the
Loan Agreement it executed with petitioner.[13]
On February 27, 1998, Land Bank informed petitioner of its intention not to share collaterals with the other banks. In the
meantime, petitioners loan with PCIB became due because of its failure to comply with the collateral requirement under the MTI or
JREM, or to provide acceptable substitute collaterals. Hence, petitioner filed with the Regional Trial Court of Makati City, Branch 133,
a complaint against Land Bank for specific performance and damages with prayer for the issuance of preliminary mandatory
injunction.
After hearing, the trial court issued an order on October 18, 2000 granting petitioners prayer for the issuance of a writ of
preliminary mandatory injunction, the dispositive portion of which reads:
Wherefore, in view of the foregoing, the application for a writ of preliminary mandatory injunction is granted, conditioned upon the
filing of a bond in the amount of three hundred thousand pesos (P300,000.00).
Defendant is hereby directed to accede to the terms of the draft MTI and/or to agree to share collaterals under a joint real estate
mortgage [JREM] with long-term creditors of plaintiff (including PCIB) as joint mortgagees and with defendant as custodian of the
titles.
SO ORDERED.

[14]

With the denial of its motion for reconsideration, respondent filed a petition for certiorari with the Court of Appeals, on the
ground that the trial court gravely abused its discretion in issuing the assailed writ of preliminary mandatory injunction. On March
23, 2001, the Court of Appeals, on motion of Landbank, issued a temporary restraining order enjoining the trial court from enforcing
the October 18, 2000 Order.[15]
[16]

In a decision rendered on April 12, 2002, the Court of Appeals annulled the assailed order of the trial court. It ruled that
petitioner failed to prove the requisite clear and legal right that would justify the issuance of the writ of preliminary mandatory
injunction; and that respondent cannot be compelled to accede to the terms of the MTI and/or JREM which was supposed to cover
the syndicated loan of petitioner inasmuch as the said schemes were never executed nor approved by the petitioner and the
participating banks.
Hence, the instant petition for review filed by petitioner which was docketed as G.R. No. 155217. On December 10, 2002,
petitioner filed an omnibus motion seeking, inter alia, the issuance of a temporary restraining order enjoining Landbank from
[17]
proceeding and completing the foreclosure proceedings over its mortgaged properties. On January 22, 2003, the Court denied
[18]
said motion for lack of merit. Petitioners motion for reconsideration was likewise denied on March 26, 2003. [19]
Meanwhile, on January 10, 2003, petitioner filed a petition to cite Landbank President Margarito Teves and Landbanks lawyer
in contempt of Court for proceeding and concluding the foreclosure proceedings and public auction sale. [20] Petitioner contended
that Landbanks acts constitute improper conduct which directly or indirectly impede, obstruct, or degrade the administration of
justice. The petition was docketed as G.R. No. 156393.
On March 12, 2003, the consolidation of G.R. No. 156393 and G.R. No. 155217 was ordered.

[21]

The issues to be resolved in this petition are as follows: (1) Is Landbank bound to share the properties mortgaged to it by
respondent with the other creditor banks in the loan syndication? (2) If the answer is in the affirmative, can Landbank be compelled
at this point to agree with the terms of the MTI or JREM?
Anent the first issue, the Court finds that Landbank is bound by a perfected contract to share petitioners collateral with the
participating banks in the loan syndication. Article 1305 of the Civil Code defines a contract as a meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something or to render some service. A contract undergoes
three distinct stages (1) preparation or negotiation; (2) perfection; and (3) consummation. Negotiation begins from the time the
prospective contracting parties manifest their interest in the contract and ends at the moment of agreement of the parties. The
perfection or birth of the contract takes place when the parties agree upon the essential elements of the contract. The last stage is
the consummation of the contract wherein the parties fulfill or perform the terms agreed upon in the contract, culminating in the
extinguishment thereof. Article 1315 of the Civil Code, on the other hand, provides that a contract is perfected by mere consent,
which is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the
contract.[22]
In the case at bar, a perfected contract for the sharing of collaterals is evident from the exchange of communications between
Landbank and petitioner and the participating banks, as well as in the Memorandum of Understanding executed by petitioner and
the participating banks, including Landbank. In its July 31, 1996 letter to petitioner, Landbank stated that it is willing to submit the
properties covered by the real estate mortgage (REM) in its favor as part of [petitioners] assets that will be covered by a Mortgage
Trust Indenture (MTI). Thus, the Information Memorandum distributed by Landbank to entice other banks to participate in the loan
syndication, expressly stated that the security for the syndicated loan will be the MTI on project assets including land, building and
[23]
equipment. Finally, on October 10, 1996, petitioner, Landbank, PCIB, RCBC, UBP, and Asiatrust executed a Memorandum of
Understanding confirming the said collateral sharing agreement. To effect said sharing, they decided to enter into a Mortgage Trust

Indenture (MTI) which will be secured by the same properties previously mortgaged by petitioner to Landbank, or more specifically,
to
enter into a Mortgage Trust Indenture (herein, the MTI), under which GEC will constitute a mortgage over the land, building, other
land improvements, machinery and equipment of GEC located within Gateway Business Park, Crisanto de Los Reyes Avenue,
Javalera, General Trias, Cavite as well as the assets to be acquired by GEC under the Project (as hereinafter defined) in favor of RCBCTID as trustee, for the benefit of the Creditors (as defined in the MTI), to secure the payment by GEC of its loan obligations. [24]
Clearly, there was an acceptance by petitioner and by PCIB, RCBC, UBP, and Asiatrust of Lanbanks offer to share collaterals,
culminating in the execution of the Memorandum of Understanding. We agree with petitioner that the MTI and/or the JREM belong
to the realm of consummation of said Memorandum of Understanding, being the proposed vehicles or modes to effect the sharing
agreement. Thus, in the JREM which was approved by Landbank, except for its loan security coverage, the participating banks
expressly acknowledged that [t]he Joint Real Estate Mortgage [is] pursued by [them] as a new mode to secure [their] respective
[25]
loans vis--vis GECs collateral. Verily, the perfection of the collateral sharing agreement is not dependent upon the execution of the
MTI or the JREM. The failure to execute said schemes did not affect the perfected and binding collateral sharing contract.
With respect, however, to the second issue, we find that the issuance by the trial court of the writ of preliminary mandatory
injunction directing Landbank to agree with the terms of the MTI or JREM was premature. This is so because the MTI and/or JREM
that were supposed to consummate the perfected collateral sharing agreement have not yet come into existence. As correctly held
by the Court of Appeals, Landbank cannot be compelled to agree with the terms of the MTI considering that no such terms were
finalized and approved by the petitioner and the participating banks. Simply stated, Landbank cannot be forced to give its
conformity to an inexistent contract. So, also, the proposed JREM was never approved by the petitioner and the participating
banks. Notably, the JREM expressly stated that we hereby appeal to the GECs senior management to decide swiftly and to favorably
approve our humble requests so that, in turn, we can seek respective approvals from our senior management to culminate this long
term project financing deal of ours.[26] No such approval, however, appears in the records.
As to the questioned security coverage under the JREM, Landbank cannot be compelled to agree to the proposed 94.42% loan
security coverage over its six hundred million peso-loan to petitioner. The security coverage of the participating banks on the
collaterals of petitioner was not agreed upon in the Memorandum of Understanding. While it is true that Landbank informed
petitioner in its letter dated July 30, 1996 that the participating banks in the loan syndication will have equal security position,[27] and
that on August 20, 1996, Landbank confirmed to PCIB that the participating banks, shall be on equal footing where the aforesaid
[28]
collateral is concerned, no such stipulation was embodied in the Memorandum of Understanding executed by petitioner,
Landbank, PCIB, RCBC, UBP, and Asiatrust on October 10, 1996. As the repository of the terms and conditions agreed upon by the
parties, the Memorandum of Understanding is considered as containing all their stipulations and there can be no evidence of such
terms other than the contents thereof.[29] Inasmuch as the parties to the Memorandum of Understanding did not agree on the terms
of the security coverage of the participating banks in the MTI or JREM, we can neither add such a stipulation nor direct Landbank to
agree to the security coverage stated in the JREM. Furthermore, the reasonableness of the terms of the MTI and JREM, as well as the
good faith or bad faith of the parties in negotiating the terms of the said schemes, are matters that should be determined at the
trial, and cannot at this point be passed upon by this Court.
Furthermore, the other participating banks, namely PCIB, RCBC, UBP, and Asiatrust, are not parties to the instant case and
cannot, therefore, be bound by an order directing Landbank to accede to the terms of the MTI or the JREM. We are not even aware
if said banks are amenable to the said schemes or pursuing other modes to effect the sharing agreement. Indeed, the scheme or
mode and the terms that would consummate the collateral sharing agreement are matters that the signatories of the Memorandum
of Understanding have yet to come up with. The rule in this jurisdiction is that the contracting parties may establish any agreement,
term, and condition they may deem advisable, provided they are not contrary to law, morals or public policy. The right to enter into
lawful contracts constitutes one of the liberties guaranteed by the Constitution. It cannot be struck down or arbitrarily interfered
with without violating the freedom to enter into lawful contracts. [30]
A writ of mandatory injunction requires the performance of a particular act and is granted only upon a showing of the following
requisites (1) the invasion of the right is material and substantial; (2) the right of a complainant is clear and unmistakable; and (3)
there is an urgent and permanent necessity for the writ to prevent serious damage.Since it commands the performance of an act, a
mandatory injunction does not preserve the status quo and is thus more cautiously regarded than a mere prohibitive
injunction.Accordingly, the issuance of the former is justified only in a clear case, free from doubt and dispute. [31]
While it is true that petitioner has a right to compel Landbank to comply with the collateral sharing agreement, its right to
enforce the same by way of an inexistent MTI or JREM is certainly not clear and unmistakable. At this stage, Landbank cannot be
compelled to agree to the terms of the MTI and/or JREM. At the most, Landbank can be compelled to comply with its obligation to
share with the other participating banks of the loan syndication the properties mortgaged to it by petitioner and to execute the
necessary contract that would implement said collateral sharing agreement.
Coming now to the petition for contempt, we find that Landbanks acts of foreclosing and selling at public auction the lots
mortgaged by petitioner were not contumacious.Landbank instituted the foreclosure proceedings upon an honest belief that
petitioner had defaulted in the payment of its obligation. Having acted in good faith, the officers of the bank cannot be held in
contempt of court. However, in order not to render this decision moot and ineffectual, the sale at public auction should be annulled.
WHEREFORE, in view of all the foregoing, the petition in G.R. No. 155217 is GRANTED. The decision of the Court of Appeals
dated April 12, 2002 in CA-G.R. SP. No. 62658 is SET ASIDE. The assailed Order dated October 18, 2000 of the Regional Trial Court of
Makati City, Branch 133, in Civil Case No. 98-782 is MODIFIED as follows: respondent Landbank is directed to implement its
agreement under the Memorandum of Understanding dated October 10, 1996 to share with Philippine Commercial International
Bank (PCIB), Union Bank of the Philippines, (UBP), Rizal Commercial Banking Corporation-Trust Investment Division (RCBC), and Asia
Trust Bank (Asia Trust) the properties mortgaged to it by petitioner Gateway Electronics Corporation, as collaterals for the
syndicated loan.
In G.R. No. 156393, the petition to cite Landbank President Margarito Teves and Landbanks lawyer in contempt of Court
is DENIED for lack of merit.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.

SECOND DIVISION
MARIA LUISA PARK ASSOCIATION, INC.,

G.R. No. 171763

Petitioner,
Present:

QUISUMBING, J., Chairperson,

- versus -

YNARES-SANTIAGO,*
VELASCO, JR.,
LEONARDO-DE CASTRO,** and
BRION, JJ.

SAMANTHA MARIE T. ALMENDRAS and PIA

ANGELA T. ALMENDRAS,

Promulgated:

Respondents.
June 5, 2009
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails the Decision [1] dated August 31, 2005 and the Resolution[2] dated February 13,
2006 of the Court of Appeals in CA-G.R. SP No. 81069.
The facts, culled from the records, are as follows:
On February 6, 2002, respondents Samantha Marie T. Almendras and Pia Angela T. Almendras purchased from MRO
Development Corporation a residential lot located in Maria Luisa Estate Park, Banilad, Cebu City. After some time, respondents filed
with petitioner Maria Luisa Park Association, Incorporated (MLPAI) an application to construct a residential house, which was
approved in February 10, 2002. Thus, respondents commenced the construction of their house.
Upon ocular inspection of the house, MLPAI found out that respondents violated the prohibition against multi-dwelling[3] stated in
MLPAIs Deed of Restriction. Consequently, on April 28, 2003, MLPAI sent a letter to the respondents, demanding that they rectify
the structure; otherwise, it will be constrained to forfeit respondents construction bond and impose stiffer penalties.
In a Letter[4] dated April 29, 2003, respondents, as represented by their father Ruben D. Almendras denied having violated MLPAIs
Deed of Restriction.
On May 5, 2003, MLPAI, in its reply, pointed out respondents specific violations of the subdivision rules, to wit: (a) installation of a
second water meter and tapping the subdivisions main water pipeline, and (b) construction of two separate entrances that are
mutually exclusive of each other. It likewise reiterated its warning that failure to comply with its demand will result in its exercise of
more stringent measures.
In view of these, respondents filed with the Regional Trial Court of Cebu City, Branch 7, a Complaint[5] on June 2, 2003 for Injunction,
Declaratory Relief, Annulment of Provisions of Articles and By-Laws with Prayer for Issuance of a Temporary Restraining Order
(TRO)/Preliminary Injunction.
MLPAI moved for the dismissal of the complaint on the ground of lack of jurisdiction and failure to comply with the
arbitration clause[6] provided for in MLPAIs by-laws.
[7]

In an Order dated July 31, 2003, the trial court dismissed the complaint for lack of jurisdiction, holding that it was the
Housing and Land Use Regulatory Board (HLURB) that has original and exclusive jurisdiction over the case. Respondents moved for
reconsideration but their motion was denied.
Aggrieved, the respondents questioned the dismissal of their complaint in a petition for certiorari and prohibition before the
Court of Appeals.
The Court of Appeals granted the petition in its Decision dated August 31, 2005, the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, the petition is GRANTED and the assailed orders of the
respondent trial court are declared NULL AND VOID, and SET ASIDE. Respondent RTC is hereby ordered to take
jurisdiction of Civil Case No. CEB-29002.
SO ORDERED.

[8]

MLPAI filed a motion for reconsideration but it was denied by the Court of Appeals in its Resolution dated February 13,
2006.
Hence, this petition raising the following issues:
I.
WHETHER THE HONORABLE COURT OF APPEALS HAS DISREGARDED LAWS AND WELL-SETTLED JURISPRUDENCE IN
HOLDING THAT JURISDICTION OVER [THE] DISPUTE BETWEEN HOMEOWNERS AND HOMEOWNERS ASSOCIATION
LIES WITH THE REGULAR COURTS AND NOT WITH HLURB.
II.
WHETHER THERE IS NO OTHER RELIEF AND REMEDY AVAILABLE TO PETITIONER TO AVERT THE CONDUCT OF A
VOID [PROCEEDING] THAN THE PRESENT RECOURSE. [9]

Simply stated, the issue is whether the appellate court erred in ruling that it was the trial court and not the HLURB that has
jurisdiction over the case.
Petitioner MLPAI contends that the HLURB[10] has exclusive jurisdiction over the present controversy, it being a dispute
between a subdivision lot owner and a subdivision association, where the latter aimed to compel respondents to comply with the
MLPAIs Deed of Restriction, specifically the provision prohibiting multi-dwelling.
Respondents, on the other hand, counter that the case they filed against MLPAI is one for declaratory relief and annulment
of the provisions of the by-laws; hence, it is outside the competence of the HLURB to resolve. They likewise stated that MLPAIs rules
and regulations are discriminatory and violative of their basic rights as members of the association. They also argued that MLPAIs
acts are illegal, immoral and against public policy and that they did not commit any violation of the MLPAIs Deed of Restriction.
We agree with the trial court that the instant controversy falls squarely within the exclusive and original jurisdiction of the
[11]
Home Insurance and Guaranty Corporation (HIGC), now HLURB.
Originally, administrative supervision over homeowners associations was vested by law with the Securities and Exchange
[12]
Commission (SEC). However, pursuant to Executive Order No. 535, the HIGC assumed the regulatory and adjudicative functions of
the SEC over homeowners associations. Section 2 of E.O. No. 535 provides:
2. In addition to the powers and functions vested under the Home Financing Act, the Corporation, shall have
among others, the following additional powers:
(a) . . . and exercise all the powers, authorities and responsibilities that are vested on the Securities and Exchange
Commission with respect to homeowners associations, the provision of Act 1459, as amended by P.D. 902-A, to the
contrary notwithstanding;
(b) To regulate and supervise the activities and operations of all houseowners associations registered in
accordance therewith;
xxxx

Moreover, by virtue of this amendatory law, the HIGC also assumed the SECs original and exclusive jurisdiction under Section 5 of
Presidential Decree No. 902-A to hear and decide cases involving:
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members, or associates; between any and/or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual franchise or right to exist as such
[13]
entity; (Emphasis supplied.)
xxxx
Consequently, in Sta. Clara Homeowners Association v. Gaston [14] and Metro Properties, Inc. v. Magallanes Village
Association, Inc.,[15] the Court recognized HIGCs Revised Rules of Procedure in the Hearing of Home Owners Disputes, pertinent
portions of which are reproduced below:
RULE II

Disputes Triable by HIGC/Nature of Proceedings

Section 1. Types of Disputes The HIGC or any person, officer, body, board or committee duly designated or
created by it shall have jurisdiction to hear and decide cases involving the following:
xxxx
(b) Controversies arising out of intra-corporate relations between and among members of the
association, between any or all of them and the association of which they are members, and between such
association and the state/general public or other entity in so far as it concerns its right to exist as a corporate
[16]
entity. (Emphasis supplied.)
xxxx

Later on, the above-mentioned powers and responsibilities, which had been vested in the HIGC with respect to
[17]
homeowners associations, were transferred to the HLURB pursuant to Republic Act No. 8763, entitled Home Guaranty
Corporation Act of 2000.
In the present case, there is no question that respondents are members of MLPAI as they have even admitted
[18]
it. Therefore, as correctly ruled by the trial court, the case involves a controversy between the homeowners association and some
of its members. Thus, the exclusive and original jurisdiction lies with the HLURB.
Indeed, in Sta. Clara Homeowners Association v. Gaston, we held:
. . . the HIGC exercises limited jurisdiction over homeowners' disputes. The law confines its authority to
controversies that arise from any of the following intra-corporate relations: (1) between and among members of
the association; (2) between any and/or all of them and the association of which they are members; and (3)
between the association and the state insofar as the controversy concerns its right to exist as a corporate
[19]
entity. (Emphasis supplied.)

The extent to which the HLURB has been vested with quasi-judicial authority must also be determined by referring to
Section 3 of P.D. No. 957,[20] which provides:
SEC. 3. National Housing Authority. The National Housing Authority shall have exclusive jurisdiction to
regulate the real estate trade and business in accordance with the provisions of this Decree. (Emphasis supplied.)

The provisions of P.D. No. 957 were intended to encompass all questions regarding subdivisions and condominiums. The
intention was aimed at providing for an appropriate government agency, the HLURB, to which all parties aggrieved in the
implementation of provisions and the enforcement of contractual rights with respect to said category of real estate may take
recourse. The business of developing subdivisions and corporations being imbued with public interest and welfare, any question arising
from the exercise of that prerogative should be brought to the HLURB which has the technical know-how on the matter.[21] In the
exercise of its powers, the HLURB must commonly interpret and apply contracts and determine the rights of private parties under such
contracts. This ancillary power is no longer a uniquely judicial function, exercisable only by the regular courts. [22]
It is apparent that although the complaint was denominated as one for declaratory relief/annulment of contracts, the
allegations therein reveal otherwise. It should be stressed that respondents neither asked for the interpretation of the questioned
by-laws nor did they allege that the same is doubtful or ambiguous and require judicial construction. In fact, what respondents really
seek to accomplish is to have a particular provision of the MLPAIs by-laws nullified and thereafter absolve them from any violations
of the same.[23] In Kawasaki Port Service Corporation v. Amores,[24] the rule was stated:
. . . where a declaratory judgment as to a disputed fact would be determinative of issues rather than a
construction of definite stated rights, status and other relations, commonly expressed in written instrument, the
case is not one for declaratory judgment.[25]

Contrary to the observation of the Court of Appeals, jurisdiction cannot be made to depend on the exclusive characterization of the
case by one of the parties.[26] While respondents are questioning the validity or legality of the MLPAIs articles of incorporation and its
by-laws, they did not, however, raise any legal ground to support its nullification. The legality of the by-laws in its entirety was never an
issue in the instant controversy but merely the provision prohibiting multi-dwelling which respondents assert they did not violate.[27] So
to speak, there is no justiciable controversy here that would warrant declaratory relief, or even an annulment of contracts.
We reiterate that in jurisdictional issues, what determines the nature of an action for the purpose of ascertaining whether a court has
jurisdiction over a case are the allegations in the complaint and the nature of the relief sought.[28]
Moreover, under the doctrine of primary administrative jurisdiction, courts cannot or will not determine a controversy
where the issues for resolution demand the exercise of sound administrative discretion requiring the special knowledge, experience,
and services of the administrative tribunal to determine technical and intricate matters of fact.[29]
In the instant case, the HLURB has the expertise to resolve the basic technical issue of whether the house built by the
respondents violated the Deed of Restriction, specifically the prohibition against multi-dwelling.

[30]

As observed in C.T. Torres Enterprises, Inc. v. Hibionada:

The argument that only courts of justice can adjudicate claims resoluble under the provisions of the Civil
Code is out of step with the fast-changing times. There are hundreds of administrative bodies now performing this
function by virtue of a valid authorization from the legislature. This quasi-judicial function, as it is called, is
exercised by them as an incident of the principal power entrusted to them of regulating certain activities falling
under their particular expertise.
In the Solid Homes case for example the Court affirmed the competence of the Housing and Land Use
Regulatory Board to award damages although this is an essentially judicial power exercisable ordinarily only by
the courts of justice. This departure from the traditional allocation of governmental powers is justified by
expediency, or the need of the government to respond swiftly and competently to the pressing problems of the
[31]
modern world.

We also note that the parties failed to abide by the arbitration agreement in the MLPAI by-laws. Article XII of the MLPAI bylaws entered into by the parties provide:
Mode of Dispute Resolution
Mode of Dispute Resolution. Should any member of the Association have any grievance, dispute or claim against
the Association or any of the officers and governors thereof in connection with their function and/or position in
the Association, the parties shall endeavor to settle the same amicably. In the event that efforts at amicable
settlement fail, such dispute, difference or disagreement shall be brought by the member to an arbitration panel
composed of three (3) arbitrators for final settlement, to the exclusion of all other fora. Such arbitration may be
initiated by giving notice to the other party, such notice designating one (1) independent arbitrator. Within thirty
(30) from the receipt of said notice, the other party shall designate a second independent arbitrator by written
notice to the first party. Both arbitrators shall within fifteen (15) days thereafter select a third independent
arbitrator, who shall be the chairman of the Arbitration Tribunal. In the event that the two (2) arbitrators
respectively nominated by the parties fail to select the third independent arbitrator within the fifteen-day period,
the third arbitrator shall be jointly selected by the parties. In the event that the other party does not nominate an
arbitrator, the Arbitration Tribunal shall be composed of one (1) arbitrator nominated by the party initiating the
proceedings. The Arbitration Tribunal shall render its decision within forty-five (45) days from the selection of the
third arbitrator, which decision shall be valid and binding between the parties unless repudiated within five (5)
days from receipt thereof on grounds that the same was procured through fraud or violence, or that there are
patent or gross errors in facts made basis of the decision. The award of the Tribunal shall be enforced by a court of
competent jurisdiction. Venue of action covered by this Article shall be in the courts of justice of Cebu City only.

Under the said provision of the by-laws, any dispute or claim against the Association or any of its officers and governors
shall first be settled amicably. If amicable settlement fails, such dispute shall be brought by the member to an arbitration panel for
final settlement. The arbitral award shall be valid and binding between the parties unless repudiated on grounds that the same was
procured through fraud or violence, or that there are patent or gross errors in the tribunals findings of facts upon which the decision
was based.
The terms of Article XII of the MLPAI by-laws clearly express the intention of the parties to bring first to the arbitration
process all disputes between them before a party can file the appropriate action. The agreement to submit all disputes to arbitration
[32]
is a contract. As such, the arbitration agreement binds the parties thereto, as well as their assigns and heirs. Respondents, being
[33]
members of MLPAI, are bound by its by-laws, and are expected to abide by it in good faith.
In the instant case, we observed that while both parties exchanged correspondence pertaining to the alleged violation of
the Deed of Restriction, they, however, made no earnest effort to resolve their differences in accordance with the arbitration clause
provided for in their by-laws. Mere exchange of correspondence will not suffice much less satisfy the requirement of
arbitration. Arbitration being the mode of settlement between the parties expressly provided for in their by-laws, the same should
be respected. Unless an arbitration agreement is such as absolutely to close the doors of the courts against the parties, the courts
[34]
should look with favor upon such amicable arrangements.
Arbitration is one of the alternative methods of dispute resolution that is now rightfully vaunted as the wave of the future
in international relations, and is recognized worldwide. To brush aside a contractual agreement calling for arbitration in case of
disagreement between the parties would therefore be a step backward. [35]
WHEREFORE, the instant petition is GRANTED. The Decision dated August 31, 2005 and Resolution dated February 13,
2006 of the Court of Appeals in CA-G.R. SP No. 81069 are SET ASIDE. The Order dated July 31, 2003 of
the Regional Trial Court of Cebu City, Branch 7, is hereby REINSTATED.
SO ORDERED.