ENTITLEMENT TO CONSTITUTIONAL GURANTEES

G.R. No. L-19550 June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL

BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN,
in his capacity as Acting Director, National Bureau of Investigation; SPECIAL
PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR.
and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of
Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES
CALUAG, Court of First Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN
JIMENEZ, Municipal Court of Quezon City, respondents.

CONCEPCION, C.J.:

Upon application of the officers of the government named on the margin 1 — hereinafter
referred to as Respondents-Prosecutors — several judges2 — hereinafter referred to as
Respondents-Judges — issued, on different dates,3 a total of 42 search warrants against
petitioners herein4 and/or the corporations of which they were officers, 5 directed to the any
peace officer, to search the persons above-named and/or the premises of their offices,
warehouses and/or residences, and to seize and take possession of the following personal
property to wit:

Books of accounts, financial records, vouchers, correspondence, receipts, ledgers,

journals, portfolios, credit journals, typewriters, and other documents and/or papers
showing all business transactions including disbursements receipts, balance sheets
and profit and loss statements and Bobbins (cigarette wrappers).

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or
"used or intended to be used as the means of committing the offense," which is described in
the applications adverted to above as "violation of Central Bank Laws, Tariff and Customs
Laws, Internal Revenue (Code) and the Revised Penal Code."

Alleging that the aforementioned search warrants are null and void, as contravening the
Constitution and the Rules of Court — because, inter alia: (1) they do not describe with
particularity the documents, books and things to be seized; (2) cash money, not mentioned in
the warrants, were actually seized; (3) the warrants were issued to fish evidence against the
aforementioned petitioners in deportation cases filed against them; (4) the searches and
seizures were made in an illegal manner; and (5) the documents, papers and cash money
seized were not delivered to the courts that issued the warrants, to be disposed of in
accordance with law — on March 20, 1962, said petitioners filed with the Supreme Court this
original action for certiorari, prohibition, mandamus and injunction, and prayed that, pending
final disposition of the present case, a writ of preliminary injunction be issued restraining
Respondents-Prosecutors, their agents and /or representatives from using the effects seized
as aforementioned or any copies thereof, in the deportation cases already adverted to, and
that, in due course, thereafter, decision be rendered quashing the contested search warrants
and declaring the same null and void, and commanding the respondents, their agents or
representatives to return to petitioners herein, in accordance with Section 3, Rule 67, of the
Rules of Court, the documents, papers, things and cash moneys seized or confiscated under
the search warrants in question.

In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are
valid and have been issued in accordance with law; (2) that the defects of said warrants, if
any, were cured by petitioners' consent; and (3) that, in any event, the effects seized are
admissible in evidence against herein petitioners, regardless of the alleged illegality of the
aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the
petition. However, by resolution dated June 29, 1962, the writ was partially lifted or dissolved,
insofar as the papers, documents and things seized from the offices of the corporations above
mentioned are concerned; but, the injunction was maintained as regards the papers,
documents and things found and seized in the residences of petitioners herein. 7

Thus, the documents, papers, and things seized under the alleged authority of the warrants in
question may be split into two (2) major groups, namely: (a) those found and seized in the
offices of the aforementioned corporations, and (b) those found and seized in the residences
of petitioners herein.

As regards the first group, we hold that petitioners herein have no cause of action to assail
the legality of the contested warrants and of the seizures made in pursuance thereof, for the
simple reason that said corporations have their respective personalities, separate and distinct
from the personality of herein petitioners, regardless of the amount of shares of stock or of the
interest of each of them in said corporations, and whatever the offices they hold therein may
be.8 Indeed, it is well settled that the legality of a seizure can be contested only by the party
whose rights have been impaired thereby,9 and that the objection to an unlawful search and
seizure is purely personal and cannot be availed of by third parties. 10 Consequently,
petitioners herein may not validly object to the use in evidence against them of the
documents, papers and things seized from the offices and premises of the corporations
adverted to above, since the right to object to the admission of said papers in evidence
belongs exclusively to the corporations, to whom the seized effects belong, and may not be
invoked by the corporate officers in proceedings against them in their individual
capacity. 11 Indeed, it has been held:

. . . that the Government's action in gaining possession of papers belonging to

the corporation did not relate to nor did it affect the personal defendants. If these
papers were unlawfully seized and thereby the constitutional rights of or any one
were invaded, they were the rights of the corporation and not the rights of the other
defendants. Next, it is clear that a question of the lawfulness of a seizure can be
raised only by one whose rights have been invaded. Certainly, such a seizure, if
unlawful, could not affect the constitutional rights of defendants whose property had
not been seized or the privacy of whose homes had not been disturbed; nor could
they claim for themselves the benefits of the Fourth Amendment, when its violation, if
any, was with reference to the rights of another. Remus vs. United States (C.C.A.)291
F. 501, 511. It follows, therefore, that the question of the admissibility of the evidence
based on an alleged unlawful search and seizure does not extend to the personal
defendants but embraces only the corporation whose property was taken. . . . (A
Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis
supplied.)

With respect to the documents, papers and things seized in the residences of petitioners
herein, the aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction
previously issued by this Court, 12 thereby, in effect, restraining herein Respondents-
Prosecutors from using them in evidence against petitioners herein.

In connection with said documents, papers and things, two (2) important questions need be
settled, namely: (1) whether the search warrants in question, and the searches and seizures
made under the authority thereof, are valid or not, and (2) if the answer to the preceding
question is in the negative, whether said documents, papers and things may be used in
evidence against petitioners herein.1äwphï1.ñët

Petitioners maintain that the aforementioned search warrants are in the nature of general
warrants and that accordingly, the seizures effected upon the authority there of are null and
void. In this connection, the Constitution 13provides:

The right of the people to be secure in their persons, houses, papers, and effects
against unreasonable searches and seizures shall not be violated, and no warrants
 shall issue but upon probable cause, to be determined by the judge after examination
under oath or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the persons or things to be
seized.

Two points must be stressed in connection with this constitutional mandate, namely: (1) that
no warrant shall issue but upon probable cause, to be determined by the judge in the manner
set forth in said provision; and (2) that the warrant shall particularly describe the things to be
seized.

None of these requirements has been complied with in the contested warrants. Indeed, the
same were issued upon applications stating that the natural and juridical person therein
named had committed a "violation of Central Ban Laws, Tariff and Customs Laws, Internal
Revenue (Code) and Revised Penal Code." In other words, no specific offense had been
alleged in said applications. The averments thereof with respect to the offense committed
were abstract. As a consequence, it was impossible for the judges who issued the warrants to
have found the existence of probable cause, for the same presupposes the introduction of
competent proof that the party against whom it is sought has performed particular acts, or
committed specific omissions, violating a given provision of our criminal laws. As a matter of
fact, the applications involved in this case do not allege any specific acts performed by herein
petitioners. It would be the legal heresy, of the highest order, to convict anybody of a
"violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and
Revised Penal Code," — as alleged in the aforementioned applications — without reference
to any determinate provision of said laws or

To uphold the validity of the warrants in question would be to wipe out completely one of the
most fundamental rights guaranteed in our Constitution, for it would place the sanctity of the
domicile and the privacy of communication and correspondence at the mercy of the whims
caprice or passion of peace officers. This is precisely the evil sought to be remedied by the
constitutional provision above quoted — to outlaw the so-called general warrants. It is not
difficult to imagine what would happen, in times of keen political strife, when the party in
power feels that the minority is likely to wrest it, even though by legal means.

Such is the seriousness of the irregularities committed in connection with the disputed search
warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of
Court 14 by providing in its counterpart, under the Revised Rules of Court 15 that "a search
warrant shall not issue but upon probable cause in connection with one specific offense." Not
satisfied with this qualification, the Court added thereto a paragraph, directing that "no search
warrant shall issue for more than one specific offense."

The grave violation of the Constitution made in the application for the contested search
warrants was compounded by the description therein made of the effects to be searched for
and seized, to wit:

Books of accounts, financial records, vouchers, journals, correspondence, receipts,

ledgers, portfolios, credit journals, typewriters, and other documents and/or papers
showing all business transactions including disbursement receipts, balance sheets
and related profit and loss statements.

Thus, the warrants authorized the search for and seizure of records pertaining to all business
transactions of petitioners herein, regardless of whether the transactions were legal or illegal.
The warrants sanctioned the seizure of all records of the petitioners and the aforementioned
corporations, whatever their nature, thus openly contravening the explicit command of our Bill
of Rights — that the things to be seized be particularly described — as well as tending to
defeat its major objective: the elimination of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain
that, even if the searches and seizures under consideration were unconstitutional, the
documents, papers and things thus seized are admissible in evidence against petitioners
herein. Upon mature deliberation, however, we are unanimously of the opinion that the
position taken in the Moncado case must be abandoned. Said position was in line with the
American common law rule, that the criminal should not be allowed to go free merely
"because the constable has blundered," 16 upon the theory that the constitutional prohibition
against unreasonable searches and seizures is protected by means other than the exclusion
of evidence unlawfully obtained, 17 such as the common-law action for damages against the
searching officer, against the party who procured the issuance of the search warrant and
against those assisting in the execution of an illegal search, their criminal punishment,
resistance, without liability to an unlawful seizure, and such other legal remedies as may be
provided by other laws.

However, most common law jurisdictions have already given up this approach and eventually
adopted the exclusionary rule, realizing that this is the only practical means of enforcing the
constitutional injunction against unreasonable searches and seizures. In the language of
Judge Learned Hand:

As we understand it, the reason for the exclusion of evidence competent as such,
which has been unlawfully acquired, is that exclusion is the only practical way of
enforcing the constitutional privilege. In earlier times the action of trespass against
the offending official may have been protection enough; but that is true no longer.
Only in case the prosecution which itself controls the seizing officials, knows that it
cannot profit by their wrong will that wrong be repressed.18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:

If letters and private documents can thus be seized and held and used in evidence
against a citizen accused of an offense, the protection of the 4th Amendment,
declaring his rights to be secure against such searches and seizures, is of no value,
and, so far as those thus placed are concerned, might as well be stricken from the
Constitution. The efforts of the courts and their officials to bring the guilty to
punishment, praiseworthy as they are, are not to be aided by the sacrifice of those
great principles established by years of endeavor and suffering which have resulted
in their embodiment in the fundamental law of the land.19

This view was, not only reiterated, but, also, broadened in subsequent decisions on the same
Federal Court. 20After reviewing previous decisions thereon, said Court held, in Mapp vs.
Ohio (supra.):

. . . Today we once again examine the Wolf's constitutional documentation of the right
of privacy free from unreasonable state intrusion, and after its dozen years on our
books, are led by it to close the only courtroom door remaining open to evidence
secured by official lawlessness in flagrant abuse of that basic right, reserved to all
persons as a specific guarantee against that very same unlawful conduct. We hold
that all evidence obtained by searches and seizures in violation of the Constitution is,
by that same authority, inadmissible in a State.

Since the Fourth Amendment's right of privacy has been declared enforceable
against the States through the Due Process Clause of the Fourteenth, it is
enforceable against them by the same sanction of exclusion as it used against the
Federal Government. Were it otherwise, then just as without the Weeks rule the
assurance against unreasonable federal searches and seizures would be "a form of
words," valueless and underserving of mention in a perpetual charter of inestimable
human liberties, so too, without that rule the freedom from state invasions of privacy
would be so ephemeral and so neatly severed from its conceptual nexus with the
freedom from all brutish means of coercing evidence as not to permit this Court's high
regard as a freedom "implicit in the concept of ordered liberty." At the time that the
Court held in Wolf that the amendment was applicable to the States through the Due
Process Clause, the cases of this Court as we have seen, had steadfastly held that
 as to federal officers the Fourth Amendment included the exclusion of the evidence
seized in violation of its provisions. Even Wolf "stoutly adhered" to that proposition.
The right to when conceded operatively enforceable against the States, was not
susceptible of destruction by avulsion of the sanction upon which its protection and
enjoyment had always been deemed dependent under the Boyd, Weeks and
Silverthorne Cases. Therefore, in extending the substantive protections of due
process to all constitutionally unreasonable searches — state or federal — it was
logically and constitutionally necessarily that the exclusion doctrine — an essential
part of the right to privacy — be also insisted upon as an essential ingredient of the
right newly recognized by the Wolf Case. In short, the admission of the new
constitutional Right by Wolf could not tolerate denial of its most important
constitutional privilege, namely, the exclusion of the evidence which an accused had
been forced to give by reason of the unlawful seizure. To hold otherwise is to grant
the right but in reality to withhold its privilege and enjoyment. Only last year the Court
itself recognized that the purpose of the exclusionary rule to "is to deter — to compel
respect for the constitutional guaranty in the only effectively available way — by
removing the incentive to disregard it" . . . .

The ignoble shortcut to conviction left open to the State tends to destroy the entire
system of constitutional restraints on which the liberties of the people rest. Having
once recognized that the right to privacy embodied in the Fourth Amendment is
enforceable against the States, and that the right to be secure against rude invasions
of privacy by state officers is, therefore constitutional in origin, we can no longer
permit that right to remain an empty promise. Because it is enforceable in the same
manner and to like effect as other basic rights secured by its Due Process Clause, we
can no longer permit it to be revocable at the whim of any police officer who, in the
name of law enforcement itself, chooses to suspend its enjoyment. Our decision,
founded on reason and truth, gives to the individual no more than that which the
Constitution guarantees him to the police officer no less than that to which honest law
enforcement is entitled, and, to the courts, that judicial integrity so necessary in the
true administration of justice. (emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the
constitutional injunction against unreasonable searches and seizures. To be sure, if the
applicant for a search warrant has competent evidence to establish probable cause of the
commission of a given crime by the party against whom the warrant is intended, then there is
no reason why the applicant should not comply with the requirements of the fundamental law.
Upon the other hand, if he has no such competent evidence, then it is not possible for the
Judge to find that there is probable cause, and, hence, no justification for the issuance of the
warrant. The only possible explanation (not justification) for its issuance is the necessity
of fishing evidence of the commission of a crime. But, then, this fishing expedition is indicative
of the absence of evidence to establish a probable cause.

Moreover, the theory that the criminal prosecution of those who secure an illegal search
warrant and/or make unreasonable searches or seizures would suffice to protect the
constitutional guarantee under consideration, overlooks the fact that violations thereof are, in
general, committed By agents of the party in power, for, certainly, those belonging to the
minority could not possibly abuse a power they do not have. Regardless of the handicap
under which the minority usually — but, understandably — finds itself in prosecuting agents of
the majority, one must not lose sight of the fact that the psychological and moral effect of the
possibility 21 of securing their conviction, is watered down by the pardoning power of the party
for whose benefit the illegality had been committed.

In their Motion for Reconsideration and Amendment of the Resolution of this Court dated
June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House
No. 2008, Dewey Boulevard, House No. 1436, Colorado Street, and Room No. 304 of the
Army-Navy Club, should be included among the premises considered in said Resolution as
residences of herein petitioners, Harry S. Stonehill, Robert P. Brook, John J. Brooks and Karl
Beck, respectively, and that, furthermore, the records, papers and other effects seized in the
offices of the corporations above referred to include personal belongings of said petitioners
and other effects under their exclusive possession and control, for the exclusion of which they
have a standing under the latest rulings of the federal courts of federal courts of the United
States. 22

We note, however, that petitioners' theory, regarding their alleged possession of and control
over the aforementioned records, papers and effects, and the alleged "personal" nature
thereof, has Been Advanced, not in their petition or amended petition herein, but in the Motion
for Reconsideration and Amendment of the Resolution of June 29, 1962. In other words, said
theory would appear to be readjustment of that followed in said petitions, to suit the approach
intimated in the Resolution sought to be reconsidered and amended. Then, too, some of the
affidavits or copies of alleged affidavits attached to said motion for reconsideration, or
submitted in support thereof, contain either inconsistent allegations, or allegations
inconsistent with the theory now advanced by petitioners herein.

Upon the other hand, we are not satisfied that the allegations of said petitions said motion for
reconsideration, and the contents of the aforementioned affidavits and other papers submitted
in support of said motion, have sufficiently established the facts or conditions contemplated in
the cases relied upon by the petitioners; to warrant application of the views therein expressed,
should we agree thereto. At any rate, we do not deem it necessary to express our opinion
thereon, it being best to leave the matter open for determination in appropriate cases in the
future.

We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby,
abandoned; that the warrants for the search of three (3) residences of herein petitioners, as
specified in the Resolution of June 29, 1962, are null and void; that the searches and seizures
therein made are illegal; that the writ of preliminary injunction heretofore issued, in connection
with the documents, papers and other effects thus seized in said residences of herein
petitioners is hereby made permanent; that the writs prayed for are granted, insofar as the
documents, papers and other effects so seized in the aforementioned residences are
concerned; that the aforementioned motion for Reconsideration and Amendment should be,
as it is hereby, denied; and that the petition herein is dismissed and the writs prayed for
denied, as regards the documents, papers and other effects seized in the twenty-nine (29)
places, offices and other premises enumerated in the same Resolution, without special
pronouncement as to costs.

It is so ordered.
ENTITLEMENT TO CONSTITUTIONAL GUARANTEES

G.R. No. 75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO
SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER
RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S.
DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private corporation
known as the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered
1 and 2, promulgated by President Corazon C. Aquino on February 28, 1986 and March 12,
1986, respectively, and (2) the sequestration, takeover, and other orders issued, and acts
done, in accordance with said executive orders by the Presidential Commission on Good
Government and/or its Commissioners and agents, affecting said corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its misery
was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed
to three of the agents of the Commission, hereafter simply referred to as PCGG. It reads as
follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good

Government, by authority of the President of the Philippines, you are hereby
directed to sequester the following companies.

1. Bataan Shipyard and Engineering Co., Inc. (Engineering

Island Shipyard and Mariveles Shipyard)

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo" Romualdez

 You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these

companies' business activities.

2. To ensure the continuity of these companies as going concerns, the care

and maintenance of these assets until such time that the Office of the
President through the Commission on Good Government should decide
otherwise.

3. To report to the Commission on Good Government periodically.

Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement
of this sequestration order. 1

b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG,
addressed a letter dated April 18, 1986 to the President and other officers of petitioner firm,
reiterating an earlier request for the production of certain documents, to wit:

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from 1973

to 1986

2.4. Minutes of the Regular and Special Meetings of the

Board of Directors from 1973 to 1986

2.5. Minutes of the Executive Committee Meetings from 1973

to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings

from 1973 to 1986 duly certified by the Corporate Secretary.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss and
others from 1973 to December 31, 1985.

5. Monthly Financial Statements for the current year up to March 31, 1986.

6. Consolidated Cash Position Reports from January to April 15, 1986.

7. Inventory listings of assets up dated up to March 31, 1986.

8. Updated schedule of Accounts Receivable and Accounts Payable.

 9. Complete list of depository banks for all funds with the authorized
signatories for withdrawals thereof.

10. Schedule of company investments and placements. 2

The letter closed with the warning that if the documents were not submitted within five days,
the officers would be cited for "contempt in pursuance with Presidential Executive Order Nos.
1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is

that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force
assigned to carry out the basic sequestration order. He sent a letter to BASECO's Vice-
President for Finance, 3 terminating the contract for security services within the Engineer
Island compound between BASECO and "Anchor and FAIRWAYS" and "other civilian
security agencies," CAPCOM military personnel having already been assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck
Owners and Contractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation,"
advising of the amendment in part of their contracts with BASECO in the sense that the
stipulated charges for use of the BASECO road network were made payable "upon entry and
not anymore subject to monthly billing as was originally agreed upon." 4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of
BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the latter
undertook to introduce improvements costing approximately P210,000.00 on the BASECO
wharf at Engineer Island, allegedly then in poor condition, avowedly to "optimize its utilization
and in return maximize the revenue which would flow into the government coffers," in
consideration of Deltamarine's being granted "priority in using the improved portion of the
wharf ahead of anybody" and exemption "from the payment of any charges for the use of
wharf including the area where it may install its bagging equipments" "until the improvement
remains in a condition suitable for port operations." 5 It seems however that this contract was
never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO Management
Team," advised Deltamarine by letter dated July 30, 1986 that "the new management is not in
a position to honor the said contract" and thus "whatever improvements * * (may be
introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent,
Mayor Melba O. Buenaventura, "to plan and implement progress towards maximizing the
continuous operation of the BASECO Sesiman Rock Quarry * * by conventional methods;"
but afterwards, Commissioner Bautista, in representation of the PCGG, authorized another
party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an agreement to
this effect having been executed by them on September 17, 1986. 7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor
Buenaventura was also "authorized to clean and beautify the Company's compound," and in
this connection, to dispose of or sell "metal scraps" and other materials, equipment and
machineries no longer usable, subject to specified guidelines and safeguards including audit
and verification. 8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover
by the PCGG of BASECO, "the Philippine Dockyard Corporation and all their affiliated
companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive Order No. 1,
empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal or

dissipation, business enterprises and properties taken over by the
government of the Marcos Administration or by entities or persons close to
former President Marcos, until the transactions leading to such acquisition by
the latter can be disposed of by the appropriate authorities.

A management team was designated to implement the order, headed by Capt. Siacunco, and
was given the following powers:

1. Conducts all aspects of operation of the subject companies;

2. Installs key officers, hires and terminates personnel as necessary;

3. Enters into contracts related to management and operation of the

companies;

4. Ensures that the assets of the companies are not dissipated and used
effectively and efficiently; revenues are duly accounted for; and disburses
funds only as may be necessary;

5. Does actions including among others, seeking of military support as may

be necessary, that will ensure compliance to this order;

6. Holds itself fully accountable to the Presidential Commission on Good

Government on all aspects related to this take-over order.

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M.
Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of their
services by the PCGG. 10

2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents which,
to repeat, petitioner BASECO would have this Court nullify. More particularly, BASECO prays
that this Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently
issued and acts done on the basis thereof, inclusive of the takeover order of July 14, 1986
and the termination of the services of the BASECO executives. 11

a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover

Orders
While BASECO concedes that "sequestration without resorting to judicial action, might be
made within the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the
Freedom Constitution was promulgated, under the principle that the law promulgated by the
ruler under a revolutionary regime is the law of the land, it ceased to be acceptable when the
same ruler opted to promulgate the Freedom Constitution on March 25, 1986 wherein under
Section I of the same, Article IV (Bill of Rights) of the 1973 Constitution was adopted
providing, among others, that "No person shall be deprived of life, liberty and property without
due process of law." (Const., Art. I V, Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the
Sequestration Order * * and Takeover Order * * issued purportedly under the authority of said
Executive Orders, rests on four fundamental considerations: First, no notice and hearing was
accorded * * (it) before its properties and business were taken over; Second, the PCGG is not
a court, but a purely investigative agency and therefore not competent to act as prosecutor
and judge in the same cause; Third, there is nothing in the issuances which envisions any
proceeding, process or remedy by which petitioner may expeditiously challenge the validity of
the takeover after the same has been effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional presumption of innocence and general rules
and procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has
apparently already complied with, was issued without court authority and infringed its
constitutional right against self-incrimination, and unreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of dominion and
management of its business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent
and against the will of the contracting parties; and amending the mode of payment of entry
fees stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation,
these acts being in violation of the non-impairment clause of the constitution; 15

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with
Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO premises; 16

3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock
quarry at Sesiman, Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and
other materials; 18

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their
affiliated companies;

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S.
Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito
R. Cuesta I; 19

7) planning to elect its own Board of Directors; 20

8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's
premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have
been buried therein. 22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze
orders have been engendered by misapprehension, or incomplete comprehension if not
indeed downright ignorance of the law governing these remedies. It is needful that these
misconceptions and doubts be dispelled so that uninformed and useless debates about them
may be avoided, and arguments tainted b sophistry or intellectual dishonesty be quickly
exposed and discarded. Towards this end, this opinion will essay an exposition of the law on
the matter. In the process many of the objections raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit command of the
Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise
of legislative power which she was authorized to continue to wield "(until a legislature is
elected and convened under a new Constitution" — "shall give priority to measures to achieve
the mandate of the people," among others to (r)ecover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the people through
orders of sequestration or freezing of assets or accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and
postulates that "vast resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and
abroad." 25 Upon these premises, the Presidential Commission on Good Government was
created, 26 "charged with the task of assisting the President in regard to (certain specified)
matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President

Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, whether located in the Philippines or abroad, including
the takeover or sequestration of all business enterprises and entities owned
or controlled by them, during his administration, directly or through nominees,
by taking undue advantage of their public office and/or using their powers,
authority, influence, connections or relationship. 27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment
of its mission, the PCGG was granted "power and authority" to do the following particular
acts, to wit:

1. To sequester or place or cause to be placed under its control or

possession any building or office wherein any ill-gotten wealth or properties
may be found, and any records pertaining thereto, in order to prevent their
destruction, concealment or disappearance which would frustrate or hamper
the investigation or otherwise prevent the Commission from accomplishing its
task.

2. To provisionally take over in the public interest or to prevent the disposal or

dissipation, business enterprises and properties taken over by the
government of the Marcos Administration or by entities or persons close to
former President Marcos, until the transactions leading to such acquisition by
the latter can be disposed of by the appropriate authorities.
 3. To enjoin or restrain any actual or threatened commission of acts by any
person or entity that may render moot and academic, or frustrate or otherwise
make ineffectual the efforts of the Commission to carry out its task under this
order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to conduct
investigations; require submission of evidence by subpoenae ad testificandum and duces
tecum; administer oaths; punish for contempt. 29It was given power also to promulgate such
rules and regulations as may be necessary to carry out the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the
recovery of ill-gotten properties amassed by the leaders and supporters of the previous
regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence

showing that there are assets and properties purportedly pertaining to former
Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their
close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly,
through or as a result of the improper or illegal use of funds or properties
owned by the government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of their office, authority, influence, connections or
relationship, resulting in their unjust enrichment and causing grave damage
and prejudice to the Filipino people and the Republic of the Philippines:" and

2) * * said assets and properties are in the form of bank accounts, deposits,
trust accounts, shares of stocks, buildings, shopping centers, condominiums,
mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former President
Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents, or nominees have any
interest or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their

close relatives, subordinates, business associates, duties, agents, or
nominees from transferring, conveying, encumbering, concealing or
dissipating said assets or properties in the Philippines and abroad, pending
the outcome of appropriate proceedings in the Philippines to determine
whether any such assets or properties were acquired by them through or as a
result of improper or illegal use of or the conversion of funds belonging to the
Government of the Philippines or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue advantage of
their official position, authority, relationship, connection or influence to
unjustly enrich themselves at the expense and to the grave damage and
prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or

otherwise depleting or concealing such assets and properties or from
assisting or taking part in their transfer, encumbrance, concealment or
dissipation under pain of such penalties as are prescribed by law;" and
 4) required "all persons in the Philippines holding such assets or properties,
whether located in the Philippines or abroad, in their names as nominees,
agents or trustees, to make full disclosure of the same to the Commission on
Good Government within thirty (30) days from publication of * (the) Executive
Order, * *. 32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is
empowered, "with the assistance of the Office of the Solicitor General and other government
agencies, * * to file and prosecute all cases investigated by it * * as may be warranted by its
findings." 34 All such cases, whether civil or criminal, are to be filed "with
the Sandiganbayan which shall have exclusive and original jurisdiction thereof." 35 Executive
Order No. 14 also pertinently provides that civil suits for restitution, reparation of damages, or
indemnification for consequential damages, forfeiture proceedings provided for under
Republic Act No. 1379, or any other civil actions under the Civil Code or other existing laws,
in connection with * * (said Executive Orders Numbered 1 and 2) may be filed separately from
and proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of procedure and
evidence shall not be strictly applied to* * (said)civil cases." 36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters

of the previous regime"; 37

a) more particularly, that ill-gotten wealth (was) accumulated by former

President Ferdinand E. Marcos, his immediate family, relatives, subordinates
and close associates, * * located in the Philippines or abroad, * * (and)
business enterprises and entities (came to be) owned or controlled by them,
during * * (the Marcos) administration, directly or through nominees, by taking
undue advantage of their public office and/or using their powers, authority,
influence, Connections or relationship; 38

b) otherwise stated, that "there are assets and properties purportedly

pertaining to former President Ferdinand E. Marcos, and/or his wife Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates, business
associates, dummies, agents or nominees which had been or were acquired
by them directly or indirectly, through or as a result of the improper or illegal
use of funds or properties owned by the Government of the Philippines or any
of its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their office, authority, influence, connections
or relationship, resulting in their unjust enrichment and causing grave
damage and prejudice to the Filipino people and the Republic of the
Philippines"; 39

c) that "said assets and properties are in the form of bank accounts. deposits,
trust. accounts, shares of stocks, buildings, shopping centers, condominiums,
mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world;" 40 and

2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to
former President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to
recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the above described
factual premises of the Executive Orders and Proclamation No. 3 to be true, to be
demonstrable by competent evidence, the recovery from Marcos, his family and his
dominions of the assets and properties involved, is not only a right but a duty on the part of
Government.

But however plain and valid that right and duty may be, still a balance must be sought with the
equally compelling necessity that a proper respect be accorded and adequate protection
assured, the fundamental rights of private property and free enterprise which are deemed
pillars of a free society such as ours, and to which all members of that society may without
exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its

necessary components freedom of conscience, freedom of expression, and
freedom in the pursuit of happiness. Along with these freedoms are included
economic freedom and freedom of enterprise within reasonable bounds and
under proper control. * * Evincing much concern for the protection of
property, the Constitution distinctly recognizes the preferred position which
real estate has occupied in law for ages. Property is bound up with every
aspect of social life in a democracy as democracy is conceived in the
Constitution.The Constitution realizes the indispensable role which property,
owned in reasonable quantities and used legitimately, plays in the stimulation
to economic effort and the formation and growth of a solid social middle class
that is said to be the bulwark of democracy and the backbone of every
progressive and happy country. 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They
will have to be duly established by adequate proof in each case, in a proper judicial
proceeding, so that the recovery of the ill-gotten wealth may be validly and properly adjudged
and consummated; although there are some who maintain that the fact-that an immense
fortune, and "vast resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and
abroad," and they have resorted to all sorts of clever schemes and manipulations to disguise
and hide their illicit acquisitions-is within the realm of judicial notice, being of so extensive
notoriety as to dispense with proof thereof, Be this as it may, the requirement of evidentiary
substantiation has been expressly acknowledged, and the procedure to be followed explicitly
laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending

Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-
gotten wealth" as the evidence at hand may reveal, there is an obvious and imperative need
for preliminary, provisional measures to prevent the concealment, disappearance, destruction,
dissipation, or loss of the assets and properties subject of the suits, or to restrain or foil acts
that may render moot and academic, or effectively hamper, delay, or negate efforts to recover
the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1)
sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-
gotten wealth." The remedy of "provisional takeover" is peculiar to cases where "business
enterprises and properties (were) taken over by the government of the Marcos Administration
or by entities or persons close to former President Marcos." 43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-
gotten" means to place or cause to be placed under its possession or control said property, or
any building or office wherein any such property and any records pertaining thereto may be
found, including "business enterprises and entities,"-for the purpose of preventing the
destruction, concealment or dissipation of, and otherwise conserving and preserving, the
same-until it can be determined, through appropriate judicial proceedings, whether the
property was in truth will- gotten," i.e., acquired through or as a result of improper or illegal
use of or the conversion of funds belonging to the Government or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of
official position, authority relationship, connection or influence, resulting in unjust enrichment
of the ostensible owner and grave damage and prejudice to the State. 44 And this, too, is the
sense in which the term is commonly understood in other jurisdictions. 45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to
constitute "ill-gotten wealth" "from transferring, conveying, encumbering or otherwise
depleting or concealing such property, or from assisting or taking part in its transfer,
encumbrance, concealment, or dissipation." 46 In other words, it commands the possessor to
hold the property and conserve it subject to the orders and disposition of the authority
decreeing such freezing. In this sense, it is akin to a garnishment by which the possessor or
ostensible owner of property is enjoined not to deliver, transfer, or otherwise dispose of any
effects or credits in his possession or control, and thus becomes in a sense an involuntary
depositary thereof. 47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the apparent
distinction between "ill gotten" "business enterprises and entities" (going concerns,
businesses in actual operation), generally, as to which the remedy of sequestration applies, it
being necessarily inferred that the remedy entails no interference, or the least possible
interference with the actual management and operations thereof; and "business enterprises
which were taken over by the government government of the Marcos Administration or by
entities or persons close to him," in particular, as to which a "provisional takeover" is
authorized, "in the public interest or to prevent disposal or dissipation of the
enterprises." 48 Such a "provisional takeover" imports something more than sequestration or
freezing, more than the placing of the business under physical possession and control, albeit
without or with the least possible interference with the management and carrying on of the
business itself. In a "provisional takeover," what is taken into custody is not only the physical
assets of the business enterprise or entity, but the business operation as well. It is in fine the
assumption of control not only over things, but over operations or on- going activities. But, to
repeat, such a "provisional takeover" is allowed only as regards "business enterprises *
* taken over by the government of the Marcos Administration or by entities or persons close to
former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character
of the remedies just described. Indeed the law plainly qualifies the remedy of take-over by the
adjective, "provisional." These remedies may be resorted to only for a particular exigency: to
prevent in the public interest the disappearance or dissipation of property or business, and
conserve it pending adjudgment in appropriate proceedings of the primary issue of whether or
not the acquisition of title or other right thereto by the apparent owner was attended by some
vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title
or any right to the property sequestered, frozen or taken over and vest it in the sequestering
agency, the Government or other person. This can be done only for the causes and by the
processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to
be understood and exercised, the language of the executive orders in question leaves no
doubt. Executive Order No. 1 declares that the sequestration of property the acquisition of
which is suspect shall last "until the transactions leading to such acquisition * * can be
disposed of by the appropriate authorities." 49 Executive Order No. 2 declares that the assets
or properties therein mentioned shall remain frozen "pending the outcome of appropriate
proceedings in the Philippines to determine whether any such assets or properties were
acquired" by illegal means. Executive Order No. 14 makes clear that judicial proceedings are
essential for the resolution of the basic issue of whether or not particular assets are "ill-
gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional

Command

There is thus no cause for the apprehension voiced by BASECO 50 that sequestration,
freezing or provisional takeover is designed to be an end in itself, that it is the device through
which persons may be deprived of their property branded as "ill-gotten," that it is intended to
bring about a permanent, rather than a passing, transitional state of affairs. That this is not so
is quite explicitly declared by the governing rules.

Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of
these provisional remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant
rule in plain terms, apart from extending ratification or confirmation (although not really
necessary) to the institution by presidential fiat of the remedy of sequestration and freeze
orders:

SEC. 26. The authority to issue sequestration or freeze orders under

Proclamation No. 3 dated March 25, 1986 in relation to the recovery of ill-
gotten wealth shag remain operative for not more than eighteen months after
the ratification of this Constitution. However, in the national interest, as
certified by the President, the Congress may extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima

facie case. The order and the list of the sequestered or frozen properties
shall forthwith be registered with the proper court. For orders issued before
the ratification of this Constitution, the corresponding judicial action or
proceeding shall be filed within six months from its ratification. For those
issued after such ratification, the judicial action or proceeding shall be
commenced within six months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial

action or proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional
remedy of preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property
of a defendant in a civil suit so that it may stand as security for the satisfaction of any
judgment that may be obtained, and not disposed of, or dissipated, or lost intentionally or
otherwise, pending the action. 54 By receivership, property, real or personal, which is subject
of litigation, is placed in the possession and control of a receiver appointed by the Court, who
shall conserve it pending final determination of the title or right of possession over it. 55 All
these remedies — sequestration, freezing, provisional, takeover, attachment and receivership
— are provisional, temporary, designed for-particular exigencies, attended by no character of
permanency or finality, and always subject to the control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a
court is of no moment. The Solicitor General draws attention to the writ of distraint and levy
which since 1936 the Commissioner of Internal Revenue has been by law authorized to issue
against property of a delinquent taxpayer. 56 BASECO itself declares that it has not
manifested "a rigid insistence on sequestration as a purely judicial remedy * * (as it feels) that
the law should not be ossified to a point that makes it insensitive to change." What it insists
on, what it pronounces to be its "unyielding position, is that any change in procedure, or the
institution of a new one, should conform to due process and the other prescriptions of the Bill
of Rights of the Constitution." 57 It is, to be sure, a proposition on which there can be no
disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal
property in replevin suits, sequestration and provisional takeover writs may issue ex
parte. 58 And as in preliminary attachment, receivership, and delivery of personality, no
objection of any significance may be raised to the ex parte issuance of an order of
sequestration, freezing or takeover, given its fundamental character of temporariness or
conditionality; and taking account specially of the constitutionally expressed "mandate of the
people to recover ill-gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people;" 59 as well as the obvious need to avoid alerting
suspected possessors of "ill-gotten wealth" and thereby cause that disappearance or loss of
property precisely sought to be prevented, and the fact, just as self-evident, that "any transfer,
disposition, concealment or disappearance of said assets and properties would frustrate,
obstruct or hamper the efforts of the Government" at the just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist
a prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and
adequate and fair opportunity to contest it and endeavor to cause its negation or
nullification. 61

Both are assured under the executive orders in question and the rules and regulations
promulgated by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and
due process." 62Executive Order No. 2 declares that with respect to claims on allegedly "ill-
gotten" assets and properties, "it is the position of the new democratic government that
President Marcos * * (and other parties affected) be afforded fair opportunity to contest these
claims before appropriate Philippine authorities." 63 Section 7 of the Commission's Rules and
Regulations provides that sequestration or freeze (and takeover) orders issue upon the
authority of at least two commissioners, based on the affirmation or complaint of an interested
party, or motu proprio when the Commission has reasonable grounds to believe that the
issuance thereof is warranted. 64 A similar requirement is now found in Section 26, Art. XVIII
of the 1987 Constitution, which requires that a "sequestration or freeze order shall be issued
only upon showing of a prima facie case." 65

b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a
party may seek to set aside a writ of sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of

sequestration or freeze or hold order is directed may request the lifting
thereof in writing, either personally or through counsel within five (5) days
from receipt of the writ or order, or in the case of a hold order, from date of
knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu

proprio for good cause shown, the Commission may lift the writ or order
unconditionally or subject to such conditions as it may deem necessary,
taking into consideration the evidence and the circumstance of the case. The
resolution of the commission may be appealed by the party concerned to the
Office of the President of the Philippines within fifteen (15) days from receipt
thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were
not expressly imposed by some rule or regulation as a condition to warrant the sequestration
or freezing of property contemplated in the executive orders in question, it would nevertheless
be exigible in this jurisdiction in which the Rule of Law prevails and official acts which are
devoid of rational basis in fact or law, or are whimsical and capricious, are condemned and
struck down. 66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity
and propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact
that these particular remedies and the authority of the PCGG to issue them have received
constitutional approbation and sanction. As already mentioned, the Provisional or "Freedom"
Constitution recognizes the power and duty of the President to enact "measures to achieve
the mandate of the people to * * * (recover ill- gotten properties amassed by the leaders and
supporters of the previous regime and protect the interest of the people through orders of
sequestration or freezing of assets or accounts." And as also already adverted to, Section 26,
Article XVIII of the 1987 Constitution 67 treats of, and ratifies the "authority to issue
sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police
power, regarded, as t lie power of promoting the public welfare by restraining and regulating
the use of liberty and property," 68 and as "the most essential, insistent and illimitable of
powers * * in the promotion of general welfare and the public interest," 69and said to be co-
extensive with self-protection and * * not inaptly termed (also) the'law of overruling necessity."
"70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG
is not, and was never intended to act as, a judge. Its general function is to conduct
investigations in order to collect evidence establishing instances of "ill-gotten wealth;" issue
sequestration, and such orders as may be warranted by the evidence thus collected and as
may be necessary to preserve and conserve the assets of which it takes custody and control
and prevent their disappearance, loss or dissipation; and eventually file and prosecute in the
proper court of competent jurisdiction all cases investigated by it as may be warranted by its
findings. It does not try and decide, or hear and determine, or adjudicate with any character of
finality or compulsion, cases involving the essential issue of whether or not property should be
forfeited and transferred to the State because "ill-gotten" within the meaning of the
Constitution and the executive orders. This function is reserved to the designated court, in this
case, the Sandiganbayan. 71 There can therefore be no serious regard accorded to the
accusation, leveled by BASECO, 72that the PCGG plays the perfidious role of prosecutor and
judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record,
hereafter to be discussed, the petition cannot succeed. The writs of certiorari and prohibition
prayed for will not be issued.

The facts show that the corporation known as BASECO was owned or controlled by President
Marcos "during his administration, through nominees, by taking undue advantage of his public
office and/or using his powers, authority, or influence, " and that it was by and through the
same means, that BASECO had taken over the business and/or assets of the National
Shipyard and Engineering Co., Inc., and other government-owned or controlled entities.

12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * *
incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a consortium of
Filipino shipowners and shipping executives. Its main office is at Engineer Island, Port Area,
Manila, where its Engineer Island Shipyard is housed, and its main shipyard is located at
Mariveles Bataan." 73 Its Articles of Incorporation disclose that its authorized capital stock is
P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of
P12,000,000.00 have been subscribed, and on said subscription, the aggregate sum of
P3,035,000.00 has been paid by the incorporators. 74The same articles Identify the
incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3)
Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11)
Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and
(15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders,
namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio
Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty
(20) stockholders listed in BASECO's Stock and Transfer Book. 75Their names and the
number of shares respectively held by them are as follows:

1. Jose A. Rojas 1,248 shares

2. Severino G. de la Cruz 1,248 shares

3. Emilio T. Yap 2,508 shares

4. Jose Fernandez 1,248 shares

5. Jose Francisco 128 shares

6. Manuel S. Mendoza 96 shares

7. Anthony P. Lee 1,248 shares

8. Hilario M. Ruiz 32 shares

9. Constante L. Fariñas 8 shares

10. Fidelity Management, Inc. 65,882 shares

 11. Trident Management 7,412 shares

12. United Phil. Lines 1,240 shares

13. Renato M. Tanseco 8 shares

14. Fidel Ventura 8 shares

15. Metro Bay Drydock 136,370 shares

16. Manuel Jacela 1 share

17. Jonathan G. Lu 1 share

18. Jose J. Tanchanco 1 share

19. Dioscoro Papa 128 shares

20. Edward T. Marcelo 4 shares

TOTAL 218,819 shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel
Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard
at Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and — except for
NASSCO's Engineer Island Shops and certain equipment of the BNS, consigned for future
negotiation — all its structures, buildings, shops, quarters, houses, plants, equipment and
facilities, in stock or in transit. This it did in virtue of a "Contract of Purchase and Sale with
Chattel Mortgage" executed on February 13, 1973. The price was P52,000,000.00. As partial
payment thereof, BASECO delivered to NASSCO a cash bond of P11,400,000.00, convertible
into cash within twenty-four (24) hours from completion of the inventory undertaken pursuant
to the contract. The balance of P41,600,000.00, with interest at seven percent (7%) per
annum, compounded semi-annually, was stipulated to be paid in equal semi-annual
installments over a term of nine (9) years, payment to commence after a grace period of two
(2) years from date of turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to

P24,311,550.00, about eight (8) months later. A document to this effect was executed on
October 9, 1973, entitled "Memorandum Agreement," and was signed for NASSCO by Arturo
Pacificador, as Presiding Officer of the Board of Directors, and David R. Ines, as General
Manager. 77 This agreement bore, at the top right corner of the first page, the word
"APPROVED" in the handwriting of President Marcos, followed by his usual full signature.
The document recited that a down payment of P5,862,310.00 had been made by BASECO,
and the balance of P19,449,240.00 was payable in equal semi-annual installments over nine
(9) years after a grace period of two (2) years, with interest at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles
from the Export Processing Zone Authority for the price of P10,047,940.00 of which, as set
out in the document of sale, P2,000.000.00 was paid upon its execution, and the balance
stipulated to be payable in installments. 78
16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the
intervention of President Marcos, acquired ownership of the rest of the assets of NASSCO
which had not been included in the first two (2) purchase documents. This was accomplished
by a deed entitled "Contract of Purchase and Sale," 79 which, like the Memorandum of
Agreement dated October 9, 1973 supra also bore at the upper right-hand corner of its first
page, the handwritten notation of President Marcos reading, "APPROVED, July 29, 1973,"
and underneath it, his usual full signature. Transferred to BASECO were NASSCO's
"ownership and all its titles, rights and interests over all equipment and facilities including
structures, buildings, shops, quarters, houses, plants and expendable or semi-expendable
assets, located at the Engineer Island, known as the Engineer Island Shops, including all the
equipment of the Bataan National Shipyards (BNS) which were excluded from the sale of
NBS to BASECO but retained by BASECO and all other selected equipment and machineries
of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO committed itself
to cooperate with BASECO for the acquisition from the National Government or other
appropriate Government entity of Engineer Island. Consideration for the sale was set at
P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the
balance was stipulated to be paid at 7% interest per annum in equal semi annual installments
over a term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo
Pacificador again signed for NASSCO, together with the general manager, Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from
"the last available Japanese war damage fund of $19,000,000.00," to pay for "Japanese
made heavy equipment (brand new)." 80 On September 3, 1975, it got another loan also from
the NDC in the amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another
loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has been made that
not a single centavo has been paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO.
The first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO
president. 83 The second was embodied in a confidential memorandum dated September 16,
1977 of Capt. A.T. Romualdez. 84 They further disclose the fine hand of Marcos in the affairs
of BASECO, and that of a Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had
been "no orders or demands for ship construction" for some time and expressed the fear that
if that state of affairs persisted, BASECO would not be able to pay its debts to the
Government, which at the time stood at the not inconsiderable amount of
P165,854,000.00. 85 He suggested that, to "save the situation," there be a "spin-off (of their)
shipbuilding activities which shall be handled exclusively by an entirely new corporation to be
created;" and towards this end, he informed Marcos that BASECO was —

* * inviting NDC and LUSTEVECO to participate by converting the NDC

shipbuilding loan to BASECO amounting to P341.165M and assuming and
converting a portion of BASECO's shipbuilding loans from REPACOM
amounting to P52.2M or a total of P83.365M as NDC's equity contribution in
the new corporation. LUSTEVECO will participate by absorbing and
converting a portion of the REPACOM loan of Bay Shipyard and Drydock,
Inc., amounting to P32.538M.86

b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened
with the following caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan
obligations due chiefly to the fact that "orders to build ships as expected * * did not
materialize."

He advised that five stockholders had "waived and/or assigned their holdings inblank," these
being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and
(5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose A.
Rojas had a major heart attack," he made the following quite revealing, and it may be added,
quite cynical and indurate recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in

the stock book prior to the implementation of your instructions to pass a
board resolution to legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents: 88

1. Stock certificates indorsed and assigned in blank with assignments and

waivers; 89

2. The articles of incorporation, the amended articles, and the by-laws of

BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land
in "Engineer Island", Port Area, Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering

"Engineer Island";

5. Contract dated October 9, 1973, between NASSCO and BASECO re-

structure and equipment at Mariveles, Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-
structure and equipment at Engineer Island, Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300

hectares of land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of

P30,000,000.00;
 10. BASECO-REPACOM Agreement dated May 27, 1975;

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the
housing facilities for BASECO's rank-and-file employees. 90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period
when BASECO will have enough orders for ships in order for the company to meet loan
obligations," and that —

An LOI may be issued to government agencies using floating equipment, that

a linkage scheme be applied to a certain percent of BASECO's net profit as
part of BASECO's amortization payments to make it justifiable for you, Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of
BASECO, yet he has presented a report on BASECO to President Marcos, and his report
demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as

regards the "spin-off" and the "linkage scheme" relative to "BASECO's amortization
payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo

Velasco of the Philippine National Oil Company and Chairman Constante Fariñas of the
National Development Company, directing them "to participate in the formation of a new
corporation resulting from the spin-off of the shipbuilding component of BASECO along the
following guidelines:

a. Equity participation of government shall be through LUSTEVECO and

NDC in the amount of P115,903,000 consisting of the following obligations of
BASECO which are hereby authorized to be converted to equity of the said
new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

b. Equity participation of government shall be in the form of non- voting

shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22)
days after receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L.
Fariñas and Geronimo Z. Velasco, in representation of their respective corporations, executed
a PRE-INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they undertook to
form a shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING
CORPORATION," to bring to realization their president's instructions. It would seem that the
new corporation ultimately formed was actually named "Philippine Dockyard Corporation
(PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On
February 14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations
Commission REPACOM the Philippine National Oil Company (PNOC), the Luzon Stevedoring
Company (LUSTEVECO), and the National Development Company (NDC). What is
commanded therein is summarized by the Solicitor General, with pithy and not inaccurate
observations as to the effects thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations

be transferred to NDC subject to reimbursement by NDC to BASECO (of) the
amount of s allegedly representing the handling and incidental expenses
incurred by BASECO in the installation of said equipment (so instead of NDC
getting paid on its loan to BASECO, it was made to pay BASECO instead the
amount of P18.285M); 2) the shipbuilding equipment procured from
reparations through EPZA, now in the possession of BASECO and BSDI
(Bay Shipyard & Drydocking, Inc.) be transferred to LUSTEVECO through
PNOC; and 3) the shipbuilding equipment (thus) transferred be invested by
LUSTEVECO, acting through PNOC and NDC, as the government's equity
participation in a shipbuilding corporation to be established in partnership
with the private sector.

xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's

loan obligation to NDC and REPACOM * * in the total amount of P83.365M
and BSD's REPACOM loan of P32.438M were wiped out and converted into
non-voting preferred shares. 95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of
the control by President Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos
not only exercised control over BASECO, but also that he actually owns well nigh one
hundred percent of its outstanding stock.

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819
shares of stock outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these
twenty are juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares;
(2) Fidelity Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4)
United Phil. Lines, 1,240 shares. The first three corporations, among themselves, own an
aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that
found in Malacanang shortly after the sudden flight of President Marcos, were certificates
corresponding to more than ninety-five percent (95%) of all the outstanding shares of stock of
BASECO, endorsed in blank, together with deeds of assignment of practically all the
outstanding shares of stock of the three (3) corporations above mentioned (which
hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity

Management Inc. — which supposedly owns as aforesaid 65,882 shares of
BASECO stock;
 2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares
of Metro Bay Drydock Corporation — which allegedly owns 136,370 shares
of BASECO stock;

3) the deeds of assignment of 800 outstanding shares of Trident

Management Co., Inc. — which allegedly owns 7,412 shares of BASECO
stock, assigned in blank; 98 and

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding

shares of BASECO stock; that is, all but 5 % — all endorsed in blank. 99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that
the BASECO stockholders were still in possession of their respective stock certificates and
had "never endorsed * * them in blank or to anyone else," 100 that denial is exposed by his
own prior and subsequent recorded statements as a mere gesture of defiance rather than a
verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of
10 days "to SUBMIT, as undertaken by him, * * the certificates of stock issued to the
stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P' of the
petition.' 101 Counsel thereafter moved for extension; and in his motion dated October 2,
1986, he declared inter alia that "said certificates of stock are in the possession of third
parties, among whom being the respondents themselves * * and petitioner is still endeavoring
to secure copies thereof from them." 102 On the same day he filed another motion praying
that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay
Drydock, Inc., and of all other Certificates, of Stock of petitioner's stockholders in possession
of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably
argued that counsel's aforestated motion to secure copies of the stock certificates "confirms
the fact that stockholders of petitioner corporation are not in possession of * * (their)
certificates of stock," and the reason, according to him, was "that 95% of said shares * * have
been endorsed in blank and found in Malacañang after the former President and his family
fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as
already mentioned, Stubbornly insisting that the firm's stockholders had not really assigned
their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986
among other things "to require * * the petitioner * * to deposit upon proper receipt with Clerk of
Court Juanito Ranjo the originals of the stock certificates alleged to be in its possession or
accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * *
within ten (10) days from notice." 106 In a motion filed on December 5, 1986, 107 BASECO's
counsel made the statement, quite surprising in the premises, that "it will negotiate with the
owners (of the BASECO stock in question) to allow petitioner to borrow from them, if
available, the certificates referred to" but that "it needs a more sufficient time therefor" (sic).
BASECO's counsel however eventually had to confess inability to produce the originals of the
stock certificates, putting up the feeble excuse that while he had "requested the stockholders
to allow * * (him) to borrow said certificates, * * some of * * (them) claimed that they had
delivered the certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in view of last national
emergency." 108 He has conveniently omitted, nor has he offered to give the details of the
transactions adverted to by him, or to explain why he had not impressed on the supposed
stockholders the primordial importance of convincing this Court of their present custody of the
originals of the stock, or if he had done so, why the stockholders are unwilling to agree to
some sort of arrangement so that the originals of their certificates might at the very least be
exhibited to the Court. Under the circumstances, the Court can only conclude that he could
not get the originals from the stockholders for the simple reason that, as the Solicitor General
maintains, said stockholders in truth no longer have them in their possession, these having
already been assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the
stockholders and directors of BASECO as of April, 1986 109 were mere "dummies,"
nominees or alter egos of President Marcos; at any rate, that they are no longer owners of
any shares of stock in the corporation, the conclusion cannot be avoided that said
stockholders and directors have no basis and no standing whatever to cause the filing and
prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the
petition, would in effect be to restore the assets, properties and business sequestered and
taken over by the PCGG to persons who are "dummies," nominees or alter egos of the former
president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that
the private corporation known as BASECO was "owned or controlled by former President
Ferdinand E. Marcos * * during his administration, * * through nominees, by taking advantage
of * * (his) public office and/or using * * (his) powers, authority, influence * *," and that
NASSCO and other property of the government had been taken over by BASECO; and the
situation justified the sequestration as well as the provisional takeover of the corporation in
the public interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the
filing of the requisite actions with the Sandiganbayan to cause divestment of title thereto from
Marcos, and its adjudication in favor of the Republic pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct;
accordingly, it sustains the acts of sequestration and takeover by the PCGG as being in
accord with the law, and, in view of what has thus far been set out in this opinion, pronounces
to be without merit the theory that said acts, and the executive orders pursuant to which they
were done, are fatally defective in not according to the parties affected prior notice and
hearing, or an adequate remedy to impugn, set aside or otherwise obtain relief therefrom, or
that the PCGG had acted as prosecutor and judge at the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of
attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial
trial." 111 "Its essence is the substitution of a legislative for a judicial determination of
guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a
determination or declaration of guilt. On the contrary, the executive orders, inclusive of
Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or
acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this case,
the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the second place,
no punishment is inflicted by the executive orders, as the merest glance at their provisions will
immediately make apparent. In no sense, therefore, may the executive orders be regarded as
a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches
and seizures had been transgressed by the Order of April 18, 1986 which required it "to
produce corporate records from 1973 to 1986 under pain of contempt of the Commission if it
fails to do so." The order was issued upon the authority of Section 3 (e) of Executive Order
No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the production of such
books, papers, contracts, records, statements of accounts and other documents as may be
material to the investigation conducted by the Commission, " and paragraph (3), Executive
Order No. 2 dealing with its power to "require all persons in the Philippines holding * *
(alleged "ill-gotten") assets or properties, whether located in the Philippines or abroad, in their
names as nominees, agents or trustees, to make full disclosure of the same * *." The
contention lacks merit.

It is elementary that the right against self-incrimination has no application to juridical persons.

While an individual may lawfully refuse to answer incriminating questions

unless protected by an immunity statute, it does not follow that a corporation,
vested with special privileges and franchises, may refuse to show its hand
when charged with an abuse ofsuchprivileges * * 113

Relevant jurisprudence is also cited by the Solicitor General. 114

* * corporations are not entitled to all of the constitutional protections which

private individuals have. * * They are not at all within the privilege against
self-incrimination, although this court more than once has said that the
privilege runs very closely with the 4th Amendment's Search and Seizure
provisions. It is also settled that an officer of the company cannot refuse to
produce its records in its possession upon the plea that they will either
incriminate him or may incriminate it." (Oklahoma Press Publishing Co. v.
Walling, 327 U.S. 186; emphasis, the Solicitor General's).

* * The corporation is a creature of the state. It is presumed to be

incorporated for the benefit of the public. It received certain special privileges
and franchises, and holds them subject to the laws of the state and the
limitations of its charter. Its powers are limited by law. It can make no contract
not authorized by its charter. Its rights to act as a corporation are only
preserved to it so long as it obeys the laws of its creation. There is a reserve
right in the legislature to investigate its contracts and find out whether it has
exceeded its powers. It would be a strange anomaly to hold that a state,
having chartered a corporation to make use of certain franchises, could not,
in the exercise of sovereignty, inquire how these franchises had been
employed, and whether they had been abused, and demand the production
of the corporate books and papers for that purpose. The defense amounts to
this, that an officer of the corporation which is charged with a criminal
violation of the statute may plead the criminality of such corporation as a
refusal to produce its books. To state this proposition is to answer it. While an
individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation, vested
with special privileges and franchises may refuse to show its hand when
charged with an abuse of such privileges. (Wilson v. United States, 55 Law
Ed., 771, 780 [emphasis, the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14
assures protection to individuals required to produce evidence before the PCGG against any
possible violation of his right against self-incrimination. It gives them immunity from
prosecution on the basis of testimony or information he is compelled to present. As amended,
said Section 4 now provides that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his
privilege against self-incrimination; but no testimony or other information
compelled under the order (or any information directly or indirectly derived
from such testimony, or other information) may be used against the witness
in any criminal case, except a prosecution for perjury, giving a false
statement, or otherwise failing to comply with the order.
The constitutional safeguard against unreasonable searches and seizures finds no application
to the case at bar either. There has been no search undertaken by any agent or
representative of the PCGG, and of course no seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the
powers that may be wielded by the PCGG with regard to the properties or businesses placed
under sequestration or provisionally taken over. Obviously, it is not a question to which an
answer can be easily given, much less one which will suffice for every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of
dominion over property sequestered, frozen or provisionally taken over. AS already earlier
stressed with no little insistence, the act of sequestration; freezing or provisional takeover of
property does not import or bring about a divestment of title over said property; does not
make the PCGG the owner thereof. In relation to the property sequestered, frozen or
provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not
perform acts of strict ownership; and this is specially true in the situations contemplated by
the sequestration rules where, unlike cases of receivership, for example, no court exercises
effective supervision or can upon due application and hearing, grant authority for the
performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least
possible interference with business operations or activities so that, in the event that the
accusation of the business enterprise being "ill gotten" be not proven, it may be returned to its
rightful owner as far as possible in the same condition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, 115 such as to
bring and defend actions in its own name; receive rents; collect debts due; pay outstanding
debts; and generally do such other acts and things as may be necessary to fulfill its mission
as conservator and administrator. In this context, it may in addition enjoin or restrain any
actual or threatened commission of acts by any person or entity that may render moot and
academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for
direct or indirect contempt in accordance with the Rules of Court; and seek and secure the
assistance of any office, agency or instrumentality of the government. 116 In the case of
sequestered businesses generally (i.e., going concerns, businesses in current operation), as
in the case of sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much
less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or

Persons Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken
over by the government of the Marcos Administration or by entities or persons close to former
President Marcos," 117 the PCGG is given power and authority, as already adverted to, to
"provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;"
and since the term is obviously employed in reference to going concerns, or business
enterprises in operation, something more than mere physical custody is connoted; the PCGG
may in this case exercise some measure of control in the operation, running, or management
of the business itself. But even in this special situation, the intrusion into management should
be restricted to the minimum degree necessary to accomplish the legislative will, which is "to
prevent the disposal or dissipation" of the business enterprise. There should be no hasty,
indiscriminate, unreasoned replacement or substitution of management officials or change of
policies, particularly in respect of viable establishments. In fact, such a replacement or
substitution should be avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes
without saying that where replacement of management officers may be called for, the greatest
prudence, circumspection, care and attention - should accompany that undertaking to the end
that truly competent, experienced and honest managers may be recruited. There should be
no role to be played in this area by rank amateurs, no matter how wen meaning. The road to
hell, it has been said, is paved with good intentions. The business is not to be experimented
or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not
ruined. Sight should never be lost sight of the ultimate objective of the whole exercise, which
is to turn over the business to the Republic, once judicially established to be "ill-gotten."
Reason dictates that it is only under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken over may legitimately
be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may
properly exercise the prerogative to vote sequestered stock of corporations, granted to it by
the President of the Philippines through a Memorandum dated June 26, 1986. That
Memorandum authorizes the PCGG, "pending the outcome of proceedings to determine the
ownership of * * (sequestered) shares of stock," "to vote such shares of stock as it may have
sequestered in corporations at all stockholders' meetings called for the election of directors,
declaration of dividends, amendment of the Articles of Incorporation, etc." The Memorandum
should be construed in such a manner as to be consistent with, and not contradictory of the
Executive Orders earlier promulgated on the same matter. There should be no exercise of the
right to vote simply because the right exists, or because the stocks sequestered constitute the
controlling or a substantial part of the corporate voting power. The stock is not to be voted to
replace directors, or revise the articles or by-laws, or otherwise bring about substantial
changes in policy, program or practice of the corporation except for demonstrably weighty and
defensible grounds, and always in the context of the stated purposes of sequestration or
provisional takeover, i.e., to prevent the dispersion or undue disposal of the corporate assets.
Directors are not to be voted out simply because the power to do so exists. Substitution of
directors is not to be done without reason or rhyme, should indeed be shunned if at an
possible, and undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstances as assure that the replacements
are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of
office and elect others in their stead because the evidence showed prima facie that the former
were just tools of President Marcos and were no longer owners of any stock in the firm, if they
ever were at all. This is why, in its Resolution of October 28, 1986; 118 this Court declared
that —

Petitioner has failed to make out a case of grave abuse or excess of

jurisdiction in respondents' calling and holding of a stockholders' meeting for
the election of directors as authorized by the Memorandum of the President *
* (to the PCGG) dated June 26, 1986, particularly, where as in this case, the
government can, through its designated directors, properly exercise control
and management over what appear to be properties and assets owned and
belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any
shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO
Board in the management of the company's affairs should henceforth be guided and
governed by the norms herein laid down. They should never for a moment allow themselves
to forget that they are conservators, not owners of the business; they are fiduciaries, trustees,
of whom the highest degree of diligence and rectitude is, in the premises, required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and
the execution of certain contracts, inclusive of the termination of the employment of some of
its executives, 119 this Court cannot, in the present state of the evidence on record, pass
upon them. It is not necessary to do so. The issues arising therefrom may and will be left for
initial determination in the appropriate action. But the Court will state that absent any showing
of any important cause therefor, it will not normally substitute its judgment for that of the
PCGG in these individual transactions. It is clear however, that as things now stand, the
petitioner cannot be said to have established the correctness of its submission that the acts of
the PCGG in question were done without or in excess of its powers, or with grave abuse of
discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on October
14, 1986 is lifted.
LIABILITY OF A CORPORATION FOR TORTS

G.R. No. L-27155 May 18, 1978

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.

ANTONIO, J.:

Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the
Court of First Instance of Manila in Civil Case No. 34185, ordering petitioner, as third-party
defendant, to pay respondent Rita Gueco Tapnio, as third-party plaintiff, the sum of
P2,379.71, plus 12% interest per annum from September 19, 1957 until the same is fully paid,
P200.00 attorney's fees and costs, the same amounts which Rita Gueco Tapnio was ordered
to pay the Philippine American General Insurance Co., Inc., to be paid directly to the
Philippine American General Insurance Co., Inc. in full satisfaction of the judgment rendered
against Rita Gueco Tapnio in favor of the former; plus P500.00 attorney's fees for Rita Gueco
Tapnio and costs. The basic action is the complaint filed by Philamgen (Philippine American
General Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio Gueco, for the
recovery of the sum of P2,379.71 paid by Philamgen to the Philippine National Bank on behalf
of respondents Tapnio and Gueco, pursuant to an indemnity agreement. Petitioner Bank was
made third-party defendant by Tapnio and Gueco on the theory that their failure to pay the
debt was due to the fault or negligence of petitioner.

The facts as found by the respondent Court of Appeals, in affirming the decision of the Court
of First Instance of Manila, are quoted hereunder:

Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as
principal, in favor of the Philippine National Bank Branch at San Fernando,
Pampanga, to guarantee the payment of defendant Rita Gueco Tapnio's
account with said Bank. In turn, to guarantee the payment of whatever
amount the bonding company would pay to the Philippine National Bank,
both defendants executed the indemnity agreement, Exh. B. Under the terms
and conditions of this indemnity agreement, whatever amount the plaintiff
would pay would earn interest at the rate of 12% per annum, plus attorney's
fees in the amount of 15 % of the whole amount due in case of court
litigation.

The original amount of the bond was for P4,000.00; but the amount was later
reduced to P2,000.00.

It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank
in the sum of P2,000.00, plus accumulated interests unpaid, which she failed
to pay despite demands. The Bank wrote a letter of demand to plaintiff, as
per Exh. C; whereupon, plaintiff paid the bank on September 18, 1957, the
full amount due and owing in the sum of P2,379.91, for and on account of
defendant Rita Gueco's obligation (Exhs. D and D-1).

Plaintiff, in turn, made several demands, both verbal and written, upon
defendants (Exhs. E and F), but to no avail.

Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims,
however, when demand was made upon her by plaintiff for her to pay her
debt to the Bank, that she told the Plaintiff that she did not consider herself to
be indebted to the Bank at all because she had an agreement with one
Jacobo-Nazon whereby she had leased to the latter her unused export sugar
quota for the 1956-1957 agricultural year, consisting of 1,000 piculs at the
rate of P2.80 per picul, or for a total of P2,800.00, which was already in
excess of her obligation guaranteed by plaintiff's bond, Exh. A. This lease
agreement, according to her, was with the knowledge of the bank. But the
Bank has placed obstacles to the consummation of the lease, and the delay
caused by said obstacles forced 'Nazon to rescind the lease contract. Thus,
Rita Gueco Tapnio filed her third-party complaint against the Bank to recover
from the latter any and all sums of money which may be adjudged against
her and in favor of the plaitiff plus moral damages, attorney's fees and costs.

Insofar as the contentions of the parties herein are concerned, we quote with
approval the following findings of the lower court based on the evidence
presented at the trial of the case:

It has been established during the trial that Mrs. Tapnio had
an export sugar quota of 1,000 piculs for the agricultural year
1956-1957 which she did not need. She agreed to allow Mr.
Jacobo C. Tuazon to use said quota for the consideration of
P2,500.00 (Exh. "4"-Gueco). This agreement was called a
contract of lease of sugar allotment.

At the time of the agreement, Mrs. Tapnio was indebted to

the Philippine National Bank at San Fernando, Pampanga.
Her indebtedness was known as a crop loan and was
secured by a mortgage on her standing crop including her
sugar quota allocation for the agricultural year corresponding
to said standing crop. This arrangement was necessary in
order that when Mrs. Tapnio harvests, the P.N.B., having a
lien on the crop, may effectively enforce collection against
her. Her sugar cannot be exported without sugar quota
allotment Sometimes, however, a planter harvest less sugar
than her quota, so her excess quota is utilized by another
who pays her for its use. This is the arrangement entered
into between Mrs. Tapnio and Mr. Tuazon regarding the
former's excess quota for 1956-1957 (Exh. "4"-Gueco).

Since the quota was mortgaged to the P.N.B., the contract of

lease had to be approved by said Bank, The same was
submitted to the branch manager at San Fernando,
Pampanga. The latter required the parties to raise the
consideration of P2.80 per picul or a total of P2,800.00 (Exh.
"2-Gueco") informing them that "the minimum lease rental
acceptable to the Bank, is P2.80 per picul." In a letter
addressed to the branch manager on August 10, 1956, Mr.
Tuazon informed the manager that he was agreeable to
raising the consideration to P2.80 per picul. He further
informed the manager that he was ready to pay said amount
as the funds were in his folder which was kept in the bank.

Explaining the meaning of Tuazon's statement as to the

funds, it was stated by him that he had an approved loan
from the bank but he had not yet utilized it as he was
intending to use it to pay for the quota. Hence, when he said
the amount needed to pay Mrs. Tapnio was in his folder
which was in the bank, he meant and the manager
understood and knew he had an approved loan available to
be used in payment of the quota. In said Exh. "6-Gueco",
Tuazon also informed the manager that he would want for a
notice from the manager as to the time when the bank
 needed the money so that Tuazon could sign the
corresponding promissory note.

Further Consideration of the evidence discloses that when the branch

manager of the Philippine National Bank at San Fernando recommended the
approval of the contract of lease at the price of P2.80 per picul (Exh. 1 1-
Bank), whose recommendation was concurred in by the Vice-president of
said Bank, J. V. Buenaventura, the board of directors required that the
amount be raised to 13.00 per picul. This act of the board of directors was
communicated to Tuazon, who in turn asked for a reconsideration thereof. On
November 19, 1956, the branch manager submitted Tuazon's request for
reconsideration to the board of directors with another recommendation for the
approval of the lease at P2.80 per picul, but the board returned the
recommendation unacted upon, considering that the current price prevailing
at the time was P3.00 per picul (Exh. 9-Bank).

The parties were notified of the refusal on the part of the board of directors of
the Bank to grant the motion for reconsideration. The matter stood as it was
until February 22, 1957, when Tuazon wrote a letter (Exh. 10-Bank informing
the Bank that he was no longer interested to continue the deal, referring to
the lease of sugar quota allotment in favor of defendant Rita Gueco Tapnio.
The result is that the latter lost the sum of P2,800.00 which she should have
received from Tuazon and which she could have paid the Bank to cancel off
her indebtedness,

The court below held, and in this holding we concur that failure of the
negotiation for the lease of the sugar quota allocation of Rita Gueco Tapnio
to Tuazon was due to the fault of the directors of the Philippine National
Bank, The refusal on the part of the bank to approve the lease at the rate of
P2.80 per picul which, as stated above, would have enabled Rita Gueco
Tapnio to realize the amount of P2,800.00 which was more than sufficient to
pay off her indebtedness to the Bank, and its insistence on the rental price of
P3.00 per picul thus unnecessarily increasing the value by only a difference
of P200.00. inevitably brought about the rescission of the lease contract to
the damage and prejudice of Rita Gueco Tapnio in the aforesaid sum of
P2,800.00. The unreasonableness of the position adopted by the board of
directors of the Philippine National Bank in refusing to approve the lease at
the rate of P2.80 per picul and insisting on the rate of P3.00 per picul, if only
to increase the retail value by only P200.00 is shown by the fact that all the
accounts of Rita Gueco Tapnio with the Bank were secured by chattel
mortgage on standing crops, assignment of leasehold rights and interests on
her properties, and surety bonds, aside from the fact that from Exh. 8-Bank, it
appears that she was offering to execute a real estate mortgage in favor of
the Bank to replace the surety bond This statement is further bolstered by the
fact that Rita Gueco Tapnio apparently had the means to pay her obligation
fact that she has been granted several value of almost P80,000.00 for the
agricultural years from 1952 to 56. 1

Its motion for the reconsideration of the decision of the Court of Appeals having been denied,
petitioner filed the present petition.

The petitioner contends that the Court of Appeals erred:

(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota
allocation of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified
refusal of petitioner to approve said lease contract, and its unreasonable insistence on the
rental price of P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar quota in the
possession of the petitioner, the latter's Board of Directors correctly fixed the rental of price
per picul of 1,000 piculs of sugar quota leased by respondent Rita Gueco Tapnio to Jacobo C.
Tuazon at P3.00 per picul.

Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both under
its own Charter and under the Corporation Law, to safeguard and protect its rights and
interests under the deed of assignment, which include the right to approve or disapprove the
said lease of sugar quota and in the exercise of that authority, its

Board of Directors necessarily had authority to determine and fix the rental price per picul of
the sugar quota subject of the lease between private respondents and Jacobo C. Tuazon. It
argued further that both under its Charter and the Corporation Law, petitioner, acting thru its
Board of Directors, has the perfect right to adopt a policy with respect to fixing of rental prices
of export sugar quota allocations, and in fixing the rentals at P3.00 per picul, it did not act
arbitrarily since the said Board was guided by statistics of sugar price and prices of sugar
quotas prevailing at the time. Since the fixing of the rental of the sugar quota is a function
lodged with petitioner's Board of Directors and is a matter of policy, the respondent Court of
Appeals could not substitute its own judgment for that of said Board of Directors, which acted
in good faith, making as its basis therefore the prevailing market price as shown by statistics
which were then in their possession.

Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great
injustice because as a creditor, it shall be deprived of a just claim against its debtor
(respondent Rita Gueco Tapnio) as it would be required to return to respondent Philamgen
the sum of P2,379.71, plus interest, which amount had been previously paid to petitioner by
said insurance company in behalf of the principal debtor, herein respondent Rita Gueco
Tapnio, and without recourse against respondent Rita Gueco Tapnio.

We must advert to the rule that this Court's appellate jurisdiction in proceedings of this nature
is limited to reviewing only errors of law, accepting as conclusive the factual fin dings of the
Court of Appeals upon its own assessment of the evidence. 2

The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco Tapnio
and Jacobo C. Tuazon was executed on April 17, 1956. This contract was submitted to the
Branch Manager of the Philippine National Bank at San Fernando, Pampanga. This
arrangement was necessary because Tapnio's indebtedness to petitioner was secured by a
mortgage on her standing crop including her sugar quota allocation for the agricultural year
corresponding to said standing crop. The latter required the parties to raise the consideration
to P2.80 per picul, the minimum lease rental acceptable to the Bank, or a total of P2,800.00.
Tuazon informed the Branch Manager, thru a letter dated August 10, 1956, that he was
agreeable to raising the consideration to P2.80 per picul. He further informed the manager
that he was ready to pay the said sum of P2,800.00 as the funds were in his folder which was
kept in the said Bank. This referred to the approved loan of Tuazon from the Bank which he
intended to use in paying for the use of the sugar quota. The Branch Manager submitted the
contract of lease of sugar quota allocation to the Head Office on September 7, 1956, with a
recommendation for approval, which recommendation was concurred in by the Vice-President
of the Bank, Mr. J. V. Buenaventura. This notwithstanding, the Board of Directors of petitioner
required that the consideration be raised to P3.00 per picul.

Tuazon, after being informed of the action of the Board of Directors, asked for a
reconsideration thereof. On November 19, 1956, the Branch Manager submitted the request
for reconsideration and again recommended the approval of the lease at P2.80 per picul, but
the Board returned the recommendation unacted, stating that the current price prevailing at
that time was P3.00 per picul.

On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer
interested in continuing the lease of sugar quota allotment. The crop year 1956-1957 ended
and Mrs. Tapnio failed to utilize her sugar quota, resulting in her loss in the sum of P2,800.00
which she should have received had the lease in favor of Tuazon been implemented.

It has been clearly shown that when the Branch Manager of petitioner required the parties to
raise the consideration of the lease from P2.50 to P2.80 per picul, or a total of P2,800-00,
they readily agreed. Hence, in his letter to the Branch Manager of the Bank on August 10,
1956, Tuazon informed him that the minimum lease rental of P2.80 per picul was acceptable
to him and that he even offered to use the loan secured by him from petitioner to pay in full
the sum of P2,800.00 which was the total consideration of the lease. This arrangement was
not only satisfactory to the Branch Manager but it was also approves by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco Tapnio could have realized
the amount of P2,800.00, which was more than enough to pay the balance of her
indebtedness to the Bank which was secured by the bond of Philamgen.

There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-
1957 was due to the disapproval of the lease by the Board of Directors of petitioner. The
issue, therefore, is whether or not petitioner is liable for the damage caused.

As observed by the trial court, time is of the essence in the approval of the lease of sugar
quota allotments, since the same must be utilized during the milling season, because any
allotment which is not filled during such milling season may be reallocated by the Sugar
Quota Administration to other holders of allotments. 3 There was no proof that there was any
other person at that time willing to lease the sugar quota allotment of private respondents for
a price higher than P2.80 per picul. "The fact that there were isolated transactions wherein
the consideration for the lease was P3.00 a picul", according to the trial court, "does not
necessarily mean that there are always ready takers of said price. " The unreasonableness of
the position adopted by the petitioner's Board of Directors is shown by the fact that the
difference between the amount of P2.80 per picul offered by Tuazon and the P3.00 per picul
demanded by the Board amounted only to a total sum of P200.00. Considering that all the
accounts of Rita Gueco Tapnio with the Bank were secured by chattel mortgage on standing
crops, assignment of leasehold rights and interests on her properties, and surety bonds and
that she had apparently "the means to pay her obligation to the Bank, as shown by the fact
that she has been granted several sugar crop loans of the total value of almost P80,000.00
for the agricultural years from 1952 to 1956", there was no reasonable basis for the Board of
Directors of petitioner to have rejected the lease agreement because of a measly sum of
P200.00.

While petitioner had the ultimate authority of approving or disapproving the proposed lease
since the quota was mortgaged to the Bank, the latter certainly cannot escape its
responsibility of observing, for the protection of the interest of private respondents, that
degree of care, precaution and vigilance which the circumstances justly demand in approving
or disapproving the lease of said sugar quota. The law makes it imperative that every person
"must in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith, 4 This petitioner failed to do. Certainly,
it knew that the agricultural year was about to expire, that by its disapproval of the lease
private respondents would be unable to utilize the sugar quota in question. In failing to
observe the reasonable degree of care and vigilance which the surrounding circumstances
reasonably impose, petitioner is consequently liable for the damages caused on private
respondents. Under Article 21 of the New Civil Code, "any person who wilfully causes loss or
injury to another in a manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage." The afore-cited provisions on human relations were
intended to expand the concept of torts in this jurisdiction by granting adequate legal remedy
for the untold number of moral wrongs which is impossible for human foresight to specifically
provide in the statutes. 5

A corporation is civilly liable in the same manner as natural persons for torts, because
"generally speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master be a natural
person or a corporation, and whether the servant or agent be a natural or artificial person. All
of the authorities agree that a principal or master is liable for every tort which he expressly
directs or authorizes, and this is just as true of a corporation as of a natural person, A
corporation is liable, therefore, whenever a tortious act is committed by an officer or agent
under express direction or authority from the stockholders or members acting as a body, or,
generally, from the directors as the governing body." 6

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby
AFFIRMED.
CRIMINAL LIABILITY OF A CORPORATION

G.R. No. L-35262 March 15, 1930

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellant,

vs.
TAN BOON KONG, defendant-appellee.

OSTRAND, J.:

This is an appeal from an order of the Judge of the Twenty-third Judicial District sustaining to
demurrer to an information charging the defendant Tan Boon Kong with the violation of
section 1458 of Act No. 2711 as amended. The information reads as follows:

That on and during the four quarters of the year 1924, in the municipality of Iloilo,
Province of Iloilo, Philippine Islands, the said accused, as corporation organized
under the laws of the Philippine Islands and engaged in the purchase and the sale of
sugar, "bayon," coprax, and other native products and as such object to the payment
of internal-revenue taxes upon its sales, did then and there voluntarily, illegally, and
criminally declare in 1924 for the purpose of taxation only the sum of P2,352,761.94,
when in truth and in fact, and the accused well knew that the total gross sales of said
corporation during that year amounted to P2543,303.44, thereby failing to declare for
the purpose of taxation the amount of P190,541.50, and voluntarily and illegally not
paying the Government as internal-revenue percentage taxes the sum of P2,960.12,
corresponding to 1½ per cent of said undeclared sales.

The question to be decided is whether the information sets forth facts rendering the
defendant, as manager of the corporation liable criminally under section 2723 of Act No. 2711
for violation of section 1458 of the same act for the benefit of said corporation. Section 1458
and 2723 read as follows:

SEC. 1458. Payment of percentage taxes — Quarterly reports of earnings. — The

percentage taxes on business shall be payable at the end of each calendar quarter in
the amount lawfully due on the business transacted during each quarter; and it shall
be on the duty of every person conducting a business subject to such tax, within the
same period as is allowed for the payment of the quarterly installments of the fixed
taxes without penalty, to make a true and complete return of the amount of the
receipts or earnings of his business during the preceeding quarter and pay the tax
due thereon. . . . (Act No. 2711.)

SEC. 2723. Failure to make true return of receipts and sales. — Any person who,
being required by law to make a return of the amount of his receipts, sales, or
business, shall fail or neglect to make such return within the time required, shall be
punished by a fine not exceeding two thousand pesos or by imprisonment for a term
not exceeding one year, or both.

And any such person who shall make a false or fraudulent return shall be punished
by a fine not exceeding ten thousand pesos or by imprisonment for a term not
exceeding two years, or both. (Act No. 2711.)

Apparently, the court below based the appealed ruling on the ground that the offense charged
must be regarded as committed by the corporation and not by its officials or agents. This view
is in direct conflict with the great weight of authority. a corporation can act only through its
officers and agent s, and where the business itself involves a violation of the law, the correct
rule is that all who participate in it are liable (Grall and Ostrand's Case, 103 Va., 855, and
authorities there cited.)
In case of State vs. Burnam (17 Wash., 199), the court went so far as to hold that the
manager of a diary corporation was criminally liable for the violation of a statute by the
corporation through he was not present when the offense was committed.

In the present case the information or complaint alleges that he defendant was the manager
of a corporation which was engaged in business as a merchant, and as such manager, he
made a false return, for purposes of taxation, of the total amount of sale made by said false
return constitutes a violation of law, the defendant, as the author of the illegal act, must
necessarily answer for its consequences, provided that the allegation are proven.

The ruling of the court below sustaining the demurrer to the complaint is therefore reversed,
and the case will be returned to said court for further proceedings not inconsistent with our
view as hereinafter stated. Without costs. So ordered.
ENTITLEMENT TO MORAL DAMAGES

G.R. No. L-22973 January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of
Camarines Norte,defendants-appellees.

ANGELES, J.:

An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil
Case No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus Philippine National
Bank and Anacleto Heraldo, defendants", dismissing the complaint against both defendants
and sentencing the plaintiff to pay to defendant Philippine National Bank (PNB for short) the
sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961
until fully paid, and the costs of suit.

In seeking the reversal of the decision, the plaintiff advances several propositions in its brief
which may be restated as follows:

1. That its total indebtedness to the PNB as of November 21, 1961, was only
P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the
proceeds of the foreclosure sale of its real property alone in the amount of
P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB
thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;

2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the
additional sum of P298.54 as expenses of the foreclosure sale;

3. That the subsequent foreclosure sale of its chattels is null and void, not only
because it had already settled its indebtedness to the PNB at the time the sale was
effected, but also for the reason that the said sale was not conducted in accordance
with the provisions of the Chattel Mortgage Law and the venue agreed upon by the
parties in the mortgage contract;

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value;
and

5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter
disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof
after the sale thru force, intimidation, coercion, and by detaining its "man-in-charge"
of said properties, the PNB is liable to plaintiff for damages and attorney's fees.

The antecedent facts of the case, as found by the trial court, are as follows:

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga
Branch of defendant PNB and the former offered real estate, machinery, logging and
transportation equipments as collaterals. The application, however, was approved for
a loan of P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to
defendant PNB a parcel of land, together with the buildings and improvements
existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao),
province of Camarines Norte, and covered by Transfer Certificate of Title No. 381 of
the land records of said province, as well as various sawmill equipment, rolling unit
and other fixed assets of the plaintiff, all situated in its compound in the
aforementioned municipality.
On August 2, 1956, the PNB released from the approved loan the sum of P27,500,
for which the plaintiff signed a promissory note wherein it promised to pay to the PNB
the said sum in five equal yearly installments at the rate of P6,528.40 beginning July
31, 1957, and every year thereafter, the last of which would be on July 31, 1961.

On October 19, 1956, the PNB made another release of P15,500 as part of the
approved loan granted to the plaintiff and so on the said date, the latter executed
another promissory note wherein it agreed to pay to the former the said sum in five
equal yearly installments at the rate of P3,679.64 beginning July 31, 1957, and
ending on July 31, 1961.

The plaintiff failed to pay the amortization on the amounts released to and received
by it. Repeated demands were made upon the plaintiff to pay its obligation but it failed
or otherwise refused to do so. Upon inspection and verification made by employees
of the PNB, it was found that the plaintiff had already stopped operation about the
end of 1957 or early part of 1958.

On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the parcel of land, together with the
improvements existing thereon, covered by Transfer Certificate of Title No. 381 of the
land records of Camarines Norte, and to sell it at public auction in accordance with
the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid
obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59,
excluding attorney's fees. In compliance with the request, on October 16, 1961, the
Provincial Sheriff of Camarines Norte issued the corresponding notice of extra-judicial
sale and sent a copy thereof to the plaintiff. According to the notice, the mortgaged
property would be sold at public auction at 10:00 a.m. on November 21, 1961, at the
ground floor of the Court House in Daet, Camarines Norte.

On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the chattels mortgaged to it by the plaintiff
and sell them at public auction also on November 21, 1961, for the satisfaction of the
sum of P57,646.59, plus 6% annual interest therefore from September 23, 1961,
attorney's fees equivalent to 10% of the amount due and the costs and expenses of
the sale. On the same day, the PNB sent notice to the plaintiff that the former was
foreclosing extrajudicially the chattels mortgaged by the latter and that the auction
sale thereof would be held on November 21, 1961, between 9:00 and 12:00 a.m., in
Mambulao, Camarines Norte, where the mortgaged chattels were situated.

On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of

the chattels mortgaged by the plaintiff and made an inventory thereof in the presence
of a PC Sergeant and a policeman of the municipality of Jose Panganiban. On
November 9, 1961, the said Deputy Sheriff issued the corresponding notice of public
auction sale of the mortgaged chattels to be held on November 21, 1961, at 10:00
a.m., at the plaintiff's compound situated in the municipality of Jose Panganiban,
Province of Camarines Norte.

On November 19, 1961, the plaintiff sent separate letters, posted as registered air
mail matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff
of Camarines Norte, protesting against the foreclosure of the real estate and chattel
mortgages on the grounds that they could not be effected unless a Court's order was
issued against it (plaintiff) for said purpose and that the foreclosure proceedings,
according to the terms of the mortgage contracts, should be made in Manila. In said
letter to the Naga Branch of the PNB, it was intimated that if the public auction sale
would be suspended and the plaintiff would be given an extension of ninety (90) days,
its obligation would be settled satisfactorily because an important negotiation was
then going on for the sale of its "whole interest" for an amount more than sufficient to
liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter
as a request for extension of the foreclosure sale of the mortgaged chattels and so it
advised the Sheriff of Camarines Norte to defer it to December 21, 1961, at the same
time and place. A copy of said advice was sent to the plaintiff for its information and
guidance.

The foreclosure sale of the parcel of land, together with the buildings and
improvements thereon, covered by Transfer Certificate of Title No. 381, was,
however, held on November 21, 1961, and the said property was sold to the PNB for
the sum of P56,908.00, subject to the right of the plaintiff to redeem the same within a
period of one year. On the same date, Deputy Provincial Sheriff Heraldo executed a
certificate of sale in favor of the PNB and a copy thereof was sent to the plaintiff.

In a letter dated December 14, 1961 (but apparently posted several days later), the
plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full
settlement of the balance of the obligation of the plaintiff after the application thereto
of the sum of P56,908.00 representing the proceeds of the foreclosure sale of parcel
of land described in Transfer Certificate of Title No. 381. In the said letter, the plaintiff
reiterated its request that the foreclosure sale of the mortgaged chattels be
discontinued on the grounds that the mortgaged indebtedness had been fully paid
and that it could not be legally effected at a place other than the City of Manila.

In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of
Camarines Norte that it had fully paid its obligation to the PNB, and enclosed
therewith a copy of its letter to the latter dated December 14, 1961.

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the
plaintiff acknowledging the remittance of P738.59 with the advice, however, that as of
that date the balance of the account of the plaintiff was P9,161.76, to which should be
added the expenses of guarding the mortgaged chattels at the rate of P4.00 a day
beginning December 19, 1961. It was further explained in said letter that the sum of
P57,646.59, which was stated in the request for the foreclosure of the real estate
mortgage, did not include the 10% attorney's fees and expenses of the sale.
Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st
of said month would be stopped if a remittance of P9,161.76, plus interest thereon
and guarding fees, would be made.

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at
10:00 a.m. and they were awarded to the PNB for the sum of P4,200 and the
corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff Heraldo.

In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB
advised the plaintiff giving it priority to repurchase the chattels acquired by the former
at public auction. This offer was reiterated in a letter dated January 3, 1962, of the
Attorney of the Naga Branch of the PNB to the plaintiff, with the suggestion that it
exercise its right of redemption and that it apply for the condonation of the attorney's
fees. The plaintiff did not follow the advice but on the contrary it made known of its
intention to file appropriate action or actions for the protection of its interests.

On May 24, 1962, several employees of the PNB arrived in the compound of the
plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief
Security Guard of the premises, that the properties therein had been auctioned and
bought by the PNB, which in turn sold them to Mariano Bundok. Upon being advised
that the purchaser would take delivery of the things he bought, Salgado was at first
reluctant to allow any piece of property to be taken out of the compound of the
plaintiff. The employees of the PNB explained that should Salgado refuse, he would
be exposing himself to a litigation wherein he could be held liable to pay big sum of
money by way of damages. Apprehensive of the risk that he would take, Salgado
immediately sent a wire to the President of the plaintiff in Manila, asking advice as to
 what he should do. In the meantime, Mariano Bundok was able to take out from the
plaintiff's compound two truckloads of equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's
President directing him not to deliver the "chattels" without court order, with the
information that the company was then filing an action for damages against the PNB.
On the following day, May 25, 1962, two trucks and men of Mariano Bundok arrived
but Salgado did not permit them to take out any equipment from inside the compound
of the plaintiff. Thru the intervention, however, of the local police and PC soldiers, the
trucks of Mariano Bundok were able finally to haul the properties originally mortgaged
by the plaintiff to the PNB, which were bought by it at the foreclosure sale and
subsequently sold to Mariano Bundok.

Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated
in the first paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the
defendant PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum from
December 22, 1961 (day following the date of the questioned foreclosure of plaintiff's
chattels) until fully paid, and the costs. Mambulao Lumber Company interposed the instant
appeal.

We shall discuss the various points raised in appellant's brief in seriatim.

The first question Mambulao Lumber Company poses is that which relates to the amount of
its indebtedness to the PNB arising out of the principal loans and the accrued interest
thereon. It is contended that its obligation under the terms of the two promissory notes it had
executed in favor of the PNB amounts only to P56,485.87 as of November 21, 1961, when
the sale of real property was effected, and not P58,213.51 as found by the trial court.

There is merit to this claim. Examining the terms of the promissory note executed by the
appellant in favor of the PNB, we find that the agreed interest on the loan of P43,000.00 —
P27,500.00 released on August 2, 1956 as per promissory note of even date (Exhibit C-3),
and P15,500.00 released on October 19, 1956, as per promissory note of the same date
(Exhibit C-4) — was six per cent (6%) per annum from the respective date of said notes "until
paid". In the statement of account of the appellant as of September 22, 1961, submitted by
the PNB, it appears that in arriving at the total indebtedness of P57,646.59 as of that date, the
PNB had compounded the principal of the loan and the accrued 6% interest thereon each
time the yearly amortizations became due, and on the basis of these compounded amounts
charged additional delinquency interest on them up to September 22, 1961; and to this
erroneously computed total of P57,646.59, the trial court added 6% interest per annum from
September 23, 1961 to November 21 of the same year. In effect, the PNB has claimed, and
the trial court has adjudicated to it, interest on accrued interests from the time the various
amortizations of the loan became due until the real estate mortgage executed to secure the
loan was extra-judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act
No. 2655 expressly provides that in computing the interest on any obligation, promissory note
or other instrument or contract, compound interest shall not be reckoned, except by
agreement, or in default thereof, whenever the debt is judicially claimed. This is also the clear
mandate of Article 2212 of the new Civil Code which provides that interest due shall earn
legal interest only from the time it is judicially demanded, and of Article 1959 of the same
code which ordains that interest due and unpaid shall not earn interest. Of course, the parties
may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn
new interest; but such stipulation is nowhere to be found in the terms of the promissory notes
involved in this case. Clearly therefore, the trial court fell into error when it awarded interest
on accrued interests, without any agreement to that effect and before they had been judicially
demanded.

Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale
in favor of the PNB. With respect to the amount of P298.54 allowed as expenses of the extra-
judicial sale of the real property, appellant maintains that the same has no basis, factual or
legal, and should not have been awarded. It likewise decries the award of attorney's fees
which, according to the appellant, should not be deducted from the proceeds of the sale of the
real property, not only because there is no express agreement in the real estate mortgage
contract to pay attorney's fees in case the same is extra-judicially foreclosed, but also for the
reason that the PNB neither spent nor incurred any obligation to pay attorney's fees in
connection with the said extra-judicial foreclosure under consideration.

There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In
this respect, the trial court said:

The parcel of land, together with the buildings and improvements existing thereon
covered by Transfer Certificate of Title No. 381, was sold for P56,908. There was,
however, no evidence how much was the expenses of the foreclosure sale although
from the pertinent provisions of the Rules of Court, the Sheriff's fees would be P1 for
advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his
commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of
P298.54.

There is really no evidence of record to support the conclusion that the PNB is entitled to the
amount awarded as expenses of the extra-judicial foreclosure sale. The court below
committed error in applying the provisions of the Rules of Court for purposes of arriving at the
amount awarded. It is to be borne in mind that the fees enumerated under paragraphs k and
n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff serving processes
of the court in connection with judicial foreclosure of mortgages under Rule 68 of the new
Rules, and not in cases of extra-judicial foreclosure of mortgages under Act 3135. The law
applicable is Section 4 of Act 3135 which provides that the officer conducting the sale is
entitled to collect a fee of P5.00 for each day of actual work performed in addition to his
expenses in connection with the foreclosure sale. Admittedly, the PNB failed to prove during
the trial of the case, that it actually spent any amount in connection with the said foreclosure
sale. Neither may expenses for publication of the notice be legally allowed in the absence of
evidence on record to support it. 1 It is true, as pointed out by the appellee bank, that courts
should take judicial notice of the fees provided for by law which need not be proved; but in the
absence of evidence to show at least the number of working days the sheriff concerned
actually spent in connection with the extra-judicial foreclosure sale, the most that he may be
entitled to, would be the amount of P10.00 as a reasonable allowance for two day's work —
one for the preparation of the necessary notices of sale, and the other for conducting the
auction sale and issuance of the corresponding certificate of sale in favor of the buyer.
Obviously, therefore, the award of P298.54 as expenses of the sale should be set aside.

But the claim of the appellant that the real estate mortgage does not provide for attorney's
fees in case the same is extra-judicially foreclosed, cannot be favorably considered, as would
readily be revealed by an examination of the pertinent provision of the mortgage contract. The
parties to the mortgage appear to have stipulated under paragraph (c) thereof, inter alia:

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the
Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as
amended, to sign all documents and to perform all acts requisite and necessary to
accomplish said purpose and to appoint its substitute as such attorney-in-fact with the
same powers as above specified. In case of judicial foreclosure, the Mortgagor
hereby consents to the appointment of the Mortgagee or any of its employees as
receiver, without any bond, to take charge of the mortgaged property at once, and to
hold possession of the same and the rents, benefits and profits derived from the
mortgaged property before the sale, less the costs and expenses of the receivership;
the Mortgagor hereby agrees further that in all cases, attorney's fees hereby fixed at
Ten Per cent (10%) of the total indebtedness then unpaid which in no case shall be
less than P100.00 exclusive of all fees allowed by law, and the expenses of collection
shall be the obligation of the Mortgagor and shall with priority, be paid to the
Mortgagee out of any sums realized as rents and profits derived from the mortgaged
property or from the proceeds realized from the sale of the said property and this
mortgage shall likewise stand as security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both cases of
foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in
all cases" appears to be part of the second sentence, a reading of the whole context of the
stipulation would readily show that it logically refers to extra-judicial foreclosure found in the
first sentence and to judicial foreclosure mentioned in the next sentence. And the ambiguity in
the stipulation suggested and pointed out by the appellant by reason of the faulty sentence
construction should not be made to defeat the otherwise clear intention of the parties in the
agreement.

It is suggested by the appellant, however, that even if the above stipulation to pay attorney's
fees were applicable to the extra-judicial foreclosure sale of its real properties, still, the award
of P5,821.35 for attorney's fees has no legal justification, considering the circumstance that
the PNB did not actually spend anything by way of attorney's fees in connection with the sale.
In support of this proposition, appellant cites authorities to the effect: (1) that when the
mortgagee has neither paid nor incurred any obligation to pay an attorney in connection with
the foreclosure sale, the claim for such fees should be denied; 2 and (2) that attorney's fees
will not be allowed when the attorney conducting the foreclosure proceedings is an officer of
the corporation (mortgagee) who receives a salary for all the legal services performed by him
for the corporation. 3 These authorities are indeed enlightening; but they should not be applied
in this case. The very same authority first cited suggests that said principle is not absolute, for
there is authority to the contrary. As to the fact that the foreclosure proceeding's were handled
by an attorney of the legal staff of the PNB, we are reluctant to exonerate herein appellant
from the payment of the stipulated attorney's fees on this ground alone, considering the
express agreement between the parties in the mortgage contract under which appellant
became liable to pay the same. At any rate, we find merit in the contention of the appellant
that the award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and
unreasonable, considering that all that the branch attorney of the said bank did in connection
with the foreclosure sale of the real property was to file a petition with the provincial sheriff of
Camarines Norte requesting the latter to sell the same in accordance with the provisions of
Act 3135.

The principle that courts should reduce stipulated attorney's fees whenever it is found under
the circumstances of the case that the same is unreasonable, is now deeply rooted in this
jurisdiction to entertain any serious objection to it. Thus, this Court has explained:

But the principle that it may be lawfully stipulated that the legal expenses involved in
the collection of a debt shall be defrayed by the debtor does not imply that such
stipulations must be enforced in accordance with the terms, no matter how injurious
or oppressive they may be. The lawful purpose to be accomplished by such a
stipulation is to permit the creditor to receive the amount due him under his contract
without a deduction of the expenses caused by the delinquency of the debtor. It
should not be permitted for him to convert such a stipulation into a source of
speculative profit at the expense of the debtor.

Contracts for attorney's services in this jurisdiction stands upon an entirely different
footing from contracts for the payment of compensation for any other services. By
express provision of section 29 of the Code of Civil Procedure, an attorney is not
entitled in the absence of express contract to recover more than a reasonable
compensation for his services; and even when an express contract is made the court
can ignore it and limit the recovery to reasonable compensation if the amount of the
stipulated fee is found by the court to be unreasonable. This is a very different rule
from that announced in section 1091 of the Civil Code with reference to the obligation
of contracts in general, where it is said that such obligation has the force of law
between the contracting parties. Had the plaintiff herein made an express contract to
pay his attorney an uncontingent fee of P2,115.25 for the services to be rendered in
reducing the note here in suit to judgment, it would not have been enforced against
him had he seen fit to oppose it, as such a fee is obviously far greater than is
necessary to remunerate the attorney for the work involved and is therefore
unreasonable. In order to enable the court to ignore an express contract for an
 attorney's fees, it is not necessary to show, as in other contracts, that it is contrary to
morality or public policy (Art. 1255, Civil Code). It is enough that it is unreasonable or
unconscionable. 4

Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever
the fees stipulated appear excessive, unconscionable, or unreasonable, because a lawyer is
primarily a court officer charged with the duty of assisting the court in administering impartial
justice between the parties, and hence, the fees should be subject to judicial control. Nor
should it be ignored that sound public policy demands that courts disregard stipulations for
counsel fees, whenever they appear to be a source of speculative profit at the expense of the
debtor or mortgagor. 5 And it is not material that the present action is between the debtor and
the creditor, and not between attorney and client. As court have power to fix the fee as
between attorney and client, it must necessarily have the right to say whether a stipulation like
this, inserted in a mortgage contract, is valid. 6

In determining the compensation of an attorney, the following circumstances should be

considered: the amount and character of the services rendered; the responsibility imposed;
the amount of money or the value of the property affected by the controversy, or involved in
the employment; the skill and experience called for in the performance of the service; the
professional standing of the attorney; the results secured; and whether or not the fee is
contingent or absolute, it being a recognized rule that an attorney may properly charge a
much larger fee when it is to be contingent than when it is not. 7 From the stipulation in the
mortgage contract earlier quoted, it appears that the agreed fee is 10% of the total
indebtedness, irrespective of the manner the foreclosure of the mortgage is to be effected.
The agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted
judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed
extra-judicially, and all that the attorney did was to file a petition for foreclosure with the sheriff
concerned. It is to be assumed though, that the said branch attorney of the PNB made a
study of the case before deciding to file the petition for foreclosure; but even with this in mind,
we believe the amount of P5,821.35 is far too excessive a fee for such services. Considering
the above circumstances mentioned, it is our considered opinion that the amount of
P1,000.00 would be more than sufficient to compensate the work aforementioned.

The next issue raised deals with the claim that the proceeds of the sale of the real properties
alone together with the amount it remitted to the PNB later was more than sufficient to
liquidate its total obligation to herein appellee bank. Again, we find merit in this claim. From
the foregoing discussion of the first two errors assigned, and for purposes of determining the
total obligation of herein appellant to the PNB as of November 21, 1961 when the real estate
mortgage was foreclosed, we have the following illustration in support of this
conclusion:1äwphï1.ñët

A. -

I. Principal Loan

(a) Promissory note dated August 2, 1956 P27,500.00

(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78

(b) Promissory note dated October 19, 1956 P15,500.00

(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08

II. Sheriff's fees [for two (2) day's work] 10.00

III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961 P57,495.86

B. -

Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21,
I. P56,908.00
1961

II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59

Deduct: Total obligation to the PNB P57,495.86

Excess Payment to the PNB P 150.73

========

From the foregoing illustration or computation, it is clear that there was no further necessity to
foreclose the mortgage of herein appellant's chattels on December 21, 1961; and on this
ground alone, we may declare the sale of appellant's chattels on the said date, illegal and
void. But we take into consideration the fact that the PNB must have been led to believe that
the stipulated 10% of the unpaid loan for attorney's fees in the real estate mortgage was
legally maintainable, and in accordance with such belief, herein appellee bank insisted that
the proceeds of the sale of appellant's real property was deficient to liquidate the latter's total
indebtedness. Be that as it may, however, we still find the subsequent sale of herein
appellant's chattels illegal and objectionable on other grounds.

That appellant vigorously objected to the foreclosure of its chattel mortgage after the
foreclosure of its real estate mortgage on November 21, 1961, can not be doubted, as shown
not only by its letter to the PNB on November 19, 1961, but also in its letter to the provincial
sheriff of Camarines Norte on the same date. These letters were followed by another letter to
the appellee bank on December 14, 1961, wherein herein appellant, in no uncertain terms,
reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at Jose
Panganiban, Camarines Norte for the reasons therein stated that: (1) it had settled in full its
total obligation to the PNB by the sale of the real estate and its subsequent remittance of the
amount of P738.59; and (2) that the contemplated sale at Jose Panganiban would violate
their agreement embodied under paragraph (i) in the Chattel Mortgage which provides as
follows:

(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended,
the parties hereto agree that the corresponding complaint for foreclosure or the
petition for sale should be filed with the courts or the sheriff of the City of Manila, as
the case may be; and that the Mortgagor shall pay attorney's fees hereby fixed at ten
per cent (10%) of the total indebtedness then unpaid but in no case shall it be less
than P100.00, exclusive of all costs and fees allowed by law and of other expenses
incurred in connection with the said foreclosure. [Emphasis supplied]

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter
disregard of the objection of herein appellant to the sale of its chattels at Jose Panganiban,
Camarines Norte and not in the City of Manila as agreed upon, the PNB proceeded with the
foreclosure sale of said chattels. The trial court, however, justified said action of the PNB in
the decision appealed from in the following rationale:

While it is true that it was stipulated in the chattel mortgage contract that a petition for
the extra-judicial foreclosure thereof should be filed with the Sheriff of the City of
Manila, nevertheless, the effect thereof was merely to provide another place where
 the mortgage chattel could be sold in addition to those specified in the Chattel
Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less
impliedly repeal a specific provision of the statute. Considering that Section 14 of Act
No. 1508 vests in the mortgagee the choice where the foreclosure sale should be
held, hence, in the case under consideration, the PNB had three places from which to
select, namely: (1) the place of residence of the mortgagor; (2) the place of the
mortgaged chattels were situated; and (3) the place stipulated in the contract. The
PNB selected the second and, accordingly, the foreclosure sale held in Jose
Panganiban, Camarines Norte, was legal and valid.

To the foregoing conclusion, We disagree. While the law grants power and authority to the
mortgagee to sell the mortgaged property at a public place in the municipality where the
mortgagor resides or where the property is situated, 8 this Court has held that the sale of a
mortgaged chattel may be made in a place other than that where it is found, provided that the
owner thereof consents thereto; or that there is an agreement to this effect between the
mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed to have the sale
of the mortgaged chattels in the City of Manila, which, any way, is the residence of the
mortgagor, it cannot be rightly said that mortgagee still retained the power and authority to
select from among the places provided for in the law and the place designated in their
agreement over the objection of the mortgagor. In providing that the mortgaged chattel may
be sold at the place of residence of the mortgagor or the place where it is situated, at the
option of the mortgagee, the law clearly contemplated benefits not only to the mortgagor but
to the mortgagee as well. Their right arising thereunder, however, are personal to them; they
do not affect either public policy or the rights of third persons. They may validly be waived.
So, when herein mortgagor and mortgagee agreed in the mortgage contract that in cases of
both judicial and extra-judicial foreclosure under Act 1508, as amended, the corresponding
complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of
Manila, as the case may be, they waived their corresponding rights under the law. The
correlative obligation arising from that agreement have the force of law between them and
should be complied with in good faith. 10

By said agreement the parties waived the legal venue, and such waiver is valid and
legally effective, because it, was merely a personal privilege they waived, which is not
contrary, to public policy or to the prejudice of third persons. It is a general principle
that a person may renounce any right which the law gives unless such renunciation is
expressly prohibited or the right conferred is of such nature that its renunciation would
be against public policy. 11

On the other hand, if a place of sale is specified in the mortgage and statutory
requirements in regard thereto are complied with, a sale is properly conducted in that
place. Indeed, in the absence of a statute to the contrary, a sale conducted at a place
other than that stipulated for in the mortgage is invalid, unless the mortgagor
consents to such sale. 12

Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale
should make a return of his doings which shall particularly describe the articles sold and the
amount received from each article. From this, it is clear that the law requires that sale be
made article by article, otherwise, it would be impossible for him to state the amount received
for each item. This requirement was totally disregarded by the Deputy Sheriff of Camarines
Norte when he sold the chattels in question in bulk, notwithstanding the fact that the said
chattels consisted of no less than twenty different items as shown in the bill of sale. 13 This
makes the sale of the chattels manifestly objectionable. And in the absence of any evidence
to show that the mortgagor had agreed or consented to such sale in gross, the same should
be set aside.

It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not
in accordance with its terms, or where the proceedings as to the sale of foreclosure do not
comply with the statute. 14 This rule applies squarely to the facts of this case where, as earlier
shown, herein appellee bank insisted, and the appellee deputy sheriff of Camarines Norte
proceeded with the sale of the mortgaged chattels at Jose Panganiban, Camarines Norte, in
utter disregard of the valid objection of the mortgagor thereto for the reason that it is not the
place of sale agreed upon in the mortgage contract; and the said deputy sheriff sold all the
chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6 trucks, a
Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy Engine, plainer,
large circular saws etc.) as a single lot in violation of the requirement of the law to sell the
same article by article. The PNB has resold the chattels to another buyer with whom it
appears to have actively cooperated in subsequently taking possession of and removing the
chattels from appellant compound by force, as shown by the circumstance that they had to
take along PC soldiers and municipal policemen of Jose Panganiban who placed the chief
security officer of the premises in jail to deprive herein appellant of its possession thereof. To
exonerate itself of any liability for the breach of peace thus committed, the PNB would want
us to believe that it was the subsequent buyer alone, who is not a party to this case, that was
responsible for the forcible taking of the property; but assuming this to be so, still the PNB
cannot escape liability for the conversion of the mortgaged chattels by parting with its interest
in the property. Neither would its claim that it afterwards gave a chance to herein appellant to
repurchase or redeem the chattels, improve its position, for the mortgagor is not under
obligation to take affirmative steps to repossess the chattels that were converted by the
mortgagee. 15 As a consequence of the said wrongful acts of the PNB and the Deputy Sheriff
of Camarines Norte, therefore, We have to declare that herein appellant is entitled to collect
from them, jointly and severally, the full value of the chattels in question at the time they were
illegally sold by them. To this effect was the holding of this Court in a similar situation. 16

The effect of this irregularity was, in our opinion to make the plaintiff liable to the
defendant for the full value of the truck at the time the plaintiff thus carried it off to be
sold; and of course, the burden is on the defendant to prove the damage to which he
was thus subjected. . . .

This brings us to the problem of determining the value of the mortgaged chattels at the time of
their sale in 1961. The trial court did not make any finding on the value of the chattels in the
decision appealed from and denied altogether the right of the appellant to recover the same.
We find enough evidence of record, however, which may be used as a guide to ascertain their
value. The record shows that at the time herein appellant applied for its loan with the PNB in
1956, for which the chattels in question were mortgaged as part of the security therefore,
herein appellant submitted a list of the chattels together with its application for the loan with a
stated value of P107,115.85. An official of the PNB made an inspection of the chattels in the
same year giving it an appraised value of P42,850.00 and a market value of
P85,700.00. 17 The same chattels with some additional equipment acquired by herein
appellant with part of the proceeds of the loan were reappraised in a re-inspection conducted
by the same official in 1958, in the report of which he gave all the chattels an appraised value
of P26,850.00 and a market value of P48,200.00. 18 Another re-inspection report in 1959 gave
the appraised value as P19,400.00 and the market value at P25,600.00. 19 The said official of
the PNB who made the foregoing reports of inspection and re-inspections testified in court
that in giving the values appearing in the reports, he used a conservative method of appraisal
which, of course, is to be expected of an official of the appellee bank. And it appears that the
values were considerably reduced in all the re-inspection reports for the reason that when he
went to herein appellant's premises at the time, he found the chattels no longer in use with
some of the heavier equipments dismantled with parts thereof kept in the bodega; and finding
it difficult to ascertain the value of the dismantled chattels in such condition, he did not give
them anymore any value in his reports. Noteworthy is the fact, however, that in the last re-
inspection report he made of the chattels in 1961, just a few months before the foreclosure
sale, the same inspector of the PNB reported that the heavy equipment of herein appellant
were "lying idle and rusty" but were "with a shed free from rains" 20 showing that although they
were no longer in use at the time, they were kept in a proper place and not exposed to the
elements. The President of the appellant company, on the other hand, testified that its
caterpillar (tractor) alone is worth P35,000.00 in the market, and that the value of its two
trucks acquired by it with part of the proceeds of the loan and included as additional items in
the mortgaged chattels were worth no less than P14,000.00. He likewise appraised the worth
of its Murphy engine at P16,000.00 which, according to him, when taken together with the
heavy equipments he mentioned, the sawmill itself and all other equipment forming part of the
chattels under consideration, and bearing in mind the current cost of equipments these days
which he alleged to have increased by about five (5) times, could safely be estimated at
P120,000.00. This testimony, except for the appraised and market values appearing in the
inspection and re-inspection reports of the PNB official earlier mentioned, stand
uncontroverted in the record; but We are not inclined to accept such testimony at its par
value, knowing that the equipments of herein appellant had been idle and unused since it
stopped operating its sawmill in 1958 up to the time of the sale of the chattels in 1961. We
have no doubt that the value of chattels was depreciated after all those years of inoperation,
although from the evidence aforementioned, We may also safely conclude that the amount of
P4,200.00 for which the chattels were sold in the foreclosure sale in question was grossly
unfair to the mortgagor. Considering, however, the facts that the appraised value of
P42,850.00 and the market value of P85,700.00 originally given by the PNB official were
admittedly conservative; that two 6 x 6 trucks subsequently bought by the appellant company
had thereafter been added to the chattels; and that the real value thereof, although
depreciated after several years of inoperation, was in a way maintained because the
depreciation is off-set by the marked increase in the cost of heavy equipment in the market, it
is our opinion that the market value of the chattels at the time of the sale should be fixed at
the original appraised value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or factual
basis. Obviously, an artificial person like herein appellant corporation cannot experience
physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or
social humiliation which are basis of moral damages. 21 A corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral damages. The
same cannot be considered under the facts of this case, however, not only because it is
admitted that herein appellant had already ceased in its business operation at the time of the
foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the
foreclosure sale of the chattels could have upon its reputation or business standing would
undoubtedly be the same whether the sale was conducted at Jose Panganiban, Camarines
Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in
proceeding with the sale in utter disregard of the agreement to have the chattels sold in
Manila as provided for in the mortgage contract, to which their attentions were timely called by
herein appellant, and in disposing of the chattels in gross for the miserable amount of
P4,200.00, herein appellant should be awarded exemplary damages in the sum of
P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as attorney's
fees for herein appellant.

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from
should be, as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of
the province of Camarines Norte are ordered to pay, jointly and severally, to Mambulao
Lumber Company the total amount of P56,000.73, broken as follows: P150.73 overpaid by
the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with interest
at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in
exemplary damages, and P3,000.00 as attorney's fees. Costs against both appellees.
ENTITLEMENT TO MORAL DAMAGES

G.R. No. 121171 December 29, 1998

ASSET PRIVATIZATION TRUST, petitioner,

vs.
COURT OF APPEALS, JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T.
CABARRUS, JOSE MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U.
MIRANDA, and MIGUEL M. ANTONIO, as Minority Stock-Holders of Marinduque Mining
and Industrial Corporation, respondents.

KAPUNAN, J.:

The petition for review on certiorari before us seeks to reverse and set aside the decision of
the Court of Appeals which denied due course to the petition for certiorari filed by the Asset
Privatization Trust (APT) assailing the order of the Regional Trial Court (RTC) Branch 62,
Makati City. The Makati RTC's order upheld and confirmed the award made by the Arbitration
Committee in favor of Marinduque Mining and Industrial Corporation (MMIC) and against the
Government, represented by herein petitioner APT for damages in the amount of P2.5
BILLION (or approximately P4.5 BILLION, including interest).

Ironically, the staggering amount of damages was imposed on the Government for exercising
its legitimate right of foreclosure as creditor against the debtor MMIC as a consequence of the
latter's failure to pay its overdue and unpaid obligation of P22 billion to the Philippine National
Bank (PNB) and the Development Bank of the Philippines (DBP).

The antecedent facts

of the case.

The development, exploration and utilization of the mineral deposits in the Surigao Mineral
Reservation have been authorized by Republic Act No. 1528, as amended by Republic Acts
Nos. 2077 and 4167, by virtue of which laws, a Memorandum of Agreement was drawn on
July 3, 1968, whereby the Republic of the Philippines thru the Surigao Mineral Reservation
Board, granted MMIC the exclusive right to explore, develop and exploit nickel, cobalt and
other minerals in the Surigao mineral reservation. 1 MMIC is a domestic corporation
engaged in mining with respondent Jesus S. Cabarrus, Sr. as President and among its
original stockholders.

The Philippine Government undertook to support the financing of MMIC by purchase of

MMIC debenture bonds and extension of guarantees. Further, the Philippine
Government obtained a firm commitment form the DBP and/or other government
financing institutions to subscribe in MMIC and issue guarantee/s for foreign loans or
deferred payment arrangements secured from the US Eximbank, Asian Development
Bank, Kobe Steel, of amount not exceeding US$100 Million.2

DBP approved guarantees in favor of MMIC and subsequent requests for guarantees
were based on the unutilized portion of the Government commitment. Thereafter, the
Government extended accommodations to MMIC in various amounts.

On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement 3 whereby
MMIC, as mortgagor, agreed to constitute a mortgage in favor or PNB and DBP as
mortgagees, over all MMIC's assets; subject of real estate and chattel mortgage
executed by the mortgagor, and additional assets described and identified, including
assets of whatever kind, nature or description, which the mortgagor may acquire
whether in substitution of, in replenishment, or in addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which
expressly includes the event that the MORTGAGOR shall fail to pay any amount
secured by this Mortgage Trust Agreement when due. 4

Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the
enumerated events of defaults, circumstances by which the mortgagor may be
declared in default, the procedure therefor, waiver of period to foreclose, authority of
Trustee before, during and after foreclosure, including taking possession of the
mortgaged properties.5

In various requests for advances/remittances of loans if huge amounts, Deeds of

Undertaking, Promissory Notes, Loan Documents, Deeds of Real Estate Mortgages,
MMIC invariably committed to pay either on demand or under certain terms the loans
and accommodations secured from or guaranteed by both DBP and PNB.

By 1984, DBP and PNB's financial both in loans and in equity in MMIC had reached
tremendous proportions, and MMIC was having a difficult time meeting its financial
obligations. MMIC had an outstanding loan with DBP in the amount of
P13,792,607,565.92 as of August 31, 1984 and with PNB in the amount of
P8,789,028,249.38 as July 15, 1984 or a total Government expose of Twenty Two Billion
Six Hundred Sixty-Eight Million Five Hundred Thirty-Seven Hundred Seventy and
05/100 (P22, 668,537,770.05), Philippine Currency. 6 Thus, a financial restructuring plan
(FRP) designed to reduce MMIC's interest expense through debt conversion to equity
was drafted by the Sycip Gorres Velayo accounting firm. 7 On April 30, 1984, the FRP
was approved by the Board of Directors of the MMIC. 8 However, the proposed FRP had
never been formally adopted, approved or ratified by either PNB or DBP. 9

In August and September 1984, as the various loans and advances made by DBP and
PNB to MMIC had become overdue and since any restructuring program relative to the
loans was no longer feasible, and in compliance with the directive of Presidential
Decree No. 385, DBP and PNB as mortgagees of MMIC assets, decided to exercise their
right to extrajudicially foreclose the mortgages in accordance with the Mortgage Trust
Agreement. 10

The foreclosed assets were sold to PNB as the lone bidder and were assigned to three
newly formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and
Industrial Corporation, and Island Cement Corporation. In 1986, these assets were
transferred to the Asset Privatization Trust (APT). 11

On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of
MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch 62,
for Annulment of Foreclosures, Specific Performance and Damages. 12 The suit,
docketed as Civil Case No. 9900, prayed that the court: (1) annul the foreclosures,
restore the foreclosed assets to MMIC, and require the banks to account for their use
and operation in the interim; (2) direct the banks to honor and perform their
commitments under the alleged FRP; and (3) pay moral and exemplary damages,
attorney's fees, litigation expenses and costs.

In the course of the trial, private respondents and petitioner APT, as successor of the
DBP and the PNB's interest in MMIC, mutually agreed to submit the case to arbitration
by entering into a "Compromise and Arbitration Agreement," stipulating, inter alia:

NOW THEREFORE, for and in consideration of the foregoing premises

and the mutual covenants contained herein the parties agree as
follows:

1. Withdrawal and Compromise. The parties have agreed to withdraw

their respective claims from the Trial Court and to resolve their dispute
 through arbitration by praying to the Trial Court to issue a Compromise
Judgment based on this Compromise and Arbitration Agreement.

In withdrawing their dispute from the court and in choosing to resolve it

through arbitration, the parties have agreed that:

(a) their respective money claims shall be reduced to purely money

claims; and

(b) as successor and assignee of the PNB and DBP interests in MMIC
and the MMIC accounts, APT shall likewise succeed to the rights and
obligations of PNB and DBP in respect of the controversy subject of
Civil Case No. 9900 to be transferred to arbitration and any arbitral
award/order against either PNB and/or DBP shall be the responsibility
be discharged by and be enforceable against APT, the parties having
agreed to drop PNB and DBP from the arbitration.

2. Submission. The parties hereby agree that (a) the controversy in Civil
Case No. 9900 shall be submitted instead to arbitration under RA 876
and (b) the reliefs prayed for in Civil Case No. 9900 shall, with the
approval of the Trial Court of this Compromise and Arbitration
Agreement, be transferred and reduced to pure pecuniary/money claims
with the parties waiving and foregoing all other forms of reliefs which
they prayed for or should have prayed for in Civil Case No. 9900. 13

The Compromise and Arbitration Agreement limited the issues to the following:

5. Issues The issues to be submitted for the Committee's resolution

shall be (a) Whether PLAINTIFFS have the capacity or the personality to
institute this derivative suit in behalf of the MMIC or its directors, (b)
Whether or not the actions leading to, and including,. the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good
faith. 14

This agreement was presented for approval to the trial court. On October 14, 1992, the
Makati RTC, Branch 61, issued an order, to wit:

WHEREFORE, this Court orders:

1. Substituting PNB and DBP with the Asset Privatization

Trust as party defendant.

2. Approving the Compromise and Arbitration

Agreement dated October 6, 1997, attached as Annex
"C" of the Omnibus Motion.

3. Approving the Transformation of the reliefs prayed for

[by] the plaintiffs in this case into pure money claims;
and

4. The Complaint is hereby DISMISSED. 15

The Arbitration Committee was composed of retired Supreme Court Justice Abraham
Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice
Magdangal Elma as Members. On November 24, 1993, after conducting several
hearings, the Arbitration Committee rendered a majority decision in favor of MMIC, the
pertinent portions of which read as follows:
Since, as this Committee finds, there is no foreclosure at all as it was
not legally and validly done, the Committee holds and so declares that
the loans of PNB and DBP to MMIC. for the payment and recovery of
which the void foreclosure sales were undertaken, continue to remain
outstanding and unpaid. Defendant APT as the successor-in-interest of
PNB and DBP to the said loans is therefore entitled and retains the
right, to collect the same from MMIC pursuant to, and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that
the latter may duly and seasonably interpose. Such loans shall,
however, be reduced by the amount which APT may have realized from
the sale of the seized assets of MMIC which by agreement should no
longer be returned even if the foreclosures were found to be null and
void.

The documentary evidence submitted and adopted by the parties

(Exhibits "3", "3-B"; Exhibit "100"; and also Exhibit "ZZZ") as their
exhibits would show that the total outstanding obligation due to DBP
and PNB as of the date of foreclosure is P22,668,537,770.05, more or
less.

Therefore defendant APT can, and is still entitled to, collect the
outstanding obligations of MMIC to PNB and DBP amounting to
P22,668,537,770.05, more or less, with interest thereon as stipulated in
the loan documents from the date of foreclosure up to the time they are
fully paid less the proportionate liability of DBP as owner of 87% of the
total capitalization of MMIC under the FRP. Simply put, DBP shall share
in the award of damages to, and in the obligations of, MMIC in
proportion to its 87% equity in tile total capital stock of MMIC.

xxx xxx xxx

As this Committee holds that the FRP is valid, DBP's equity in MMIC is
raised to 87%. So pursuant to the above provision of the Compromise
and Arbitration Agreement, the 87% equity of DBP is hereby deducted
from the actual damages of P19,486,118,654.00 resulting in the net
actual damages of P2,531,635,425.02 plus interest.

DISPOSITION

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendant to pay to the Marinduque Mining and

Industrial Corporation, except the DBP, the sum of P2,531,635,425.02
with interest thereon at the legal rate of six per cent (6%)per
annum reckoned from August 3, 9, and 24, 1984, pari passu, as and for
actual damages. Payment of these actual damages shall be offset by
APT from the outstanding and unpaid loans of MMIC with DBP and
PNB, which have not been converted into equity. Should there be any
balance due to MMIC after the offsetting, the same shall be satisfied
from the funds representing the purchase price of the sale of the shares
of Island Cement Corporation in the amount of P503,000,000.00 held
under escrow pursuant to the Escrow Agreement dated April 22, 1988
or to such subsequent escrow agreement that would supercede [sic] it
pursuant to paragraph (9) of the Compromise and Arbitration
Agreement;

2. Ordering the defendant to pay to the Marinduque Mining and

Industrial Corporation, except the DBP, the sum of P13,000.000.00, as
 and for moral and exemplary damages. Payment of these moral and
exemplary damages shall be offset by APT from the outstanding and
unpaid loans of MMIC with DBP and PNB, which have not been
converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing
the purchase price of the sale of the shares of Island Cement
Corporation in the amount of P503,000,000.00 held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such
subsequent escrow agreement that would supercede [sic] it pursuant to
paragraph (9) of the Compromise and Arbitration Agreement;

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr.,

the sum of P10,000,000.00, to be satisfied likewise from the funds held
under escrow pursuant to the Escrow Agreement dated April 22, 1988
or to such subsequent escrow agreement that would supersede it,
pursuant to paragraph (9) of the Compromise and Arbitration
Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.

IT IS SO ORDERED. 16

Motions for reconsideration were filed by both parties, but the same were denied.

On October 17, 1993, private respondents filed in the same Civil Case No. 9900 an
"Application/Motion for Confirmation of Arbitration Award." Petitioner countered with
an "Opposition and Motion to Vacate Judgment" raising the following grounds.

1. The plaintiffs Application/Motion is improperly filed with this branch

of the Court, considering that the said motion is neither a part nor the
continuation of the proceedings in Civil Case No. 9900 which was
dismissed upon motion of the parties. In fact, the defendants in the said
Civil Case No. 9900 were the Development Bank of the Philippines and
the Philippine National Bank (PNB);

2. Under Section 71 of Rep. Act 876, an arbitration under a contract or

submission shall be deemed a special proceedings and a party to the
controversy which was arbitrated may apply to the court having
jurisdiction, (not necessarily with this Honorable Court) for an order
confirming the award;

3. The issues submitted for arbitration have been limited to two: (1)
propriety of the plaintiffs filing the derivative suit and (2) the regularity
of the foreclosure proceedings. The arbitration award sought to be
confirmed herein, far exceeded the issues submitted and even granted
moral damages to one of the herein plaintiffs;

4. Under Section 24 of Rep. Act 876, the Court must make an order
vacating the award where the arbitrators exceeded their powers, or so
imperfectly executed them, that a mutual, final and definite award upon
the subject matter submitted to them was not made. 17

Private respondents filed a "REPLY AND OPPOSITION" dated November 10, 1984,
arguing that a dismissal of Civil Case No. 9900 was merely a "qualified dismissal" to
pave the way for the submission of the controversy to arbitration and operated simply
as "a mere suspension of the proceedings" They denied that the Arbitration Committee
had exceeded its powers.

In an Order dated November 28, 1993, the trial court confirmed the award of the
Arbitration Committee. The dispositive portion of said order reads:

WHEREFORE, premises considered, and in the light of the parties [sic]

Compromise and Arbitration Agreement dated October 6, 1992, the
Decision of the Arbitration Committee promulgated on November 24,
1993, as affirmed in a Resolution dated July 26, 1994, and finally settled
and clarified in the Separate Opinion dated September 2, 1994 of
Committee Member Elma, and the pertinent provisions of RA 876, also
known as the Arbitration Law, this Court GRANTS PLAINTIFFS'
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD, AND
JUDGMENT IS HEREBY RENDERED:

(a) Ordering the defendant APT to the Marinduque Mining and Industrial
Corporation (MMIC), except the DBP, the sum of P3,811,757,425.00, as
and for actual damages, which shall be partially satisfied from the funds
held under escrow in the amount of P503,000,000.00 pursuant to the
Escrow Agreement dated April 22, 1988. The balance of the award, after
the escrow funds are fully applied, shall be executed against the APT;

(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum
of P13,000,000.00 as and for moral and exemplary damages;

(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00 as and for moral damages; and

(d) Ordering the defendant to pay the herein

plaintiffs/applicants/movants the sum of P1,705,410.23 as arbitration
costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8

paragraph 2 of the Compromise and Arbitration Agreement, and the
final edict of the Arbitration Committee's decision, and with this Court's
Confirmation, the issuance of the Arbitration Committee's Award shall
henceforth be final and executory.

SO ORDERED. 18

On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated
November 28, 1994. Private respondents, in turn, submitted their reply and opposition
thereto.

On January 18, 1995, the trial court handed down its order denying APT's motion for
reconsideration for lack of merit and for having been filed out of time. The trial court
declared that "considering that the defendant APT, through counsel, officially and
actually received a copy of the Order of this Court dated November 28, 1994 on
December 6, 1994, the Motion for Reconsideration thereof filed by the defendant APT
on December 27, 1994, or after the lapse of 21 days, was clearly filed beyond the 15-
day reglementary period prescribed or provided for by law for the filing of an appeal
from final orders, resolutions, awards, judgments or decisions of any court in all
cases, and by necessary implication for the filing of a motion for reconsideration
thereof."

On February 7, 1995, petitioner received private respondents' Motion for Execution and
Appointment of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action
for certiorari with temporary restraining order and/or preliminary injunction dated
February 13, 1996 to annul and declare as void the Orders of the RTC-Makati dated
November 28, 1994 and January 18, 1995 for having been issued without or in excess
of jurisdiction and/or with grave abuse of discretion. 19 As ground therefor, petitioner
alleged that:

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED

JURISDICTION MUCH LESS, HAS THE COURT AUTHORITY, TO
CONFIRM THE ARBITRAL AWARD CONSIDERING THAT THE ORIGINAL
CASE, CIVIL CASE NO. 9900, HAD PREVIOUSLY BEEN DISMISSED.

II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF

DISCRETION AND ACTED WITHOUT OR IN EXCESS OF JURISDICTION,
IN ISSUING THE QUESTIONED ORDERS CONFIRMING THE ARBITRAL
AWARD AND DENYING THE MOTION FOR RECONSIDERATION OF
ORDER OF AWARD.

III

THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND

ACTED WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN
RECKONING THE COUNTING OF THE PERIOD TO FILE MOTION FOR
RECONSIDERATION, NOT FROM THE DATE OF SERVICE OF THE
COURT'S COPY CONFIRMING THE AWARD, BUT FROM RECEIPT OF A
XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING COUNSEL'S
COPY THEREOF. 20

On July 12, 1995, he Court of Appeals, through its Fifth-Division, denied due course
and dismissed the petition for certiorari.

Hence, the instant petition for review on certiorari imputing to the Court of Appeals the
following errors:

ASSIGNMENT OF ERRORS

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI

REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOUSLY
DISMISSED CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO
CONFIRM THE ARBITRAL AWARD UNDER THE SAME CIVIL CASE AND
NOT RULING THAT THE APPLICATION FOR CONFIRMATION SHOULD
HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF AMONG THE
DIFFERENT BRANCHES OF THE RTC.

II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT

PETITIONER WAS ESTOPPED FROM QUESTIONING THE ARBITRATION
AWARD, WHEN PETITIONER QUESTIONED THE JURISDICTION OF THE
RTC-MAKATI, BRANCH 62 AND AT THE SAME TIME MOVED TO
VACATE THE ARBITRAL AWARD.
 III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

RESPONDENT TRIAL COURT SHOULD HAVE EITHER
DISMISSED/DENIED PRIVATE RESPONDENTS' MOTION/PETITION FOR
CONFIRMATION OF ARBITRATION AWARD AND/OR SHOULD HAVE
CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL
AWARD.

IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER

APT'S PETITION FORCERTIORARI AS AN APPEAL TAKEN FROM THE
ORDER CONFIRMING THE AWARD.

THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL

ISSUE OF WHEN TO RECKON THE COUNTING OF THE PERIOD TO
FILE A MOTION FOR RECONSIDERATION. 21

The petition is impressed with merit.

The RTC of Makati, Branch 62,

did not have jurisdiction to confirm
the arbitral award.

The use of the term "dismissed" is not "a mere semantic imperfection". The dispositive
portion of the Order of the trial court dated October 14, 1992 stated in no uncertain
terms:

4. The Complaint is hereby DISMISSED. 22

The term "dismiss" has a precise definition in law. "To dispose of an action,
suit, or motion without trial on the issues involved. Conclude, discontinue,
terminate, quash." 23

Admittedly, the correct procedure was for the parties to go back to the court where the
case was pending to have the award confirmed by said court. However, Branch 62
made the fatal mistake of issuing a final order dismissing the case. While Branch 62
should have merely suspended the case and not dismissed it, 24neither of the parties
questioned said dismissal. Thus, both parties as well as said court are bound by such
error.

It is erroneous then to argue, as private respondents do, that petitioner APT was
charged with the knowledge that the "case was merely stayed until arbitration
finished," as again, the order of Branch 62 in very clear terms stated that the
"complaint was dismissed." By its own action, Branch 62 had lost jurisdiction over the
case. It could not have validly reacquired jurisdiction over the said case on mere
motion of one of the parties. The Rules of Court is specific on how a new case may be
initiated and such is not done by mere motion in a particular branch of the RTC.
Consequently, as there was no "pending action" to speak of, the petition to confirm the
arbitral award should have been filed as a new case and raffled accordingly to one of
the branches of the Regional Trial Court.

II

Petitioner was not estopped from

questioning the jurisdiction of
Branch 62 of the RTC of Makati.

The Court of Appeals ruled that APT was already estopped to question the jurisdiction
of the RTC to confirm the arbitral award because it sought affirmative relief in said
court by asking that the arbitral award be vacated.

The rule is that "Where the court itself clearly has no jurisdiction over the subject
matter or the nature of the action, the invocation of this defense may be done at any
time. It is neither for the courts nor for the parties to violate or disregard that rule, let
alone to confer that jurisdiction this matter being legislative in character." 25 As a rule
then, neither waiver nor estoppel shall apply to confer jurisdiction upon a courtbarring
highly meritorious and exceptional circumstances. 26 One such exception was
enunciated in Tijam vs. Sibonghanoy, 27 where it was held that "after voluntarily
submitting a cause and encountering an adverse decision on the merits, it is too late
for the loser to question the jurisdiction or power of the court."

Petitioner's situation is different because from the outset, it has consistently held the
position that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award;
consequently, it cannot be said that it was estopped from questioning the RTC's
jurisdiction. Petitioner's prayer for the setting aside of the arbitral award was not
inconsistent with its disavowal of the court's jurisdiction.

III

Appeal of petitioner to the

Court of Appeals thru certiorari
under Rule 65 was proper.

The Court of Appeals in dismissing APT's petition for certiorari upheld the trial court's
denial of APT's motion for reconsideration of the trial court's order confirming the
arbitral award, on the ground that said motion was filed beyond the 15-day
reglementary period; consequently, the petition for certiorari could not be resorted to
as substitute to the lost right of appeal.

We do not agree.

Section 99 of Republic Act No. 876, 28 provides that:

. . . An appeal may be taken from an order made in a proceeding under

this Act, or from a judgment entered upon an award
through certiorari proceedings, but such appeals shall be limited to
questions of law. . . ..

The aforequoted provision, however, does not preclude a party aggrieved by the
arbitral award from resorting to the extraordinary remedy of certiorari under Rule 65 of
the Rules of Court where, as in this case, the Regional Trial Court to which the award
was submitted for confirmation has acted without jurisdiction or with grave abuse of
discretion and there is no appeal, nor any plain, speedy remedy in the course of law.

Thus, Section 1 of Rule 65 provides:

 Sec 1. Petition for Certiorari: — When any tribunal, board or officer
exercising judicial functions, has acted without or in excess of its or his
jurisdiction, or with grave abuse of discretion and there is no appeal,
nor any plain, speed, and adequate remedy in the ordinary course of
law, a person aggrieved thereby may file a verified petition in the proper
court alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings, as the law requires,
of such tribunal, board or officer.

In the instant case, the respondent court erred in dismissing the special civil action
for certiorari, it being clear from the pleadings and the evidence that the trial court
lacked jurisdiction and/or committed grave abuse of discretion in taking cognizance of
private respondents' motion to confirm the arbitral award and, worse, in confirming
said award which is grossly and patently not in accord with the arbitration agreement,
as will be hereinafter demonstrated.

IV

The nature and limits of the

Arbitrators' power.

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment
either as to the law or as to the facts. 29 Courts are without power to amend or overrule
merely because of disagreement with matters of law or facts determined by the
arbitrators. 30 They will not review the findings of law and fact contained in an award,
and will not undertake to substitute their judgment for that of the arbitrators, since any
other rule would make an award the commencement, not the end, of litigation. 31 Errors
of law and fact, or an erroneous decision of matters submitted to the judgment of the
arbitrators, are insufficient to invalidate an award fairly and honestly made. 32 Judicial
review of an arbitration is thus, more limited than judicial review of a trial. 33

Nonetheless, the arbitrators' award is not absolute and without exceptions. The
arbitrators cannot resolve issues beyond the scope of the submission
agreement. 34 The parties to such an agreement are bound by the arbitrators' award
only to the extent and in the manner prescribed by the contract and only if the award is
rendered in conformity thereto. 35 Thus, Sections 24 and 25 of the Arbitration Law
provide grounds for vacating, rescinding or modifying an arbitration award. Where the
conditions described in Articles 2038, 36
37 38
2039, and 1040 of the Civil Code applicable to compromises and arbitration are
attendant, the arbitration award may also be annulled.

39
In Chung Fu Industries (Phils.) vs. Court of Appeals, we held:

. . . . It is stated explicitly under Art. 2044 of the Civil Code that the
finality of the arbitrators' award is not absolute and without exceptions.
Where the conditions described in Articles 2038, 2039 and 2040
applicable to both compromises and arbitrations are obtaining, the
arbitrator's award may be annulled or rescended. Additionally, under
Sections 24 and 25 of the Arbitration Law, there are grounds for
vacating, modifying or rescinding an arbitrator's award. Thus, if and
when the factual circumstances referred to the above-cited provisions
are present, judicial review of the award is properly warranted.

According, Section 20 of R.A. 876 provides:

Sec. 20. Form and contents of award. — The award must be made in
writing and signed and acknowledge by a majority of the arbitrators, if
more than one; and by the sole arbitrator, if there is only only. Each
 party shall be furnished with a copy of the award. The arbitrators in
their award may grant any remedy or relief which they deem just and
equitable and within the scope of the agreement of the parties, which
shall include, but not be limited to, the specific performance of a
contract.

xxx xxx xxx

The arbitrators shall have the power to decide only those matters which
have been submitted to them. The terms of the award shall be confined
to such disputes. (Emphasis ours).

xxx xxx xxx

Sec. 24 of the same law enumerating the grounds for vacating an award states:

Sec. 24. Grounds for vacating award. — In any one of the following
cases, the court must make an order vacating the award upon the
petition of any party to the controversy when such party proves
affirmatively that in the arbitration proceeding:

(a) The award was procured by corruption, fraud, or other undue

means; or

(b) That there was evident partiality or corruption in the arbitrators or

any of them; or

(c) That the arbitrators were guilty of misconduct in refusing to

postpone the hearing upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy; that one or
more of the arbitrators was disqualified to act as such under section
nine hereof, and willfully refrained from disclosing such
disqualifications or any other misbehavior by which the rights of any
party have been materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly

executed them, that a mutual, final and definite award upon the subject
matter submitted to them was not made. (Emphasis ours)

xxx xxx xxx.

Section 25 which enumerates the grounds for modifying the award provides:

Sec. 25. Grounds for modifying or correcting award — In anyone of the

following cases, the court must make an order modifying or correcting
the award, upon the application of any party to the controversy which
was arbitrated:

(a) Where there was an evident miscalculation of figures, or an evident

mistake in the description of any person, thing or property referred to in
the award; or

(b) Where the arbitrators have awarded upon a matter not submitted to
them, not affecting the merits of the decision upon the matter
submitted; or
 (c) Where the award is imperfect in a matter of form not affecting the
merits of the controversy, and if it had been a commissioner's report,
the defect could have been amended or disregarded by the court.

xxx xxx xxx

Finally, it should be stressed that while a court is precluded from overturning an award
for errors in the determination of factual issues, nevertheless, if an examination of the
record reveals no support whatever for the arbitrators determinations, their award
must be vacated. 40 in the same manner, an award must be vacated if it was made in
"manifest disregard of the law." 41

Against the backdrop of the foregoing provisions and principles, we find that the
arbitrators came out with an award in excess of their powers and palpably devoid of
factual and legal basis.

There was no financial

structuring program:
foreclosure of mortgage
was fully justified.

The point need not be belabored that PNB and DBP had the legitimate right to
foreclose of the mortgages of MMIC whose obligations were past due. The foreclosure
was not a wrongful act of the banks and, therefore, could not be the basis of any award
of damages. There was no financial restructuring agreement to speak of that could
have constituted an impediment to the exercise of the banks' right to foreclose.

As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who
wrote a separate opinion:

1. The various loans and advances made by DBP and PNB to MMIC
have become overdue and remain unpaid. The fact that a FRP was
drawn up is enough to establish that MMIC has not been complying
with the terms of the loan agreement. Restructuring simply connotes
that the obligations are past due that is why it is "restructurable";

2. When MMIC thru its board and the stockholders agreed and adopted
the FRP, it only means that MMIC had been informed or notified that its
obligations were past due and that foreclosure is forthcoming;

3. At that stage, MMIC also knew that PNB-DBP had the option of either
approving the FRP or proceeding with the foreclosure. Cabarrus, who
filed this case supposedly in behalf of MMIC should have insisted on
the FRP. Yet Cabarrus himself opposed the FRP;

4. So when PNB-DBP proceeded with the foreclosure, it was done

without bad faith but with the honest and sincere belief that foreclosure
was the only alternative; a decision further explained by Dr. Placido
Mapa who testified that foreclosure was, in the judgment of PNB, the
best move to save MMIC itself.

Q : Now in this portion of Exh. "L" which was marked as Exh. "L-1", and
we adopted as Exh. 37-A for the respondent, may I know from you, Dr.
Mapa what you meant by "that the decision to foreclose was neither
precipitate nor arbitrary"?
 A : Well, it is not a whimsical decision but rather decision arrived at
after weighty consideration of the information that we have received,
and listening to the prospects which reported to us that what we had
assumed would be the premises of the financial rehabilitation plan was
not materialized nor expected to materialize.

Q : And this statement that "it was premised upon the known fact" that
means, it was referring to the decision to foreclose, was premised upon
the known fact that the rehabilitation plan earlier approved by the
stockholders was no longer feasible, just what is meant "by no longer
feasible"?

A : Because the revenue that they were counting on to make the

rehabilitation plan possible, was not anymore expected to be
forthcoming because it will result in a short fall compared to the prices
that were actually taking place in the market.

Q : And I suppose that was what you were referring to when you stated
that the production targets and assumed prices of MMIC's products,
among other projections, used in the financial reorganization program
that will make it viable were not met nor expected to be met?

A : Yes.

xxx xxx xxx

Which brings me to my last point in this separate opinion. Was PNB and
DBP absolutely unjustified in foreclosing the mortgages?

In this connection, it can readily be seen and it cannot quite be denied

that MMIC accounts in PNB-DBP were past due. The drawing up of the
FRP is the best proof of this. When MMIC adopted a restructuring
program for its loan, it only meant that these loans were already due
and unpaid. If these loans were restructurable because they were
already due and unpaid, they are likewise "forecloseable". The option is
with the PNB-DBP on what steps to take.

The mere fact that MMIC adopted the FRP does not mean that DBP-PNB
lost the option to foreclose. Neither does it mean that the FRP is legally
binding and implementable. It must be pointed that said FRP will, in
effect, supersede the existing and past due loans of MMIC with PNB-
DBP. It will become the new loan agreement between the lenders and
the borrowers. As in all other contracts, there must therefore be a
meeting of minds of the parties; the PNB and DBP must have to validly
adopt and ratify such FRP before they can be bound by it; before it can
be implemented. In this case, not an iota of proof has been presented
by the PLAINTIFFS showing that PNB and DBP ratified and adopted the
FRP. PLAINTIFFS simply relied on a legal doctrine of promissory
estoppel to support its allegations in this regard. 42

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D.
No. 385, which took effect on January 31, 1974. The decree requires government
financial institutions to foreclose collaterals for loans where the arrearages amount to
20% of the total outstanding obligations. The pertinent provisions of said decree read
as follow:

Sec. 1. It shall be mandatory for government financial institutions, after

the lapse of sixty (60) days from the issuance of this Decree, to
 foreclose the collaterals and/or securities for any loan, credit,
accommodation, and/or guarantees granted by them whenever the
arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total
outstanding obligations, including interest and other charges, as
appearing in the books of account and/or related records of the
financial institutions concerned. This shall be without prejudice to the
exercise by the government financial institutions of such rights and/or
remedies available to them under their respective contracts with their
debtors, including the right to foreclosure on loans, credits,
accommodations and/or guarantees on which the arrearages are less
than twenty percent (20%).

Sec. 2. No restraining order temporary or permanent injunction shall be

issued by the court against any government financial institution in any
action taken by such institution in compliance with the mandatory
foreclosure provided in Section 1 hereof, whether such restraining
order, temporary or permanent injunction is sought by the borrower(s)
or any third party or parties, except after due hearing in which it is
established by the borrower and admitted by the government financial
institution concerned that twenty percent (20%) of the outstanding
arrearages has been paid after the filing of foreclosure proceedings.
(Emphasis supplied.)

Private respondents' thesis that the foreclosure proceedings were null and void
because of lack of publication in the newspaper is nothing more than a mere
unsubstantiated aliegation not borne out by the evidence. In any case, a disputable
presumption exists in favor of petitioner that official duty has been regularly performed
and ordinary course of business has been followed. 43

VI

Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from
the facts of the case, the arbitrators in making the award went beyond the arbitration
agreement.

In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed
for judgment in their favor:

1. Declaring the foreclosures effected by the defendants DBP and PNB

on the assets of MMIC null and void and directing said defendants to
restore the foreclosed assets to the possession of MMIC, to render an
accounting of their use and/or operation of said assets and to
indemnify MMIC for the loss occasioned by its dispossession or the
deterioration thereof;

2. Directing the defendants DBP and PNB to honor and perform their
commitments under the financial reorganization plan which was
approved at the annual stockholders' meeting of MMIC on 30 April 1984;

3. Condemning the defendants DBP and PNB, jointly and severally to

pay the plaintiffs actual damages consisting of the loss of value of their
investments amounting to not less than P80,000,000, the damnum
emergens and lucrum cessans in such amount as may be established
during the trial, moral damages in such amount as this Honorable Court
may deem just and equitable in the premises, exemplary damages in
such amount as this Honorable Court may consider appropriate for the
purpose of setting an example for the public good, attorney's fees and
 litigation expenses in such amounts as may be proven during the trial,
and the costs legally taxable in this litigation.

Further, plaintiffs pray for such other reliefs as may be just and
equitable in the premises. 44

Upon submission for arbitration, the Compromise and Arbitration Agreement of the
parties clearly and explicitly defined and limited the issues to the following:

(a) whether PLAINTIFFS have the capacity or the personality to institute

this derivative suit in behalf of the MMIC or its directors;

(b) whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith. 45

Item No. 8 of the Agreement provides for the period by which the Committee was to
render its decision, as well as the nature thereof:

8. Decision. The committee shall issue a decision on the controversy

not later than six (6) months from the date of its constitution.

In the event the committee finds that PLAINTIFFS have the personality
to file this suit and the extra-judicial foreclosure of the MMIC assets
wrongful, it shall make an award in favor of the PLAINTIFFS (excluding
DBP), in an amount as may be established or warranted by the evidence
which shall be payable in Philippine Pesos at the time of the award.
Such award shall be paid by the APT or its successor-in-interest within
sixty (60) days from the date of the award in accordance with the
provisions of par. 9 hereunder. . . . . The PLAINTIFFS' remedies under
this Section shall be in addition to other remedies that may be available
to the PLAINTIFFS, all such remedies being cumulative and not
exclusive of each other.

On the other hand, in case the arbitration committee finds that

PLAINTIFFS have no capacity to sue and/or that the extra-judicial
foreclosure is valid and legal, it shall also make an award in favor of
APT based on the counterclaims of DBP and PNB in an amount as may
be established or warranted by the evidence. This decision of the
arbitration committee in favor of APT shall likewise finally settle all
issues regarding the foreclosure of the MMIC assets so that the funds
held in escrow mentioned in par. 9 hereunder will thus be released in
full in favor of
APT. 46

The clear and explicit terms of the submission notwithstanding, the Arbitration
Committee clearly exceeded its powers or so imperfectly executed them: (a) in ruling
on and declaring valid the FRP; (b) in awarding damages to MMIC which was not a
party to the derivative suit; and (c) in awarding moral damages to Jesus S. Cabarrus,
Sr.

The arbiters overstepped

their powers by declaring as
valid the proposed Financial
Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its
powers when it ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue
to the "validity of the foreclosure" and to transform the relief prayed for therein into
pure money claims.

There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly,
to the proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires
the consent of the parties thereto. 47 The contract must bind both contracting
parties. 48 Private respondents even by their own admission recognized that the FRP
had yet not been carried out and that the loans of MMIC had not yet been converted
into equity. 49

However, the Arbitration Committee not only declared the FRP valid and effective, but
also converted the loans of MMIC into equity raising the equity of DBP to 87%. 50

The Arbitration Committee ruled that there was "a commitment to carry out the
FRP" 51 on the ground of promissory estoppel.

Similarly, the principle of promissory estoppel applies in the present

case considering as we observed, the fact that the government (that is,
Alfredo Velayo) was the FRP's proponent. Although the plaintiffs are
agreed that the government executed no formal agreement, the fact
remains that the DBP itself which made representations that the FRP
constituted a "way out" for MMIC. The Committee believes that
although the DBP did not formally agree (assuming that the board and
stockholders' approvals were not formal enough), it is bound
nonetheless if only for its conspicuous representations.

Although the DBP sat in the board in a dual capacity — as holder of

36% of MMIC's equity (at that time) and as MMIC's creditor — the DBP
can not validly renege on its commitments simply because at the same
time, it held interests against the MMIC.

The fact, of course, is that as APT itself asserted, the FRP was being
"carried out" although apparently, it would supposedly fall short of its
targets. Assuming that the FRP would fail to meet its targets, the DBP
— and so this Committee holds — can not, in any event, brook any
denial that it was bound to begin with, and the fact is that adequate or
not (the FRP), the government is still bound by virtue of its acts.

The FRP, of course, did not itself promise a resounding success,

although it raised DBP's equity in MMIC to 87%. It is not an excuse,
however, for the government to deny its commitments. 52

Atty. Sison, however, did not agree and correctly observed that:

But the doctrine of promissory estoppel can hardly find application

here. The nearest that there can be said of any estoppel being present
in this case is the fact that the board of MMIC was, at the time the FRP
was adopted, mostly composed of PNB and DBP representatives. But
those representatives, singly or collectively, are not themselves PNB or
DBP. They are individuals with personalities separate and distinct from
the banks they represent. PNB and DBP have different boards with
different members who may have different decisions. It is unfair to
impose upon them the decision of the board of another company and
thus pin them down on the equitable principle of estoppel. Estoppel is a
principle based on equity and it is certainly not equitable to apply it in
this particular situation. Otherwise the rights of entirely separate
distinct and autonomous legal entities like PNB and DBP with
 thousands of stockholders will be suppressed and rendered
nugatory. 53

As a rule, a corporation exercises its powers, including the power to enter into
contracts, through its board of directors. While a corporation may appoint agents to
enter into a contract in its behalf, the agent should not exceed his authority. 54 In the
case at bar, there was no showing that the representatives of PNB and DBP in MMIC
even had the requisite authority to enter into a debt-for-equity swap. And if they had
such authority, there was no showing that the banks, through their board of directors,
had ratified the FRP.

Further, how could the MMIC be entitled to a big amount of moral damages when its
credit reputation was not exactly something to be considered sound and wholesome.
Under Article 2217 of the Civil Code, moral damages include besmirched reputation
which a corporation may possibly suffer. A corporation whose overdue and unpaid
debts to the Government alone reached a tremendous amount of P22 Billion Pesos
cannot certainly have a solid business reputation to brag about. As Atty. Sison in his
separate opinion persuasively put it:

Besides, it is not yet a well settled jurisprudence that corporations are

entitled to moral damages. While the Supreme Court may have awarded
moral damages to a corporation for besmirched reputation in Mambulao
vs. PNB, 22 SCRA 359, such ruling cannot find application in this case.
It must be pointed out that when the supposed wrongful act of
foreclosure was done, MMIC's credit reputation was no longer a
desirable one. The company then was already suffering from serious
financial crisis which definitely projects an image not compatible with
good and wholesome reputation. So it could not be said that there was
a "reputation" besmirched by the act of foreclosure. 55

The arbiters exceeded their

authority in awarding damages
to MMIC, which is not impleaded
as a party to the derivative suit.

Civil Case No. 9900 filed before the RTC being a derivative suit, MMIC should have
been impleaded as a party. It was not joined as a party plaintiff or party defendant at
any stage of the proceedings. As it is, the award of damages to MMIC, which was not a
party before the Arbitration Committee, is a complete nullity.

Settled is the doctrine that in a derivative suit, the corporation is the real party in
interest while the stockholder filing suit for the corporation's behalf is only a nominal
party. The corporation should be included as a party in the suit.

An individual stockholder is permitted to institute a derivative suit on

behalf of the corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. . . . . 56

It is a condition sine qua non that the corporation be impleaded as a party because —

. . . Not only is the corporation an indispensable party, but it is also the

present rule that it must be served with process. The reason given is
that the judgment must be made binding upon the corporation in order
that the corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of
 action. In other words the corporation must be joined as party because
it is its cause of action that is being litigated and because judgment
must be a res ajudicata against it. 57

The reasons given for not allowing direct individual suit are:

(1) . . . "the universally recognized doctrine that a stockholder in a

corporation has no title legal or equitable to the corporate property; that
both of these are in the corporation itself for the benefit of the
stockholders." In other words, to allow shareholders to sue separately
would conflict with the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our
Supreme Court held in the case of Evangelista v. Santos, that "the
stockholders may not directly claim those damages for themselves for
that would result in the appropriation by, and the distribution among
them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of section 16 of the Corporation
Law . . .;

(3) the filing of such suits would conflict with the duty of the
management to sue for the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in a ascertaining the effect of partial

recovery by an individual on the damages recoverable by the
corporation for the same act. 58

If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the
corporation, in view of the doctrine that a corporation has a personality separate and
distinct from its individual stockholders or members. DBP's alleged equity, even if it
were indeed 87%, did not give it ownership over any corporate property, including the
monetary award, its right over said corporate property being a mere expectancy or
inchoate right. 59Notably, the stipulation even had the effect of prejudicing the other
creditors of MMIC.

The arbiters, likewise,

exceeded their authority
in awarding moral damages
to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case
before it is a derivative suit, in which the aggrieved party or the real party in interest is
supposedly the MMIC, and at the same time award moral damages to an individual
stockholder, to wit:

WHEREFORE, premises considered, judgment is hereby rendered:

xxx xxx xxx

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr.,

the sum of P10,000,000.00, to be satisfied likewise from the funds held
under escrow pursuant to the Escrow Agreement dated April 22, 1988
or to such subsequent escrow agreement that would supersede it,
 pursuant to paragraph (9), Compromise and Arbitration Agreement, as
and for moral damages; . . . 60

The majority decision of the Arbitration Committee sought to justify its award of moral
damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized
by the government were assets belonging to Industrial Enterprise Inc. (IEI), of which
Cabarrus is the majority stockholder. It then acknowledged that Cabarrus had already
recovered said assets in the RTC, but that "he won no more than actual damages.
While the Committee cannot possibly speak for the RTC, there is no doubt that Jesus
S. Cabarrus, Sr., suffered moral damages on account of that specific foreclosure,
damages the Committee believes and so holds, he, Jesus S. Cabarrus, Sr., may be
awarded in this proceeding." 61

Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is
the majority stockholder, having been ventilated in a complaint he previously filed with
the RTC, from which he obtained actual damages, he was barred by res judicata from
filing a similar case in another court, this time asking for moral damages which he
failed to get from the earlier case. 62 Worse, private respondents violated the rule
against non-forum shopping.

It is a basic postulate that a corporation has a personality separate and distinct from
its stockholders. 63 The properties foreclosed belonged to MMIC, not to its
stockholders. Hence, if wrong was committed in the foreclosure, it was done against
the corporation. Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim
those damages for himself that would result in the appropriation by, and the
distribution to, him part of the corporation's assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. The Arbitration Committee,
therefore, passed upon matters nor submitted to it. Moreover, said cause of action had
already been decided in a separate case. It is thus quite patent that the arbitration
committee exceeded the authority granted to it by the parties' Compromise and
Arbitration Agreement by awarding moral damages to Jesus S. Cabarrus, Sr.

Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of
moral damages to Jesus S. Cabarrus, Sr.:

It is clear and it cannot be disputed therefore that based on these

stipulated issues, the parties themselves have agreed that the basic
ingredient of the causes of action in this case is the wrong committed
on the corporation (MMIC) for the alleged illegal foreclosure of its
assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of
MMIC.

Perforce this has to be so because it is the basic rule in Corporation

Law that "the shareholders have no title, legal or equitable to the
property which is owned by the corporation (13 Am. Jur. 165; Pascual
vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs. Register of Deeds, 6
SCRA 373, the rule has been reiterated that "a stockholder is not the co-
owner of corporate property." Since the property or assets foreclosed
belongs [sic] to MMIC, the wrong committed, if any, is done against the
corporation. There is therefore no direct injury or direct violation of the
rights of Cabarrus et al. There is no way, legal or equitable, by which
Cabarrus et al. could recover damages in their personal capacities even
assuming or just because the foreclosure is improper or invalid. The
Compromise and Arbitration Agreement itself and the elementary
principles of Corporation Law say so. Therefore, I am constrained to
dissent from the award of moral damages to Cabarrus. 64
From the foregoing discussions, it is evident that, not only did the arbitration
committee exceed its powers or so imperfectly execute them, but also, its findings and
conclusions are palpably devoid of any factual basis, and in manifest disregard of the
law.

We do not find it necessary to remand this case to the RTC for appropriate action. The
pleadings and memoranda filed with this Court, as well as in the Court of Appeals,
raised and extensively discussed the issues on the merits. Such being the case, there
is sufficient basis for us to resolve the controversy between the parties anchored on
the records and the pleadings before us. 65

WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the
Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and
January 19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the
Arbitration Committee is hereby VACATED.

SO ORDERED.
ENTITLEMENT TO MORAL DAMAGES

G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA
PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter
ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October 1996 and the
resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former
affirmed with modification the decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to
reconsider the decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A")
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
Sometime in December 1991, in accordance with paragraph 2.4 [sic] of said
agreement stating that —.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24)
Viva films for TV telecast under such terms as may be agreed upon by the
parties hereto, provided, however, that such right shall be exercised by ABS-
CBN from the actual offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-
president Charo Santos-Concio, a list of three(3) film packages (36 title) from
which ABS-CBN may exercise its right of first refusal under the afore-said
agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however
through Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we can
purchase" (Exh. "3" - Viva) and therefore did not accept said list (TSN, June
8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of
the case at bar except the film ''Maging Sino Ka Man."

For further enlightenment, this rejection letter dated January 06, 1992 (Exh
"3" - Viva) is hereby quoted:

6 January 1992

Dear Vic,

This is not a very formal business letter I am writing to you as I would like to
express my difficulty in recommending the purchase of the three film
packages you are offering ABS-CBN.

From among the three packages I can only tick off 10 titles we can purchase.
Please see attached. I hope you will understand my position. Most of the
action pictures in the list do not have big action stars in the cast. They are not
for primetime. In line with this I wish to mention that I have not scheduled for
telecast several action pictures in out very first contract because of the cheap
production value of these movies as well as the lack of big action stars. As a
 film producer, I am sure you understand what I am trying to say as Viva
produces only big action pictures.

In fact, I would like to request two (2) additional runs for these movies as I
can only schedule them in our non-primetime slots. We have to cover the
amount that was paid for these movies because as you very well know that
non-primetime advertising rates are very low. These are the unaired titles in
the first contract.

1. Kontra Persa [sic].

2. Raider Platoon.

3. Underground guerillas

4. Tiger Command

5. Boy de Sabog

6. Lady Commando

7. Batang Matadero

8. Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been
rejected because of the ruling of MTRCB to have them aired at 9:00 p.m. due
to their very adult themes.

As for the 10 titles I have choosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an
attractive offer to make.

Thanking you and with my warmest regards.

(Signed)
Charo Santos-Concio

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms.

Concio, with a list consisting of 52 original movie titles (i.e. not yet aired on
television) including the 14 titles subject of the present case, as well as 104
re-runs (previously aired on television) from which ABS-CBN may choose
another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing
rights over this package of 52 originals and 52 re-runs for P60,000,000.00 of
which P30,000,000.00 will be in cash and P30,000,000.00 worth of television
spots (Exh. "4" to "4-C" Viva; "9" -Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager,

Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What transpired in that lunch meeting
is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del
Rosario allegedly agreed that ABS-CRN was granted exclusive film rights to
fourteen (14) films for a total consideration of P36 million; that he allegedly
put this agreement as to the price and number of films in a "napkin'' and
signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June
 8, 1992). On the other hand, Del Rosario denied having made any agreement
with Lopez regarding the 14 Viva films; denied the existence of a napkin in
which Lopez wrote something; and insisted that what he and Lopez
discussed at the lunch meeting was Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising
[sic]to make a counter proposal which came in the form of a proposal
contract Annex "C" of the complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-
president for Finance discussed the terms and conditions of Viva's offer to
sell the 104 films, after the rejection of the same package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the
draft of the contract. I hope you find everything in order," to which was
attached a draft exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p.
3) a counter-proposal covering 53 films, 52 of which came from the list sent
by defendant Del Rosario and one film was added by Ms. Concio, for a
consideration of P35 million. Exhibit "C" provides that ABS-CBN is granted
films right to 53 films and contains a right of first refusal to "1992 Viva Films."
The said counter proposal was however rejected by Viva's Board of Directors
[in the] evening of the same day, April 7, 1992, as Viva would not sell
anything less than the package of 104 films for P60 million pesos (Exh. "9" -
Viva), and such rejection was relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and following several
negotiations and meetings defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million, signed a letter of agreement
dated April 24, 1992. granting RBS the exclusive right to air 104 Viva-
produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including
the fourteen (14) films subject of the present case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a
prayer for a writ of preliminary injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production
(hereafter VIVA), and Vicente Del Rosario. The complaint was docketed as Civil Case No. Q-
92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents
from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka Man, which was scheduled to
be shown on private respondents RBS' channel 7 at seven o'clock in the evening of said date.

On 17 June 1992, after appropriate proceedings, the RTC issued an

order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of
P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents
moved for reconsideration of the order and offered to put up a counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also
set up a cross-claim against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction
upon the posting by RBS of a P30 million counterbond to answer for whatever damages ABS-
CBN might suffer by virtue of such dissolution. However, it reduced petitioner's injunction
bond to P15 million as a condition precedent for the reinstatement of the writ of preliminary
injunction should private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to
explore the possibility of an amicable settlement. In the meantime, RBS prayed for and was
granted reasonable time within which to put up a P30 million counterbond in the event that no
settlement would be reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992. 13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15
October 1992 Orders, which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals
a petition17challenging the RTC's Orders of 3 August and 15 October 1992 and praying for the
issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The
case was docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order 18 to enjoin
the airing, broadcasting, and televising of any or all of the films involved in the controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition
in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition
for review filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against
ABS-CBN disposing as follows:

WHEREFORE, under cool reflection and prescinding from the foregoing,

judgments is rendered in favor of defendants and against the plaintiff.

(1) The complaint is hereby dismissed;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the

following:

a) P107,727.00, the amount of premium paid

by RBS to the surety which issued defendant
RBS's bond to lift the injunction;

b) P191,843.00 for the amount of print

advertisement for "Maging Sino Ka Man" in
various newspapers;

c) Attorney's fees in the amount of P1

million;

d) P5 million as and by way of moral

damages;

e) P5 million as and by way of exemplary

damages;

(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay

P212,000.00 by way of reasonable attorney's fees.
 (4) The cross-claim of defendant RBS against defendant
VIVA is dismissed.

(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the
VIVA Board of Directors, and said agreement was disapproved during the meeting of the
Board on 7 April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed
the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990 Film
Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del Rosario
ticking off ten titles acceptable to them, which would have made the 1992 agreement an
entirely new contract.

On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as
no reversible error was committed by the Court of Appeals in its challenged decision and the
case had "become moot and academic in view of the dismissal of the main action by the
court a quo in its decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that
there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive
right to exhibit the subject films. Private respondents VIVA and Del Rosario also appealed
seeking moral and exemplary damages and additional attorney's fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board
of Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The
appellate court did not even believe ABS-CBN's evidence that Lopez III actually wrote down
such an agreement on a "napkin," as the same was never produced in court. It likewise
rejected ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film
Exhibition Agreement was entered into between Appellant ABS-CBN and
appellant VIVA under Exhibit "A" in 1990, and that parag. 1.4 thereof
provides:

1.4 ABS-CBN shall have the right of first refusal to the next
twenty-four (24) VIVA films for TV telecast under such terms
as may be agreed upon by the parties hereto, provided,
however, that such right shall be exercised by ABS-CBN
within a period of fifteen (15) days from the actual offer in
writing (Records, p. 14).

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN
shall still be subject to such terms as may be agreed upon by the parties
thereto, and that the said right shall be exercised by ABS-CBN within fifteen
(15) days from the actual offer in writing.

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did
not fix the price of the film right to the twenty-four (24) films, nor did it specify
the terms thereof. The same are still left to be agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89)

stated that it can only tick off ten (10) films, and the draft contract Exhibit "C"
accepted only fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of
the next twenty-four (24) films.
 The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B;
Records, pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of
VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice President of
ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated January 6, 1992
(Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by
rejecting the offer of VIVA.. As aptly observed by the trial court, with the said
letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its right of first
refusal. And even if We reckon the fifteen (15) day period from February 27,
1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the
letter of Mrs. Concio, still the fifteen (15) day period within which ABS-CBN
shall exercise its right of first refusal has already expired. 22

Accordingly, respondent court sustained the award of actual damages consisting in the cost
of print advertisements and the premium payments for the counterbond, there being adequate
proof of the pecuniary loss which RBS had suffered as a result of the filing of the complaint by
ABS-CBN. As to the award of moral damages, the Court of Appeals found reasonable basis
therefor, holding that RBS's reputation was debased by the filing of the complaint in Civil
Case No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent
court also held that exemplary damages were correctly imposed by way of example or
correction for the public good in view of the filing of the complaint despite petitioner's
knowledge that the contract with VIVA had not been perfected, It also upheld the award of
attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No, Q-92-1209,
RBS was "unnecessarily forced to litigate." The appellate court, however, reduced the awards
of moral damages to P2 million, exemplary damages to P2 million, and attorney's fees to
P500, 000.00.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal
because it was "RBS and not VIVA which was actually prejudiced when the complaint was
filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in

. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN

PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.

II

. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR

OF PRIVATE RESPONDENT RBS.

III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF

PRIVATE RESPONDENT RBS.

IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles
under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It
insists that we give credence to Lopez's testimony that he and Del Rosario met at the
Tamarind Grill Restaurant, discussed the terms and conditions of the second list (the 1992
Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin.
It also asserts that the contract has already been effective, as the elements thereof, namely,
consent, object, and consideration were established. It then concludes that the Court of
Appeals' pronouncements were not supported by law and jurisprudence, as per our decision
of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota
Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco
Realty Company v. Bormaheco. Inc.26

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent
for the premium on the counterbond of its own volition in order to negate the injunction issued
by the trial court after the parties had ventilated their respective positions during the hearings
for the purpose. The filing of the counterbond was an option available to RBS, but it can
hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had
another available option, i.e., move for the dissolution or the injunction; or if it was determined
to put up a counterbond, it could have presented a cash bond. Furthermore under Article
2203 of the Civil Code, the party suffering loss or injury is also required to exercise the
diligence of a good father of a family to minimize the damages resulting from the act or
omission. As regards the cost of print advertisements, RBS had not convincingly established
that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the contrary, it
was brought out during trial that with or without the case or the injunction, RBS would have
spent such an amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and
exemplary damages. The controversy involving ABS-CBN and RBS did not in any way
originate from business transaction between them. The claims for such damages did not arise
from any contractual dealings or from specific acts committed by ABS-CBN against RBS that
may be characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing
of the complaint, An award of moral and exemplary damages is not warranted where the
record is bereft of any proof that a party acted maliciously or in bad faith in filing an
action. 27 In any case, free resort to courts for redress of wrongs is a matter of public policy.
The law recognizes the right of every one to sue for that which he honestly believes to be his
right without fear of standing trial for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the matter, the case would lose
ground. 28 One who makes use of his own legal right does no injury. 29 If damage results front
the filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are
generally not awarded in favor of a juridical person, unless it enjoys a good reputation that
was debased by the offending party resulting in social humiliation. 31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual,
legal, or equitable justification. In sustaining the trial court's award, the Court of Appeals acted
in clear disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the
decision should state the reason why attorney's fees are being awarded; otherwise, the award
should be disallowed. Besides, no bad faith has been imputed on, much less proved as
having been committed by, ABS-CBN. It has been held that "where no sufficient showing of
bad faith would be reflected in a party' s persistence in a case other than an erroneous
conviction of the righteousness of his cause, attorney's fees shall not be recovered as
cost." 33

On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and
VIVA absent any meeting of minds between them regarding the object and consideration of
the alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly
rejected by the trial court. RBS insist the premium it had paid for the counterbond constituted
a pecuniary loss upon which it may recover. It was obliged to put up the counterbound due to
the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause
of action or valid claim against RBS and, therefore not entitled to the writ of injunction, RBS
could recover from ABS-CBN the premium paid on the counterbond. Contrary to the claim of
ABS-CBN, the cash bond would prove to be more expensive, as the loss would be equivalent
to the cost of money RBS would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled
showing of the film "Maging Sino Ka Man" because the print advertisements were put out to
announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at one
time, not a series to be shown on a periodic basis. Hence, the print advertisement were good
and relevant for the particular date showing, and since the film could not be shown on that
particular date and hour because of the injunction, the expenses for the advertisements had
gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and
secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then
to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such
damages. Citing Tolentino,34 damages may be awarded in cases of abuse of rights even if the
act done is not illicit and there is abuse of rights were plaintiff institutes and action purely for
the purpose of harassing or prejudicing the defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages,
private respondents RBS cited People v. Manero,35 where it was stated that such entity may
recover moral and exemplary damages if it has a good reputation that is debased resulting in
social humiliation. it then ratiocinates; thus:

There can be no doubt that RBS' reputation has been debased by ABS-
CBN's acts in this case. When RBS was not able to fulfill its commitment to
the viewing public to show the film "Maging Sino Ka Man" on the scheduled
dates and times (and on two occasions that RBS advertised), it suffered
serious embarrassment and social humiliation. When the showing was
canceled, late viewers called up RBS' offices and subjected RBS to verbal
abuse ("Announce kayo nang announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something
RBS brought upon itself. it was exactly what ABS-CBN had planned to
happen.

The amount of moral and exemplary damages cannot be said to be

excessive. Two reasons justify the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS
operations as a broadcasting company is [sic] nationwide. Its clientele, like
that of ABS-CBN, consists of those who own and watch television. It is not an
exaggeration to state, and it is a matter of judicial notice that almost every
other person in the country watches television. The humiliation suffered by
RBS is multiplied by the number of televiewers who had anticipated the
showing of the film "Maging Sino Ka Man" on May 28 and November 3, 1992
but did not see it owing to the cancellation. Added to this are the advertisers
who had placed commercial spots for the telecast and to whom RBS had a
commitment in consideration of the placement to show the film in the dates
and times specified.

The second is that it is a competitor that caused RBS to suffer the

humiliation. The humiliation and injury are far greater in degree when caused
by an entity whose ultimate business objective is to lure customers (viewers
in this case) away from the competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court
and the Court of Appeals do not support ABS-CBN's claim that there was a perfected
contract. Such factual findings can no longer be disturbed in this petition for review under
Rule 45, as only questions of law can be raised, not questions of fact. On the issue of
damages and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract between
VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may
be noted that the award of attorney's fees of P212,000 in favor of VIVA is not assigned as
another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds
between two persons whereby one binds himself to give something or to render some service
to another 37 for a consideration. there is no contract unless the following requisites concur:
(1) consent of the contracting parties; (2) object certain which is the subject of the contract;
and (3) cause of the obligation, which is established.38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation

and bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties
come to agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the

terms agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once
there is concurrence between the offer and the acceptance upon the subject matter,
consideration, and terms of payment a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must not qualify the
terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any
sort from the proposal. A qualified acceptance, or one that involves a new proposal,
constitutes a counter-offer and is a rejection of the original offer. Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance is
not sufficient to generate consent because any modification or variation from the terms of the
offer annuls the offer.40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2
April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer to
ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms.
Concio, a counter-proposal in the form of a draft contract proposing exhibition of 53 films for a
consideration of P35 million. This counter-proposal could be nothing less than the counter-
offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant.
Clearly, there was no acceptance of VIVA's offer, for it was met by a counter-offer which
substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of

Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases,
it was held that an acceptance may contain a request for certain changes in the terms of the
offer and yet be a binding acceptance as long as "it is clear that the meaning of the
acceptance is positively and unequivocally to accept the offer, whether such request is
granted or not." This ruling was, however, reversed in the resolution of 29 March
1996, 43 which ruled that the acceptance of all offer must be unqualified and absolute, i.e., it
"must be identical in all respects with that of the offer so as to produce consent or meeting of
the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-
offer were not material but merely clarificatory of what had previously been agreed upon.
It cited the statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's change in a
phrase of the offer to purchase, which change does not essentially change the terms of the
offer, does not amount to a rejection of the offer and the tender of a counter-
offer." 45However, when any of the elements of the contract is modified upon acceptance,
such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-
offer in a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even
if it be conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance
did not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific
authority to do so.

Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such
as the power; to enter into contracts; are exercised by the Board of Directors. However, the
Board may delegate such powers to either an executive committee or officials or contracted
managers. The delegation, except for the executive committee, must be for specific
purposes, 47 Delegation to officers makes the latter agents of the corporation; accordingly, the
general rules of agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power
of the Board, the latter must specially authorize them to do so. That Del Rosario did not have
the authority to accept ABS-CBN's counter-offer was best evidenced by his submission of the
draft contract to VIVA's Board of Directors for the latter's approval. In any event, there was
between Del Rosario and Lopez III no meeting of minds. The following findings of the trial
court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract

was perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.

FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill
referred to the price and the number of films, which he wrote on a napkin.
However, Exhibit "C" contains numerous provisions which, were not
discussed at the Tamarind Grill, if Lopez testimony was to be believed nor
could they have been physically written on a napkin. There was even doubt
as to whether it was a paper napkin or a cloth napkin. In short what were
written in Exhibit "C'' were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court compel the parties to
sign Exhibit "C" when the provisions thereof were not previously agreed
upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject
matter of the contract was 14 films. The complaint in fact prays for delivery of
14 films. But Exhibit "C" mentions 53 films as its subject matter. Which is
which If Exhibits "C" reflected the true intent of the parties, then ABS-CBN's
claim for 14 films in its complaint is false or if what it alleged in the complaint
is true, then Exhibit "C" did not reflect what was agreed upon by the parties.
This underscores the fact that there was no meeting of the minds as to the
subject matter of the contracts, so as to preclude perfection thereof. For
settled is the rule that there can be no contract where there is no object which
is its subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh.
"D") states:

We were able to reach an agreement. VIVA gave us the

exclusive license to show these fourteen (14) films, and we
agreed to pay Viva the amount of P16,050,000.00 as well as
grant Viva commercial slots worth P19,950,000.00. We had
already earmarked this P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus
P16,050,000.00. equals P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?

A. The total price, the breakdown the known Viva movies, the
7 blockbuster movies and the other 7 Viva movies because
the price was broken down accordingly. The none [sic] Viva
and the seven other Viva movies and the sharing between
the cash portion and the concerned spot portion in the total
amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's
claim.

FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted
Exhibit "C" to Mr. Del Rosario with a handwritten note, describing said Exhibit
"C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft
has a well defined meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory

writing prepared for discussion, the terms and conditions thereof could not
have been previously agreed upon by ABS-CBN and Viva Exhibit "C'' could
not therefore legally bind Viva, not having agreed thereto. In fact, Ms. Concio
admitted that the terms and conditions embodied in Exhibit "C" were
prepared by ABS-CBN's lawyers and there was no discussion on said terms
and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in
Exhibit "C," and there was no evidence whatsoever that Viva agreed to the
terms and conditions thereof, said document cannot be a binding contract.
The fact that Viva refused to sign Exhibit "C" reveals only two [sic] well that it
did not agree on its terms and conditions, and this court has no authority to
compel Viva to agree thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed
upon at the Tamarind Grill was only provisional, in the sense that it was
subject to approval by the Board of Directors of Viva. He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the
second meeting wherein you claimed that you have the
meeting of the minds between you and Mr. Vic del Rosario,
what happened?

A. Vic Del Rosario was supposed to call us up and tell us

specifically the result of the discussion with the Board of
Directors.

Q. And you are referring to the so-called agreement which

you wrote in [sic] a piece of paper?

A. Yes, sir.

Q. So, he was going to forward that to the board of Directors

for approval?
 A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)

Q. Did Mr. Del Rosario tell you that he will submit it to his
Board for approval?

A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del
Rosario had no authority to bind Viva to a contract with ABS-CBN until and
unless its Board of Directors approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of defendant Viva" which "is a
corporation." (par. 2, complaint). As a mere agent of Viva, Del Rosario could
not bind Viva unless what he did is ratified by its Board of Directors. (Vicente
vs. Geraldez, 52 SCRA 210; Arnold vs. Willetsand Paterson, 44 Phil. 634).
As a mere agent, recognized as such by plaintiff, Del Rosario could not be
held liable jointly and severally with Viva and his inclusion as party defendant
has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear
admissions that what was supposed to have been agreed upon at the
Tamarind Grill between Mr. Lopez and Del Rosario was not a binding
agreement. It is as it should be because corporate power to enter into a
contract is lodged in the Board of Directors. (Sec. 23, Corporation Code).
Without such board approval by the Viva board, whatever agreement Lopez
and Del Rosario arrived at could not ripen into a valid contract binding upon
Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The
evidence adduced shows that the Board of Directors of Viva rejected Exhibit
"C" and insisted that the film package for 140 films be maintained (Exh. "7-1"
- Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four
films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del
Rosario was a continuation of said previous contract is untenable. As observed by the trial
court, ABS-CBN right of first refusal had already been exercised when Ms. Concio wrote to
VIVA ticking off ten films, Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter
was sent, was for an entirely different package. Ms. Concio herself admitted
on cross-examination to having used or exercised the right of first refusal.
She stated that the list was not acceptable and was indeed not accepted by
ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted
that the right of the first refusal may have been already exercised by Ms.
Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario himself
knew and understand [sic] that ABS-CBN has lost its rights of the first refusal
when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50

II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or
compensatory damages. Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss suffered by him as he has duly
proved. 51 The indemnification shall comprehend not only the value of the loss suffered, but
also that of the profits that the obligee failed to obtain. 52 In contracts and quasi-contracts the
damages which may be awarded are dependent on whether the obligor acted with good faith
or otherwise, It case of good faith, the damages recoverable are those which are the natural
and probable consequences of the breach of the obligation and which the parties have
foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If
the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for
all damages which may be reasonably attributed to the non-performance of the
obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages which
are the natural and probable consequences of the act or omission complained of, whether or
not such damages has been foreseen or could have reasonably been foreseen by the
defendant.54

Actual damages may likewise be recovered for loss or impairment of earning capacity in
cases of temporary or permanent personal injury, or for injury to the plaintiff's business
standing or commercial credit.55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or
quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged
knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim
and Cross-claim under the heading COUNTERCLAIM specifically alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of
action RBS. As a result thereof, RBS suffered actual damages in the amount
of P6,621,195.32. 56

Needless to state the award of actual damages cannot be comprehended under the above
law on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of
the Civil Code, which read as follows:

Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.

Art. 20. Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for tile same.

Art. 21. Any person who wilfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate
the latter for the damage.

It may further be observed that in cases where a writ of preliminary injunction is issued, the
damages which the defendant may suffer by reason of the writ are recoverable from the
injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of Appeals to challenge the
order on the matter, Clearly then, it was not necessary for RBS to file a counterbond. Hence,
ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for
lack of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that there existed sufficient ground for
the issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of
legal and factual basis, but because of the plea of RBS that it be allowed to put up a
counterbond.

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees
may be recovered as actual or compensatory damages under any of the circumstances
provided for in Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages because of
the policy that no premium should be placed on the right to litigate. 59 They are not to be
awarded every time a party wins a suit. The power of the court to award attorney's fees under
Article 2208 demands factual, legal, and equitable justification. 60Even when claimant is
compelled to litigate with third persons or to incur expenses to protect his rights, still
attorney's fees may not be awarded where no sufficient showing of bad faith could be
reflected in a party's persistence in a case other than erroneous conviction of the
righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code.
Article 2217 thereof defines what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered, Article 2220 provides that moral
damages may be recovered in breaches of contract where the defendant acted fraudulently or
in bad faith. RBS's claim for moral damages could possibly fall only under item (10) of Article
2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and
35.

Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered. and not to impose a penalty on the wrongdoer. 62 The award is not
meant to enrich the complainant at the expense of the defendant, but to enable the injured
party to obtain means, diversion, or amusements that will serve to obviate then moral
suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of
the spiritual status quo ante, and should be proportionate to the suffering inflicted. 63 Trial
courts must then guard against the award of exorbitant damages; they should exercise
balanced restrained and measured objectivity to avoid suspicion that it was due to passion,
prejudice, or corruption on the part of the trial court. 64

The award of moral damages cannot be granted in favor of a corporation because, being an
artificial person and having existence only in legal contemplation, it has no feelings, no
emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish,
which call be experienced only by one having a nervous system. 65 The statement in People
v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral
damages if it "has a good reputation that is debased, resulting in social humiliation" is
an obiter dictum. On this score alone the award for damages must be set aside, since RBS is
a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil
Code. These are imposed by way of example or correction for the public good, in addition to
moral, temperate, liquidated or compensatory damages. 68 They are recoverable in criminal
cases as part of the civil liability when the crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with gross negligence; 70 and in
contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-
contract, delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only
be based on Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal
right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or
injuring another. Article 20 speaks of the general sanction for all other provisions of law which
do not especially provide for their own sanction; while Article 21 deals with acts contra bonus
mores, and has the following elements; (1) there is an act which is legal, (2) but which is
contrary to morals, good custom, public order, or public policy, and (3) and it is done with
intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith
implies a conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in
its formal submission of a draft contract. Settled is the rule that the adverse result of an action
does not per se make the action wrongful and subject the actor to damages, for the law could
not have meant to impose a penalty on the right to litigate. If damages result from a person's
exercise of a right, it is damnum absque injuria.75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of
attorney's fees in favor of VIVA Productions, Inc.1âwphi1.nêt

No pronouncement as to costs.

SO ORDERED.
ENTITLEMENT TO MORAL DAMAGES

G.R. No. 128066 June 19, 2000

JARDINE DAVIES INC., petitioner,

vs.
COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.

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

G.R. No. 128069

PURE FOODS CORPORATION, petitioner,

vs.
COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.

BELLOSILLO, J.:

This is rather a simple case for specific performance with damages which could have been
resolved through mediation and conciliation during its infancy stage had the parties been
earnest in expediting the disposal of this case. They opted however to resort to full court
proceedings and denied themselves the benefits of alternative dispute resolution, thus making
the process more arduous and long-drawn.

The controversy started in 1992 at the height of the power crisis which the country was then
experiencing. To remedy and curtail further losses due to the series of power failures,
petitioner PURE FOODS CORPORATION (hereafter PUREFOODS) decided to install two (2)
1500 KW generators in its food processing plant in San Roque, Marikina City.

Sometime in November 1992 a bidding for the supply and installation of the generators was
held. Several suppliers and dealers were invited to attend a pre-bidding conference to discuss
the conditions, propose scheme and specifications that would best suit the needs of
PUREFOODS. Out of the eight (8) prospective bidders who attended the pre-bidding
conference, only three (3) bidders, namely, respondent FAR EAST MILLS SUPPLY
CORPORATION (hereafter FEMSCO), MONARK and ADVANCE POWER submitted bid
proposals and gave bid bonds equivalent to 5% of their respective bids, as required.

Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po,
PUREFOODS confirmed the award of the contract to FEMSCO —

Gentlemen:

This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply
and Installation of two (2) units of 1500 KW/unit Generator Sets at the Processed Meats
Plant, Bo. San Roque, Marikina, based on your proposal number PC 28-92 dated November
20, 1992, subject to the following basic terms and conditions:

1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials
and labor for the local portion and the labor for the imported materials, payable by
progress billing twice a month, with ten percent (10%) retention. The retained amount
shall be released thirty (30) days after acceptance of the completed project and upon
posting of Guarantee Bond in an amount equivalent to twenty percent (20%) of the
contract price. The Guarantee Bond shall be valid for one (1) year from completion
and acceptance of project. The contract price includes future increase/s in costs of
materials and labor;
 2. The projects shall be undertaken pursuant to the attached specifications. It is
understood that any item required to complete the project, and those not included in
the list of items shall be deemed included and covered and shall be performed;

3. All materials shall be brand new;

4. The project shall commence immediately and must be completed within twenty
(20) working days after the delivery of Generator Set to Marikina Plant, penalty
equivalent to 1/10 of 1% of the purchase price for every day of delay;

5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the
contract price, and shall procure All Risk Insurance equivalent to the contract price
upon commencement of the project. The All Risk Insurance Policy shall be endorsed
in favor of and shall be delivered to Pure Foods Corporation;

6. Warranty of one (1) year against defective material and/or workmanship.

Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms
and conditions.

Immediately, FEMSCO submitted the required performance bond in the amount of

P1,841,187.90 and contractor's all-risk insurance policy in the amount of P6,137,293.00
which PUREFOODS through its Vice President Benedicto G. Tope acknowledged in a letter
dated 18 December 1992. FEMSCO also made arrangements with its principal and started
the PUREFOODS project by purchasing the necessary materials. PUREFOODS on the other
hand returned FEMSCO's Bidder's Bond in the amount of P1,000,000.00, as requested.

Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice
President Teodoro L. Dimayuga unilaterally canceled the award as "significant factors were
uncovered and brought to (their) attention which dictate (the) cancellation and warrant a total
review and re-bid of (the) project." Consequently, FEMSCO protested the cancellation of the
award and sought a meeting with PUREFOODS. However, on 26 March 1993, before the
matter could be resolved, PUREFOODS already awarded the project and entered into a
contract with JARDINE NELL, a division of Jardine Davies, Inc. (hereafter JARDINE), which
incidentally was not one of the bidders.1âwphi1.nêt

FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to
cease and desist from delivering and installing the two (2) generators at PUREFOODS. Its
demand letters unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS
for reneging on its contract, and JARDINE for its unwarranted interference and inducement.
Trial ensued. After FEMSCO presented its evidence, JARDINE filed a Demurrer to Evidence.

On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, 1 granted JARDINE's Demurrer to
Evidence. The trial court concluded that "[w]hile it may seem to the plaintiff that by the actions
of the two defendants there is something underhanded going on, this is all a matter of
perception, and unsupported by hard evidence, mere suspicions and suppositions would not
stand up very well in a court of law." 2 Meanwhile trial proceeded as regards the case against
PUREFOODS.

On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify
FEMSCO the sum of P2,300,000.00 representing the value of engineering services it
rendered; (b) to pay FEMSCO the sum of US$14,000.00 or its peso equivalent, and
P900,000.00 representing contractor's mark-up on installation work, considering that it would
be impossible to compel PUREFOODS to honor, perform and fulfill its contractual obligations
in view of PUREFOOD's contract with JARDINE and noting that construction had already
started thereon; (c) to pay attorney's fees in an amount equivalent to 20% of the total amount
due; and, (d) to pay the costs. The trial court dismissed the counterclaim filed by
PUREFOODS for lack of factual and legal basis.
Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the
27 June 1994 Resolution of the trial court which granted the Demurrer to Evidence filed by
JARDINE resulting in the dismissal of the complaint against it, while PUREFOODS appealed
the 28 July 1994 Decision of the same court which ordered it to pay FEMSCO.

On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial
court. 3 It also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE
to pay FEMSCO damages for inducing PUREFOODS to violate the latter's contract with
FEMSCO. As such, JARDINE was ordered to pay FEMSCO P2,000,000.00 for moral
damages. In addition, PUREFOODS was also directed to pay FEMSCO P2,000,000.00 as
moral damages and P1,000,000.00 as exemplary damages as well as 20% of the total
amount due as attorney's fees.

On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for
reconsideration filed by PUREFOODS and JARDINE. Hence, these two (2) petitions for
review filed by PUREFOODS and JARDINE which were subsequently consolidated.

PUREFOODS maintains that the conclusions of both the trial court and the appellate court
are premised on a misapprehension of facts. It argues that its 12 December 1992 letter to
FEMSCO was not an acceptance of the latter's bid proposal and award of the project but
more of a qualified acceptance constituting a counter-offer which required FEMSCO's
express conforme. Since PUREFOODS never received FEMSCO's conforme, PUREFOODS
was very well within reason to revoke its qualified acceptance or counter-offer. Hence, no
contract was perfected between PUREFOODS and FEMSCO. PUREFOODS also contends
that it was never in bad faith when it dealt with FEMSCO. Hence moral and exemplary
damages should not have been awarded.

Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior
knowledge of the supposed contract between PUREFOODS and FEMSCO, and that it
induced PUREFOODS to violate the latter's alleged contract with FEMSCO. Moreover,
JARDINE reasons that FEMSCO, an artificial person, is not entitled to moral damages. But
granting arguendo that the award of moral damages is proper, P2,000,000.00 is extremely
excessive.

In the main, these consolidated cases present two (2) issues: first, whether there existed a
perfected contract between PUREFOODS and FEMSCO; and second, granting there existed
a perfected contract, whether there is any showing that JARDINE induced or connived with
PUREFOODS to violate the latter's contract with FEMSCO.

A contract is defined as "a juridical convention manifested in legal form, by virtue of which one
or more persons bind themselves in favor of another or others, or reciprocally, to the
fulfillment of a prestation to give, to do, or not to do." 4There can be no contract unless the
following requisites concur: (a) consent of the contracting parties; (b) object certain which is
the subject matter of the contract; and, (c) cause of the obligation which is established. 5 A
contract binds both contracting parties and has the force of law between them.

Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer
made by the offeror. From that moment, the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law. 6 To produce a contract, the
acceptance must not qualify the terms of the offer. However, the acceptance may be express
or implied. 7 For a contract to arise, the acceptance must be made known to the offeror.
Accordingly, the acceptance can be withdrawn or revoked before it is made known to the
offeror.

In the instant case, there is no issue as regards the subject matter of the contract and the
cause of the obligation. The controversy lies in the consent — whether there was an
acceptance of the offer, and if so, if it was communicated, thereby perfecting the contract.
To resolve the dispute, there is a need to determine what constituted the offer and the
acceptance. Since petitioner PUREFOODS started the process of entering into the contract
by conducting a bidding, Art. 1326 of the Civil Code, which provides that "[a]dvertisements for
bidders are simply invitations to make proposals," applies. Accordingly, the Terms and
Conditions of the Bidding disseminated by petitioner PUREFOODS constitutes the
"advertisement" to bid on the project. The bid proposals or quotations submitted by the
prospective suppliers including respondent FEMSCO, are the offers. And, the reply of
petitioner PUREFOODS, the acceptance or rejection of the respective offers.

Quite obviously, the 12 December 1992 letter of petitioner. PUREFOODS to FEMSCO

constituted acceptance of respondent FEMSCO's offer as contemplated by law. The tenor of
the letter, i.e., "This will confirm that Pure Foods has awarded to your firm (FEMSCO) the
project," could not be more categorical. While the same letter enumerated certain "basic
terms and conditions," these conditions were imposed on the performance of the obligation
rather than on the perfection of the contract. Thus, the first "condition" was merely a
reiteration of the contract price and billing scheme based on the Terms and Conditions of
Bidding and the bid or previous offer of respondent FEMSCO. The second and third
"conditions" were nothing more than general statements that all items and materials including
those excluded in the list but necessary to complete the project shall be deemed included and
should be brand new. The fourth "condition" concerned the completion of the work to be
done, i.e., within twenty (20) days from the delivery of the generator set, the purchase of
which was part of the contract. The fifth "condition" had to do with the putting up of a
performance bond and an all-risk insurance, both of which should be given upon
commencement of the project. The sixth "condition" related to the standard warranty of one
(1) year. In fine, the enumerated "basic terms and conditions" were prescriptions on how the
obligation was to be performed and implemented. They were far from being conditions
imposed on the perfection of the contract.

In Babasa v. Court of Appeals 8 we distinguished between a condition imposed on the

perfection of a contract and a condition imposed merely on the performance of an obligation.
While failure to comply with the first condition results in the failure of a contract, failure to
comply with the second merely gives the other party options and/or remedies to protect his
interests.

We thus agree with the conclusion of respondent appellate court which affirmed the trial court
—

As can be inferred from the actual phrase used in the first portion of the letter, the
decision to award the contract has already been made. The letter only serves as a
confirmation of such decision. Hence, to the Court's mind, there is already an
acceptance made of the offer received by Purefoods. Notwithstanding the terms and
conditions enumerated therein, the offer has been accepted and/or amplified the
details of the terms and conditions contained in the Terms and Conditions of Bidding
given out by Purefoods to prospective bidders. 9

But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS
constituted a "conditional counter-offer," respondent FEMCO's submission of the performance
bond and contractor's all-risk insurance was an implied acceptance, if not a clear indication of
its acquiescence to, the "conditional counter-offer," which expressly stated that the
performance bond and the contractor's all-risk insurance should be given upon the
commencement of the contract. Corollarily, the acknowledgment thereof by petitioner
PUREFOODS, not to mention its return of FEMSCO's bidder's bond, was a concrete
manifestation of its knowledge that respondent FEMSCO indeed consented to the
"conditional counter-offer." After all, as earlier adverted to, an acceptance may either be
express or implied, 10 and this can be inferred from the contemporaneous and subsequent
acts of the contracting parties.

Accordingly, for all intents and purposes, the contract at that point has been perfected, and
respondent FEMSCO's conforme would only be a mere surplusage. The discussion of the
price of the project two (2) months after the 12 December 1992 letter can be deemed as
nothing more than a pressure being exerted by petitioner PUREFOODS on respondent
FEMSCO to lower the price even after the contract had been perfected. Indeed from the facts,
it can easily be surmised that petitioner PUREFOODS was haggling for a lower price even
after agreeing to the earlier quotation, and was threatening to unilaterally cancel the contract,
which it eventually did. Petitioner PUREFOODS also makes an issue out of the absence of a
purchase order (PO). Suffice it to say that purchase orders or POs do not make or break a
contract. Thus, even the tenor of the subsequent letter of petitioner PUREFOODS, i.e., "Pure
Foods Corporation is hereby canceling the award to your company of the project,"
presupposes that the contract has been perfected. For, there can be no cancellation if the
contract was not perfected in the first place.

Petitioner PUREFOODS also argues that it was never in bad faith.1avvphi1 On the contrary, it
believed in good faith that no such contract was perfected. We are not convinced. We
subscribe to the factual findings and conclusions of the trial court which were affirmed by the
appellate court —

Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE
FOODS) has acted with bad faith and this was further aggravated by the subsequent
inking of a contract between defendant Purefoods and erstwhile co-defendant
Jardine. It is very evident that Purefoods thought that by the expedient means of
merely writing a letter would automatically cancel or nullify the existing contract
entered into by both parties after a process of bidding. This, to the Court's mind, is a
flagrant violation of the express provisions of the law and is contrary to fair and just
dealings to which every man is due. 11

This Court has awarded in the past moral damages to a corporation whose reputation has
been besmirched. 12 In the instant case, respondent FEMSCO has sufficiently shown that its
reputation was tarnished after it immediately ordered equipment from its suppliers on account
of the urgency of the project, only to be canceled later. We thus sustain respondent appellate
court's award of moral damages. We however reduce the award from P2,000,000.00 to
P1,000,000.00, as moral damages are never intended to enrich the recipient. Likewise, the
award of exemplary damages by way of example for the public good is excessive and should
be reduced to P100,000.00.

Petitioner JARDINE maintains on the other hand that respondent appellate court erred in
ordering it to pay moral damages to respondent FEMSCO as it supposedly induced
PUREFOODS to violate the contract with FEMSCO. We agree. While it may seem that
petitioners PUREFOODS and JARDINE connived to deceive respondent FEMSCO, we find
no specific evidence on record to support such perception. Likewise, there is no showing
whatsoever that petitioner JARDINE induced petitioner PUREFOODS. The similarity in the
design submitted to petitioner PUREFOODS by both petitioner JARDINE and respondent
FEMSCO, and the tender of a lower quotation by petitioner JARDINE are insufficient to show
that petitioner JARDINE indeed induced petitioner PUREFOODS to violate its contract with
respondent FEMSCO.

WHEREFORE, judgment is hereby rendered as follows:

(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court
of Appeals reversing the 27 June 1994 resolution of the trial court and ordering
petitioner JARDINE DAVIES, INC., to pay private respondent FAR EAST MILLS
SUPPLY CORPORATION P2,000,000.00 as moral damages is REVERSED and SET
ASIDE for insufficiency of evidence; and

(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of
Appeals ordering petitioner PUREFOODS CORPORATION to pay private respondent
FAR EAST MILLS SUPPLY CORPORATION the sum of P2,300,000.00 representing
the value of engineering services it rendered, US$14,000.00 or its peso equivalent,
and P900,000.00 representing the contractor's mark-up on installation work, as well
 as attorney's fees equivalent to twenty percent (20%) of the total amount due, is
AFFIRMED. In addition, petitioner PURE FOODS CORPORATION is ordered to pay
private respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in
the amount of P1,000,000.00 and exemplary damages in the amount of
P1,000,000.00. Costs against petitioner.

SO ORDERED.
ENTITLEMENT TO MORAL DAMAGES

G.R. No. 131723 December 13, 2007

MANILA ELECTRIC COMPANY, petitioner,

vs.
T.E.A.M. ELECTRONICS CORPORATION, TECHNOLOGY ELECTRONICS ASSEMBLY
and MANAGEMENT PACIFIC CORPORATION; and ULTRA ELECTRONICS
INSTRUMENTS, INC., respondents.

DECISION

NACHURA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking the
reversal of the Decision1 of the Court of Appeals (CA) dated June 18, 1997 and its
Resolution2 dated December 3, 1997 in CA-G.R. CV No. 40282 denying the appeal filed by
petitioner Manila Electric Company.

The facts of the case, as culled from the records, are as follows:

Respondent T.E.A.M. Electronics Corporation (TEC) was formerly known as NS Electronics

(Philippines), Inc. before 1982 and National Semi-Conductors (Phils.) before 1988. TEC is
wholly owned by respondent Technology Electronics Assembly and Management Pacific
Corporation (TPC). On the other hand, petitioner Manila Electric Company (Meralco) is a
utility company supplying electricity in the Metro Manila area.

Petitioner and NS Electronics (Philippines), Inc., the predecessor-in-interest of respondent

TEC, were parties to two separate contracts denominated as Agreements for the Sale of
Electric Energy under the following account numbers: 09341-1322-163 and 09341-1812-
13.4 Under the aforesaid agreements, petitioner undertook to supply TEC's building known as
Dyna Craft International Manila (DCIM) located at Electronics Avenue, Food Terminal
Complex, Taguig, Metro Manila, with electric power. Another contract was entered into for the
supply of electric power to TEC's NS Building under Account No. 19389-0900-10.

In September 1986, TEC, under its former name National Semi-Conductors (Phils.) entered
into a Contract of Lease5 with respondent Ultra Electronics Industries, Inc. (Ultra) for the use
of the former's DCIM building for a period of five years or until September 1991. Ultra was,
however, ejected from the premises on February 12, 1988 by virtue of a court order, for
repeated violation of the terms and conditions of the lease contract.

On September 28, 1987, a team of petitioner's inspectors conducted a surprise inspection of

the electric meters installed at the DCIM building, witnessed by Ultra's 6 representative, Mr.
Willie Abangan. The two meters covered by account numbers 09341-1322-16 and 09341-
1812-13, were found to be allegedly tampered with and did not register the actual power
consumption in the building. The results of the inspection were reflected in the Service
Inspection Reports7 prepared by the team.

In a letter dated November 25, 1987, petitioner informed TEC of the results of the inspection
and demanded from the latter the payment of P7,040,401.01 representing its unregistered
consumption from February 10, 1986 until September 28, 1987, as a result of the alleged
tampering of the meters.8 TEC received the letters on January 7, 1988. Since Ultra was in
possession of the subject building during the covered period, TEC's Managing Director, Mr.
Bobby Tan, referred the demand letter to Ultra9 which, in turn, informed TEC that its
Executive Vice-President had met with petitioner's representative. Ultra further intimated that
assuming that there was tampering of the meters, petitioner's assessment was
excessive.10 For failure of TEC to pay the differential billing, petitioner disconnected the
electricity supply to the DCIM building on April 29, 1988.

TEC demanded from petitioner the reconnection of electrical service, claiming that it had
nothing to do with the alleged tampering but the latter refused to heed the demand. Hence,
TEC filed a complaint on May 27, 1988 before the Energy Regulatory Board (ERB) praying
that electric power be restored to the DCIM building. 11 The ERB immediately ordered the
reconnection of the service but petitioner complied with it only on October 12, 1988 after TEC
paid P1,000,000.00, under protest. The complaint before the ERB was later withdrawn as the
parties deemed it best to have the issues threshed out in the regular courts. Prior to the
reconnection, or on June 7, 1988, petitioner conducted a scheduled inspection of the
questioned meters and found them to have been tampered anew.12

Meanwhile, on April 25, 1988, petitioner conducted another inspection, this time, in TEC's NS
Building. The inspection allegedly revealed that the electric meters were not registering the
correct power consumption. Petitioner, thus, sent a letter dated June 18, 1988 demanding
payment of P280,813.72 representing the differential billing.13TEC denied petitioner's
allegations and claim in a letter dated June 29, 1988.14 Petitioner, thus, sent TEC another
letter demanding payment of the aforesaid amount, with a warning that the electric service
would be disconnected in case of continued refusal to pay the differential billing. 15 To avert
the impending disconnection of electrical service, TEC paid the above amount, under
protest.16

On January 13, 1989, TEC and TPC filed a complaint for damages against petitioner and
Ultra17 before the Regional Trial Court (RTC) of Pasig. The case was raffled to Branch 162
and was docketed as Civil Case No. 56851.18 Upon the filing of the parties' answer to the
complaint, pre-trial was scheduled.

At the pre-trial, the parties agreed to limit the issues, as follows:

1. Whether or not the defendant Meralco is liable for the plaintiffs' disconnection of
electric service at DCIM Building.

2. Whether or not the plaintiff is liable for (sic) the defendant for the differential billings
in the amount of P7,040,401.01.

3. Whether or not the plaintiff is liable to defendant for exemplary damages. 19

For failure of the parties to reach an amicable settlement, trial on the merits ensued. On June
17, 1992, the trial court rendered a Decision in favor of respondents TEC and TPC, and
against respondent Ultra and petitioner. The pertinent portion of the decision reads:

WHEREFORE, judgment is hereby rendered in this case in favor of the plaintiffs and
against the defendants as follows:

(1) Ordering both defendants Meralco and ULTRA Electronics Instruments,

Inc. to jointly and severally reimburse plaintiff TEC actual damages in the
amount of ONE MILLION PESOS with legal rate of interest from the date of
the filing of this case on January 19, 1989 until the said amount shall have
been fully paid;

(2) Ordering defendant Meralco to pay to plaintiff TEC the amount

of P280,813.72 as actual damages with legal rate of interest also from
January 19, 1989;

(3) Ordering defendant Meralco to pay to plaintiff TPC the amount

of P150,000.00 as actual damages with interest at legal rate from January
19, 1989;
 (4) Condemning defendant Meralco to pay both plaintiffs moral damages in
the amount pf P500,000.00;

(5) Condemning defendant Meralco to pay both plaintiffs corrective and/or

exemplary damages in the amount of P200,000.00;

(6) Ordering defendant Meralco to pay attorney's fees in the amount

of P200,000.00

Costs against defendant Meralco.

SO ORDERED.20

The trial court found the evidence of petitioner insufficient to prove that TEC was guilty of
tampering the meter installations. The deformed condition of the meter seal and the existence
of an opening in the wire duct leading to the transformer vault did not, in themselves, prove
the alleged tampering, especially since access to the transformer was given only to
petitioner's employees.21 The sudden drop in TEC's (or Ultra's) electric consumption did not,
per se, show meter tampering. The delay in the sending of notice of the results of the
inspection was likewise viewed by the court as evidence of inefficiency and arbitrariness on
the part of petitioner. More importantly, petitioner's act of disconnecting the DCIM building's
electric supply constituted bad faith and thus makes it liable for damages. 22 The court further
denied petitioner's claim of differential billing primarily on the ground of equitable
negligence.23Considering that TEC and TPC paid P1,000,000.00 to avert the disconnection of
electric power; and because Ultra manifested to settle the claims of petitioner, the court
imposed solidary liability on both Ultra and petitioner for the payment of the P1,000,000.00.

Ultra and petitioner appealed to the CA which affirmed the RTC decision, with a modification
of the amount of actual damages and interest thereon. The dispositive portion of the CA
decision dated June 18, 1997, states:

WHEREFORE, this Court renders judgment affirming in toto the Decision rendered by
the trial court with the slight modification that the interest at legal rate shall be
computed from January 13, 1989 and that Meralco shall pay plaintiff T.E.A.M.
Electronics Corporation and Technology Electronics Assembly and Management
Pacific Corporation the sum of P150,000.00 per month for five (5) months for actual
damages incurred when it was compelled to lease a generator set with interest at the
legal rate from the above-stated date.

SO ORDERED.24

The appellate court agreed with the RTC's conclusion. In addition, it considered petitioner
negligent for failing to discover the alleged defects in the electric meters; in belatedly notifying
TEC and TPC of the results of the inspection; and in disconnecting the electric power without
prior notice.

Petitioner now comes before this Court in this petition for review on certiorari contending that:

The Court of Appeals committed grievous errors and decided matters of substance
contrary to law and the rulings of this Honorable Court:

1. In finding that the issue in the case is whether there was deliberate tampering of
the metering installations at the building owned by TEC.

2. In not finding that the issue is: whether or not, based on the tampered meters,
whether or not petitioner is entitled to differential billing, and if so, how much.
 3. In declaring that petitioner ME RALCO had the burden of proof to show by clear
and convincing evidence that with respect to the tampered meters that TEC and/or
TPC authored their tampering.

4. In finding that petitioner Meralco should not have held TEC and/or TPC responsible
for the acts of Ultra.

5. In finding that TEC should not be held liable for the tampering of this electric meter
in its DCIM Building.

6. In finding that there was no notice of disconnection.

7. In finding that petitioner MERALCO was negligent in informing TEC of the alleged
tampering.

8. In making the finding that it is difficult to believe that when petitioner MERALCO
inspected on June 7, 1988 the meter installations, they were found to be tampered.

9. In declaring that petitioner MERALCO estopped from claiming any tampering of the
meters.

10. In finding that "the method employed by MERALCO to as certain (sic) the 'correct'
amount of electricity consumed is questionable";

11. In declaring that MERALCO all throughout its dealings with TEC took on an
"attitude" which is oppressive, wanton and reckless.

12. In declaring that MERALCO acted arbitrarily in inspecting TEC's DCIM building
and the NS building.

13. In declaring that respondents TEC and TPC are entitled to the damages which it
awarded.

14. In not declaring that petitioner is entitled to the differential bill.

15. In not declaring that respondents are liable to petitioner for exemplary damages,
attorney's fee and expenses for litigation.25

The petition must fail.

The issues for resolution can be summarized as follows: 1) whether or not TEC tampered with
the electric meters installed at its DCIM and NS buildings; 2) If so, whether or not it is liable
for the differential billing as computed by petitioner; and 3) whether or not petitioner was
justified in disconnecting the electric power supply in TEC's DCIM building.

Petitioner insists that the tampering of the electric meters installed at the DCIM and NS
buildings owned by respondent TEC has been established by overwhelming evidence, as
specifically shown by the shorting devices found during the inspection. Thus, says petitioner,
tampering of the meter is no longer an issue.

It is obvious that petitioner wants this Court to revisit the factual findings of the lower courts.
Well-established is the doctrine that under Rule 45 of the Rules of Court, only questions of
law, not of fact, may be raised before the Court. We would like to stress that this Court is not
a trier of facts and may not re-examine and weigh anew the respective evidence of the
parties. Factual findings of the trial court, especially those affirmed by the Court of Appeals,
are binding on this Court.26
Looking at the record, we note that petitioner claims to have discovered three incidences of
meter-tampering; twice in the DCIM building on September 28, 1987 and June 7, 1988; and
once in the NS building on April 24, 1988.

The first instance was supposedly discovered on September 28, 1987. The inspector
allegedly found the presence of a short circuiting device and saw that the meter seal was
deformed. In addition, petitioner, through the Supervising Engineer of its Special Billing
Analysis Department,27 claimed that there was a sudden and unexplainable drop in TEC's
electrical consumption starting February 10, 1986. On the basis of the foregoing, petitioner
concluded that the electric meters were tampered with.

However, contrary to petitioner's claim that there was a drastic and unexplainable drop in
TEC's electric consumption during the affected period, the Pattern of TEC's Electrical
Consumption28 shows that the sudden drop is not peculiar to the said period. Noteworthy is
the observation of the RTC in this wise:

In fact, in Account No. 09341-1812-13 (heretofore referred as Account/Meter No. 2),

as evidenced by Exhibits "35" and "35-A," there was likewise a sudden drop of
electrical consumption from the year 1984 which recorded an average 141,300
kwh/month to 1985 which recorded an average kwh/month at 87,600 or a difference-
drop of 53,700 kwh/month; from 1985's 87,600 recorded consumption, the same
dropped to 18,600 kwh/month or a difference-drop of 69,000 kwh/month. Surely, a
drop of 53,700 could be equally categorized as a sudden drop amounting to 69,000
which, incidentally, the Meralco claimed as "unexplainable. x x x.29

The witnesses for petitioner who testified on the alleged tampering of the electric meters,
declared that tampering is committed by consumers to prevent the meter from registering the
correct amount of electric consumption, and result in a reduced monthly electric bill, while
continuing to enjoy the same power supply. Only the registration of actual electric energy
consumption, not the supply of electricity, is affected when a meter is tampered with.30 The
witnesses claimed that after the inspection, the tampered electric meters were corrected, so
that they would register the correct consumption of TEC. Logically, then, after the correction
of the allegedly tampered meters, the customer's registered consumption would go up.

In this case, the period claimed to have been affected by the tampered electric meters is from
February 1986 until September 1987. Based on petitioner's Billing Record 31 (for the DCIM
building), TEC's monthly electric consumption on Account No. 9341-1322-16 was between
4,500 and 27,000 kwh.32 Account No. 9341-1812-13 showed a monthly consumption between
9,600 and 34,200 kwh.33 It is interesting to note that, after correction of the allegedly
tampered meters, TEC's monthly electric consumption from October 1987 to February 1988
(the last month that Ultra occupied the DCIM building) was between 8,700 and 24,300 kwh in
its first account, and 16,200 to 46,800 kwh on the second account.

Even more revealing is the fact that TEC's meters registered 9,300 kwh and 19,200 kwh
consumption on the first and second accounts, respectively, a month prior to the inspection.
On the first month after the meters were corrected, TEC's electric consumption registered at
9,300 kwh and 22,200 kwh on the respective accounts. These figures clearly show that there
was no palpably drastic difference between the consumption before and after the inspection,
casting a cloud of doubt over petitioner's claim of meter-tampering. Indeed, Ultra's
explanation that the corporation was losing; thus, it had lesser consumption of electric power
appear to be the more plausible reason for the drop in electric consumption.

Petitioner likewise claimed that when the subject meters were again inspected on June 7,
1988, they were found to have been tampered anew. The Court notes that prior to the
inspection, TEC was informed about it; and months before the inspection, there was an
unsettled controversy between TEC and petitioner, brought about by the disconnection of
electric power and the non-payment of differential billing. We are more disposed to accept the
trial court's conclusion that it is hard to believe that a customer previously apprehended for
tampered meters and assessed P7 million would further jeopardize itself in the eyes of
petitioner.34 If it is true that there was evidence of tampering found on September 28, 1987
and again on June 7, 1988, the better view would be that the defective meters were not
actually corrected after the first inspection. If so, then Manila Electric Company v. Macro
Textile Mills Corporation35 would apply, where we said that we cannot sanction a situation
wherein the defects in the electric meter are allowed to continue indefinitely until suddenly,
the public utilities demand payment for the unrecorded electricity utilized when they could
have remedied the situation immediately. Petitioner's failure to do so may encourage neglect
of public utilities to the detriment of the consuming public. Corollarily, it must be underscored
that petitioner has the imperative duty to make a reasonable and proper inspection of its
apparatus and equipment to ensure that they do not malfunction, and the due diligence to
discover and repair defects therein. Failure to perform such duties constitutes
negligence.36 By reason of said negligence, public utilities run the risk of forfeiting amounts
originally due from their customers.37

As to the alleged tampering of the electric meter in TEC's NS building, suffice it to state that
the allegation was not proven, considering that the meters therein were enclosed in a metal
cabinet the metal seal of which was unbroken, with petitioner having sole access to the said
meters.38

In view of the negative finding on the alleged tampering of electric meters on TEC's DCIM and
NS buildings, petitioner's claim of differential billing was correctly denied by the trial and
appellate courts. With greater reason, therefore, could petitioner not exercise the right of
immediate disconnection.

The law in force at the time material to this controversy was Presidential Decree (P.D.) No.
40139 issued on March 1, 1974.40 The decree penalized unauthorized installation of water,
electrical or telephone connections and such acts as the use of tampered electrical meters. It
was issued in answer to the urgent need to put an end to illegal activities that prejudice the
economic well-being of both the companies concerned and the consuming public. 41 P.D. 401
granted the electric companies the right to conduct inspections of electric meters and the
criminal prosecution42of erring consumers who were found to have tampered with their
electric meters. It did not expressly provide for more expedient remedies such as the charging
of differential billing and immediate disconnection against erring consumers. Thus, electric
companies found a creative way of availing themselves of such remedies by inserting into
their service contracts (or agreements for the sale of electric energy) a provision for
differential billing with the option of disconnection upon non-payment by the erring consumer.
The Court has recognized the validity of such stipulations. 43 However, recourse to differential
billing with disconnection was subject to the prior requirement of a 48-hour written notice of
disconnection.44

Petitioner, in the instant case, resorted to the remedy of disconnection without prior notice.
While it is true that petitioner sent a demand letter to TEC for the payment of differential
billing, it did not include any notice that the electric supply would be disconnected. In fine,
petitioner abused the remedies granted to it under P.D. 401 and Revised General Order No. 1
by outrightly depriving TEC of electrical services without first notifying it of the impending
disconnection. Accordingly, the CA did not err in affirming the RTC decision.

As to the damages awarded by the CA, we deem it proper to modify the same. Actual
damages are compensation for an injury that will put the injured party in the position where it
was before the injury. They pertain to such injuries or losses that are actually sustained and
susceptible of measurement. Except as provided by law or by stipulation, a party is entitled to
adequate compensation only for such pecuniary loss as is duly proven. Basic is the rule that
to recover actual damages, not only must the amount of loss be capable of proof; it must also
be actually proven with a reasonable degree of certainty, premised upon competent proof or
the best evidence obtainable.45

Respondent TEC sufficiently established, and petitioner in fact admitted, that the former
paid P1,000,000.00 and P280,813.72 under protest, the amounts representing a portion of
the latter's claim of differential billing. With the finding that no tampering was committed and,
thus, no differential billing due, the aforesaid amounts should be returned by petitioner, with
interest, as ordered by the Court of Appeals and pursuant to the guidelines set forth by the
Court.46

However, despite the appellate court's conclusion that no tampering was committed, it held
Ultra solidarily liable with petitioner for P1,000,000.00, only because the former, as occupant
of the building, promised to settle the claims of the latter. This ruling is erroneous. Ultra's
promise was conditioned upon the finding of defect or tampering of the meters. It did not
acknowledge any culpability and liability, and absent any tampered meter, it is absurd to
make the lawful occupant liable. It was petitioner who received the P1 million; thus, it alone
should be held liable for the return of the amount.

TEC also sufficiently established its claim for the reimbursement of the amount paid as rentals
for the generator set it was constrained to rent by reason of the illegal disconnection of
electrical service. The official receipts and purchase orders submitted by TEC as evidence
sufficiently show that such rentals were indeed made. However, the amount of P150,000.00
per month for five months, awarded by the CA, is excessive. Instead, a total sum
of P150,000.00, as found by the RTC, is proper.

As to the payment of exemplary damages and attorney's fees, we find no cogent reason to
disturb the same. Exemplary damages are imposed by way of example or correction for the
public good in addition to moral, temperate, liquidated, or compensatory damages. 47 In this
case, to serve as an example – that before a disconnection of electrical supply can be
effected by a public utility, the requisites of law must be complied with – we affirm the award
of P200,000.00 as exemplary damages. With the award of exemplary damages, the award of
attorney's fees is likewise proper, pursuant to Article 2208 48 of the Civil Code. It is obvious
that TEC needed the services of a lawyer to argue its cause through three levels of the
judicial hierarchy. Thus, the award of P200,000.00 is in order.49

We, however, deem it proper to delete the award of moral damages. TEC's claim was
premised allegedly on the damage to its goodwill and reputation. 50 As a rule, a corporation is
not entitled to moral damages because, not being a natural person, it cannot experience
physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and
moral shock. The only exception to this rule is when the corporation has a reputation that is
debased, resulting in its humiliation in the business realm. 51 But in such a case, it is
imperative for the claimant to present proof to justify the award. It is essential to prove the
existence of the factual basis of the damage and its causal relation to petitioner's acts. 52 In
the present case, the records are bereft of any evidence that the name or reputation of
TEC/TPC has been debased as a result of petitioner's acts. Besides, the trial court simply
awarded moral damages in the dispositive portion of its decision without stating the basis
thereof.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 40282 dated June 18, 1997 and its Resolution dated December 3, 1997
are AFFIRMED with the following MODIFICATIONS: (1) the award of P150,000.00 per month
for five months as reimbursement for the rentals of the generator set
is REDUCEDto P150,000.00; and (2) the award of P500,000.00 as moral damages is
hereby DELETED.

SO ORDERED.
FOREIGN INVESTMENTS ACT

G.R. No. L-6776 May 21, 1955

THE REGISTER OF DEEDS OF RIZAL, petitioner-appellee,

vs.
UNG SIU SI TEMPLE, respondent-appellant.

REYES, J.B.L., J.:

The Register of Deeds for the province of Rizal refused to accept for record a deed of
donation executed in due form on January 22, 1953, by Jesus Dy, a Filipino citizen,
conveying a parcel of residential land, in Caloocan, Rizal, known as lot No. 2, block 48-D,
PSD-4212, G.L.R.O. Record No. 11267, in favor of the unregistered religious organization
"Ung Siu Si Temple", operating through three trustees all of Chinese nationality. The donation
was duly accepted by Yu Juan, of Chinese nationality, founder and deaconess of the Temple,
acting in representation and in behalf of the latter and its trustees.

The refusal of the Registrar was elevated en Consultato the IVth Branch of the Court of First
Instance of Manila. On March 14, 1953, the Court upheld the action of the Rizal Register of
Deeds, saying:

The question raised by the Register of Deeds in the above transcribed consulta is
whether a deed of donation of a parcel of land executed in favor of a religious
organization whose founder, trustees and administrator are Chinese citizens should
be registered or not.

It appearing from the record of the Consulta that UNG SIU SI TEMPLE is a religious
organization whose deaconess, founder, trustees and administrator are all Chinese
citizens, this Court is of the opinion and so hold that in view of the provisions of the
sections 1 and 5 of Article XIII of the Constitution of the Philippines limiting the
acquisition of land in the Philippines to its citizens, or to corporations or associations
at least sixty per centum of the capital stock of which is owned by such citizens
adopted after the enactment of said Act No. 271, and the decision of the Supreme
Court in the case of Krivenko vs. the Register of Deeds of Manila, the deed of
donation in question should not be admitted for admitted for registration. (Printed
Rec. App. pp 17-18).

Not satisfied with the ruling of the Court of First Instance, counsel for the donee Uy Siu Si
Temple has appealed to this Court, claiming: (1) that the acquisition of the land in question,
for religious purposes, is authorized and permitted by Act No. 271 of the old Philippine
Commission, providing as follows:

SECTION 1. It shall be lawful for all religious associations, of whatever sort or

denomination, whether incorporated in the Philippine Islands or in the name of other
country, or not incorporated at all, to hold land in the Philippine Islands upon which to
build churches, parsonages, or educational or charitable institutions.

SEC. 2. Such religious institutions, if not incorporated, shall hold the land in the name
of three Trustees for the use of such associations; . . .. (Printed Rec. App. p. 5.)

and (2) that the refusal of the Register of Deeds violates the freedom of religion clause of our
Constitution [Art. III, Sec. 1(7)].

We are of the opinion that the Court below has correctly held that in view of the absolute
terms of section 5, Title XIII, of the Constitution, the provisions of Act No. 271 of the old
Philippine Commission must be deemed repealed since the Constitution was enacted, in so
far as incompatible therewith. In providing that, —

Save in cases of hereditary succession, no private agricultural land shall be

transferred or assigned except to individuals, corporations or associations qualified to
acquire or hold lands of the public domain in the Philippines,

the Constitution makes no exception in favor of religious associations. Neither is there any
such saving found in sections 1 and 2 of Article XIII, restricting the acquisition of public
agricultural lands and other natural resources to "corporations or associations at least sixty
per centum of the capital of which is owned by such citizens" (of the Philippines).

The fact that the appellant religious organization has no capital stock does not suffice to
escape the Constitutional inhibition, since it is admitted that its members are of foreign
nationality. The purpose of the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to exploit natural
resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in
the absence of capital stock, the controlling membership should be composed of Filipino
citizens.

To permit religious associations controlled by non-Filipinos to acquire agricultural lands would

be to drive the opening wedge to revive alien religious land holdings in this country. We can
not ignore the historical fact that complaints against land holdings of that kind were among the
factors that sparked the revolution of 1896.

As to the complaint that the disqualification under article XIII is violative of the freedom of
religion guaranteed by Article III of the Constitution, we are by no means convinced (nor has it
been shown) that land tenure is indispensable to the free exercise and enjoyment of religious
profession or worship; or that one may not worship the Deity according to the dictates of his
own conscience unless upon land held in fee simple.
FOREIGN INVESTMENTS ACT

G.R. No. L-8451 December 20, 1957

THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO, INC., petitioner,

vs.
THE LAND REGISTRATION COMMISSION and THE REGISTER OF DEEDS OF DAVAO
CITY, respondents.

FELIX, J.:

This is a petition for mandamus filed by the Roman Catholic Apostolic Administrator of Davao
seeking the reversal of a resolution by the Land Registration Commissioner in L.R.C.
Consulta No. 14. The facts of the case are as follows:

On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of the City of Davao,
executed a deed of sale of a parcel of land located in the same city covered by Transfer
Certificate No. 2263, in favor of the Roman Catholic Apostolic Administrator of Davao Inc., s
corporation sole organized and existing in accordance with Philippine Laws, with Msgr. Clovis
Thibault, a Canadian citizen, as actual incumbent. When the deed of sale was presented to
Register of Deeds of Davao for registration, the latter.

having in mind a previous resolution of the Fourth Branch of the Court of First
Instance of Manila wherein the Carmelite Nuns of Davao were made to prepare an
affidavit to the effect that 60 per cent of the members of their corporation were Filipino
citizens when they sought to register in favor of their congregation of deed of
donation of a parcel of land—

required said corporation sole to submit a similar affidavit declaring that 60 per cent of the
members thereof were Filipino citizens.

The vendee in the letter dated June 28, 1954, expressed willingness to submit an affidavit,
both not in the same tenor as that made the Progress of the Carmelite Nuns because the two
cases were not similar, for whereas the congregation of the Carmelite Nuns had five
incorporators, the corporation sole has only one; that according to their articles of
incorporation, the organization of the Carmelite Nuns became the owner of properties
donated to it, whereas the case at bar, the totality of the Catholic population of Davao would
become the owner of the property bought to be registered.

As the Register of Deeds entertained some doubts as to the registerability if the document,
the matter was referred to the Land Registration Commissioner en consulta for resolution in
accordance with section 4 of Republic Act No. 1151. Proper hearing on the matter was
conducted by the Commissioner and after the petitioner corporation had filed its
memorandum, a resolution was rendered on September 21, 1954, holding that in view of the
provisions of Section 1 and 5 of Article XIII of the Philippine Constitution, the vendee was not
qualified to acquire private lands in the Philippines in the absence of proof that at least 60 per
centum of the capital, property, or assets of the Roman Catholic Apostolic Administrator of
Davao, Inc., was actually owned or controlled by Filipino citizens, there being no question that
the present incumbent of the corporation sole was a Canadian citizen. It was also the opinion
of the Land Registration Commissioner that section 159 of the corporation Law relied upon by
the vendee was rendered operative by the aforementioned provisions of the Constitution with
respect to real estate, unless the precise condition set therein — that at least 60 per cent of
its capital is owned by Filipino citizens — be present, and, therefore, ordered the Registered
Deeds of Davao to deny registration of the deed of sale in the absence of proof of compliance
with such condition.
After the motion to reconsider said resolution was denied, an action for mandamus was
instituted with this Court by said corporation sole, alleging that under the Corporation Law as
well as the settled jurisprudence on the matter, the deed of sale executed by Mateo L. Rodis
in favor of petitioner is actually a deed of sale in favor of the Catholic Church which is
qualified to acquire private agricultural lands for the establishment and maintenance of places
of worship, and prayed that judgment be rendered reserving and setting aside the resolution
of the Land Registration Commissioner in question. In its resolution of November 15, 1954,
this Court gave due course to this petition providing that the procedure prescribed for appeals
from the Public Service Commission of the Securities and Exchange Commissions (Rule 43),
be followed.

Section 5 of Article XIII of the Philippine Constitution reads as follows:

SEC. 5. Save in cases of hereditary succession, no private agricultural land shall be

transferred or assigned except to individuals, corporations, or associations qualified
to acquire or hold lands of the public domain in the Philippines.

Section 1 of the same Article also provides the following:

SECTION 1. All agricultural, timber, and mineral lands of the public domain, water, minerals,
coal, petroleum, and other mineral oils, all forces of potential energy, and other natural
resources of the Philippines belong to the State, and their disposition, exploitation,
development, or utilization shall be limited to cititzens of the Philippines, or to corporations or
associations at least sixty per centum of the capital of which is owned by such citizens,
SUBJECT TO ANY EXISTING RIGHT, grant, lease, or concession AT THE TIME OF THE
INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER CONSTITUTION.
Natural resources, with the exception of public agricultural land, shall not be alienated, and no
license, concession, or leases for the exploitation, development, or utilization of any of the
natural resources shall be granted for a period exceeding twenty-five years, renewable for
another twenty-five years, except as to water rights for irrigation, water supply, fisheries, or
industrial uses other than the development of water power, in which cases other than the
development and limit of the grant.

In virtue of the foregoing mandates of the Constitution, who are considered "qualified" to
acquire and hold agricultural lands in the Philippines? What is the effect of these
constitutional prohibition of the right of a religious corporation recognized by our Corporation
Law and registered as a corporation sole, to possess, acquire and register real estates in its
name when the Head, Manager, Administrator or actual incumbent is an alien?

Petitioner consistently maintained that a corporation sole, irrespective of the citizenship of its
incumbent, is not prohibited or disqualified to acquire and hold real properties. The
Corporation Law and the Canon Law are explicit in their provisions that a corporation sole or
"ordinary" is not the owner of the of the properties that he may acquire but merely the
administrator thereof. The Canon Law also specified that church temporalities are owned by
the Catholic Church as a "moral person" or by the diocess as minor "moral persons" with the
ordinary or bishop as administrator.

And elaborating on the composition of the Catholic Church in the Philippines, petitioner
explained that as a religious society or organization, it is made up of 2 elements or divisions
— the clergy or religious members and the faithful or lay members. The 1948 figures of the
Bureau of Census showed that there were 277,551 Catholics in Davao and aliens residing
therein numbered 3,465. Ever granting that all these foreigners are Catholics, petitioner
contends that Filipino citizens form more than 80 per cent of the entire Catholics population of
that area. As to its clergy and religious composition, counsel for petitioner presented the
Catholic Directory of the Philippines for 1954 (Annex A) which revealed that as of that year,
Filipino clergy and women novices comprise already 60.5 per cent of the group. It was,
therefore, allowed that the constitutional requirement was fully met and satisfied.
Respondents, on the other hand, averred that although it might be true that petitioner is not
the owner of the land purchased, yet he has control over the same, with full power to
administer, take possession of, alienate, transfer, encumber, sell or dispose of any or all lands
and their improvements registered in the name of the corporation sole and can collect,
receive, demand or sue for all money or values of any kind that may be kind that may become
due or owing to said corporation, and vested with authority to enter into agreements with any
persons, concerns or entities in connection with said real properties, or in other words,
actually exercising all rights of ownership over the properties. It was their stand that the theory
that properties registered in the name of the corporation sole are held in true for the benefit of
the Catholic population of a place, as of Davao in the case at bar should be sustained
because a conglomeration of persons cannot just be pointed out as the cestui que trust or
recipient of the benefits from the property allegedly administered in their behalf. Neither can it
be said that the mass of people referred to as such beneficiary exercise ant right of ownership
over the same. This set-up, respondents argued, falls short of a trust. The respondents
instead tried to prove that in reality, the beneficiary of ecclesiastical properties are not
members or faithful of the church but someone else, by quoting a portion a portion of the
ought of fidelity subscribed by a bishop upon his elevation to the episcopacy wherein he
promises to render to the Pontificial Father or his successors an account of his pastoral office
and of all things appertaining to the state of this church.

Respondents likewise advanced the opinion that in construing the constitutional provision
calling for 60 per cent of Filipino citizenship, the criterion of the properties or assets thereof.

In solving the problem thus submitted to our consideration, We can say the following: A
corporation sole is a special form of corporation usually associated with the clergy. Conceived
and introduced into the common law by sheer necessity, this legal creation which was
referred to as "that unhappy freak of English law" was designed to facilitate the exercise of
the functions of ownership carried on by the clerics for and on behalf of the church which was
regarded as the property owner (See I Couvier's Law Dictionary, p. 682-683).

A corporation sole consists of one person only, and his successors (who will always be one at
a time), in some particular station, who are incorporated by law in order to give them some
legal capacities and advantages, particularly that of perpetuity, which in their natural persons
they could not have had. In this sense, the king is a sole corporation; so is a bishop, or dens,
distinct from their several chapters (Reid vs. Barry, 93 Fla. 849, 112 So. 846).

The provisions of our Corporation law on religious corporations are illuminating and sustain
the stand of petitioner. Section 154 thereof provides:

SEC. 154. — For the administration of the temporalities of any religious

denomination, society or church and the management of the estates and the
properties thereof, it shall be lawful for the bishop, chief priest, or presiding either of
any such religious denomination, society or church to become a corporation sole,
unless inconsistent wit the rules, regulations or discipline of his religious
denomination, society or church or forbidden by competent authority thereof.

See also the pertinent provisions of the succeeding sections of the same Corporation Law
copied hereunder:

SEC. 155. In order to become a corporation sole the bishop, chief priest, or presiding
elder of any religious denomination, society or church must file with the Securities
and Exchange Commissioner articles of incorporation setting forth the following facts:

xxx xxx xxx.

(3) That as such bishop, chief priest, or presiding elder he is charged with the
administration of the temporalities and the management of the estates and properties
 of his religious denomination, society, or church within its territorial jurisdiction,
describing it;

xxx xxx xxx.

(As amended by Commonwealth Act No. 287).

SEC. 157. From and after the filing with the Securities and Exchange Commissioner
of the said articles of incorporation, which verified by affidavit or affirmation as
aforesaid and accompanied by the copy of the commission, certificate of election, or
letters of appointment of the bishop, chief priest, or presiding elder, duly certified as
prescribed in the section immediately preceding such the bishop, chief priest, or
presiding elder, as the case may be, shall become a corporation sole and all
temporalities, estates, and properties the religious denomination, society, or church
therefore administered or managed by him as such bishop, chief priest, or presiding
elder, shall be held in trust by him as a corporation sole, for the use, purpose, behalf,
and sole benefit of his religious denomination, society, or church, including hospitals,
schools, colleges, orphan, asylums, parsonages, and cemeteries thereof. For the
filing of such articles of incorporation, the Securities and Exchange Commissioner
shall collect twenty-five pesos. (As amended by Commonwealth Act. No. 287); and.

SEC. 163. The right to administer all temporalities and all property held or owned by a
religious order or society, or by the diocese, synod, or district organization of any
religious denomination or church shall, on its incorporation, pass to the corporation
and shall be held in trust for the use, purpose behalf, and benefit of the religious
society, or order so incorporated or of the church of which the diocese, or district
organization is an organized and constituent part.

The Cannon Law contains similar provisions regarding the duties of the corporation sole or
ordinary as administrator of the church properties, as follows:

Al Ordinario local pertenence vigilar diligentemente sobre la administracion de todos

los bienes eclesiasticos que se hallan en su territorio y no estuvieren sustraidos de
su jurisdiccion, salvs las prescriciones legitimas que le concedan mas aamplios
derechos.

Teniendo en cuenta los derechos y las legitimas costumbres y circunstancias,

procuraran los Ordinarios regular todo lo concerniente a la administracion de los
bienes eclesciasticos, dando las oportunas instucciones particularles dentro del
narco del derecho comun. (Title XXVIII, Codigo de Derecho Canonico, Lib. III, Canon
1519).1

That leaves no room for doubt that the bishops or archbishops, as the case may be, as
corporation's sole are merely administrators of the church properties that come to their
possession, in which they hold in trust for the church. It can also be said that while it is true
that church properties could be administered by a natural persons, problems regarding
succession to said properties can not be avoided to rise upon his death. Through this legal
fiction, however, church properties acquired by the incumbent of a corporation sole pass, by
operation of law, upon his death not his personal heirs but to his successor in office. It could
be seen, therefore, that a corporation sole is created not only to administer the temporalities
of the church or religious society where he belongs but also to hold and transmit the same to
his successor in said office. If the ownership or title to the properties do not pass to the
administrators, who are the owners of church properties?.

Bouscaren and Elis, S.J., authorities on cannon law, on their treatise comment:

In matters regarding property belonging to the Universal Church and to the Apostolic
See, the Supreme Pontiff exercises his office of supreme administrator through the
 Roman Curia; in matters regarding other church property, through the administrators
of the individual moral persons in the Church according to that norms, laid down in
the Code of Cannon Law. This does not mean, however, that the Roman Pontiff is the
owner of all the church property; but merely that he is the supreme
guardian (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p. 764).

and this Court, citing Campes y Pulido, Legislacion y Jurisprudencia Canonica, ruled in the
case of Trinidad vs. Roman Catholic Archbishop of Manila, 63 Phil. 881, that:

The second question to be decided is in whom the ownership of the properties

constituting the endowment of the ecclesiastical or collative chaplaincies is vested.

Canonists entertain different opinions as to the persons in whom the ownership of the
ecclesiastical properties is vested, with respect to which we shall, for our purpose,
confine ourselves to stating with Donoso that, while many doctors cited by Fagnano
believe that it resides in the Roman Pontiff as Head of the Universal Church, it is
more probable that ownership, strictly speaking, does not reside in the latter, and,
consequently, ecclesiastical properties are owned by the churches, institutions and
canonically established private corporations to which said properties have been
donated.

Considering that nowhere can We find any provision conferring ownership of church
properties on the Pope although he appears to be the supreme administrator or guardian of
his flock, nor on the corporation sole or heads of dioceses as they are admittedly
mere administrators of said properties, ownership of these temporalities logically fall and
develop upon the church, diocese or congregation acquiring the same. Although this question
of ownership of ecclesiastical properties has off and on been mentioned in several decisions
of the Court yet in no instance was the subject of citizenship of this religious society been
passed upon.

We are not unaware of the opinion expressed by the late Justice Perfecto in his dissent in the
case of Agustines vs. Court of First Instance of Bulacan, 80 Phil. 565, to the effect that "the
Roman Catholic Archbishop of Manila is only a branch of a universal church by the Pope, with
permanent residence in Rome, Italy". There is no question that the Roman Catholic Church
existing in the Philippines is a tributary and part of the international religious organization, for
the word "Roman" clearly expresses its unity with and recognizes the authority of the Pope in
Rome. However, lest We become hasty in drawing conclusions, We have to analyze and take
note of the nature of the government established in the Vatican City, of which it was said:

GOVERNMENT. In the Roman Catholic Church supreme authority and jurisdiction

over clergy and laity alike as held by the pope who (since the Middle Ages) is elected
by the cardinals assembled in conclave, and holds office until his death or legitimate
abdication. . . While the pope is obviously independent of the laws made, and the
officials appointed, by himself or his predecessors, he usually exercises his
administrative authority according to the code of canon law and through the
congregations, tribunals and offices of the Curia Romana. In their respective
territories (called generally dioceses) and over their respective subjects, the
patriarchs, metropolitans or archbishops and bishops exercise a jurisdiction which is
called ordinary (as attached by law to an office given to a person. . . (Collier's
Encyclopedia, Vol. 17, p. 93).

While it is true and We have to concede that in the profession of their faith, the Roman Pontiff
is the supreme head; that in the religious matters, in the exercise of their belief, the Catholic
congregation of the faithful throughout the world seeks the guidance and direction of their
Spiritual Father in the Vatican, yet it cannot be said that there is a merger of personalities
resultant therein. Neither can it be said that the political and civil rights of the faithful, inherent
or acquired under the laws of their country, are affected by that relationship with the Pope.
The fact that the Roman Catholic Church in almost every country springs from that society
that saw its beginning in Europe and the fact that the clergy of this faith derive their authorities
and receive orders from the Holy See do not give or bestow the citizenship of the Pope upon
these branches. Citizenship is a political right which cannot be acquired by a sort of
"radiation". We have to realize that although there is a fraternity among all the catholic
countries and the dioceses therein all over the globe, the universality that the word "catholic"
implies, merely characterize their faith, a uniformity in the practice and the interpretation of
their dogma and in the exercise of their belief, but certainly they are separate and
independent from one another in jurisdiction, governed by different laws under which they are
incorporated, and entirely independent on the others in the management and ownership of
their temporalities. To allow theory that the Roman Catholic Churches all over the world follow
the citizenship of their Supreme Head, the Pontifical Father, would lead to the absurdity of
finding the citizens of a country who embrace the Catholic faith and become members of that
religious society, likewise citizens of the Vatican or of Italy. And this is more so if We consider
that the Pope himself may be an Italian or national of any other country of the world. The
same thing be said with regard to the nationality or citizenship of the corporation sole created
under the laws of the Philippines, which is not altered by the change of citizenship of the
incumbent bishops or head of said corporation sole.

We must therefore, declare that although a branch of the Universal Roman Catholic Apostolic
Church, every Roman Catholic Church in different countries, if it exercises its mission and is
lawfully incorporated in accordance with the laws of the country where it is located, is
considered an entity or person with all the rights and privileges granted to such artificial being
under the laws of that country, separate and distinct from the personality of the Roman Pontiff
or the Holy See, without prejudice to its religious relations with the latter which are governed
by the Canon Law or their rules and regulations.

We certainly are conscious of the fact that whatever conclusion We may draw on this matter
will have a far reaching influence, nor can We overlook the pages of history that arouse
indignation and criticisms against church landholdings. This nurtured feeling that snowbailed
into a strong nationalistic sentiment manifested itself when the provisions on natural to be
embodied in the Philippine Constitution were framed, but all that has been said on this regard
referred more particularly to landholdings of religious corporations known as "Friar Estates"
which have already bee acquired by our government, and not to properties held by
corporations sole which, We repeat, are properties held in trust for the benefit of the faithful
residing within its territorial jurisdiction. Though that same feeling probably precipitated and
influenced to a large extent the doctrine laid down in the celebrated Krivenco decision, We
have to take this matter in the light of legal provisions and jurisprudence actually obtaining,
irrespective of sentiments.

The question now left for our determination is whether the Universal Roman Catholic
Apostolic Church in the Philippines, or better still, the corporation sole named the Roman
Catholic Apostolic Administrator of Davao, Inc., is qualified to acquire private agricultural
lands in the Philippines pursuant to the provisions of Article XIII of the Constitution.

We see from sections 1 and 5 of said Article quoted before, that only persons or corporations
qualified to acquire hold lands of the public domain in the Philippines may acquire or be
assigned and hold private agricultural lands. Consequently, the decisive factor in the present
controversy hinges on the proposition or whether or not the petitioner in this case can acquire
agricultural lands of the public domain.

From the data secured from the Securities and Exchange Commission, We find that the
Roman Catholic Bishop of Zamboanga was incorporated (as a corporation sole)
in September, 1912, principally to administer its temporalities and manage its properties.
Probably due to the ravages of the last war, its articles of incorporation were reconstructed in
the Securities and Exchange Commission on April 8, 1948. At first, this corporation sole
administered all the temporalities of the church existing or located in the island of Mindanao.
Later on, however, new dioceses were formed and new corporations sole were created to
correspond with the territorial jurisdiction of the new dioceses, one of them being petitioner
herein, the Roman Catholic Apostolic Administrator of Davao, Inc., which was registered with
the Securities and Exchange Commission on September 12, 1950, and succeeded in the
administrative for all the "temporalities" of the Roman Catholic Church existing in Davao.

According to our Corporation Law, Public Act No. 1549, approved April 1, 1906, a corporation
sole.

is organized and composed of a single individual, the head of any religious society or
church, for the ADMINISTRATION of the temporalities of such society or church. By
"temporalities" is meant estate and properties not used exclusively for religious
worship. The successor in office of such religious head or chief priest incorporated as
a corporation sole shall become the corporation sole on ascension to office, and shall
be permitted to transact business as such on filing with the Securities and Exchange
Commission a copy of his commission, certificate of election or letter of appointment
duly certified by any notary public or clerk of court of record (Guevara's The
Philippine Corporation Law, p. 223).

The Corporation Law also contains the following provisions:

SECTION 159. Any corporation sole may purchase and hold real estate and
personal; property for its church, charitable, benevolent, or educational purposes, and
may receive bequests or gifts of such purposes. Such corporation may mortgage or
sell real property held by it upon obtaining an order for that purpose from the Court of
First Instance of the province in which the property is situated; but before making the
order proof must be made to the satisfaction of the Court that notice of the application
for leave to mortgage or sell has been given by publication or otherwise in such
manner and for such time as said Court or the Judge thereof may have directed, and
that it is to the interest of the corporation that leave to mortgage or sell must be made
by petition, duly verified by the bishop, chief priest, or presiding elder acting as
corporation sole, and may be opposed by any member of the religious denomination,
society or church represented by the corporation sole: Provided, however, That in
cases where the rules, regulations, and discipline of the religious denomination,
society or church concerned represented by such corporation sole regulate the
methods of acquiring, holding, selling and mortgaging real estate and personal
property, such rules, regulations, and discipline shall control and the intervention of
the Courts shall not be necessary.

It can, therefore, be noticed that the power of a corporation sole to purchase real property,
like the power exercised in the case at bar, it is not restricted although the power to sell or
mortgage sometimes is, depending upon the rules, regulations, and discipline of the church
concerned represented by said corporation sole. If corporations sole can purchase and sell
real estate for its church, charitable, benevolent, or educational purposes, can they register
said real properties? As provided by law, lands held in trust for specific purposes me be
subject of registration (section 69, Act 496), and the capacity of a corporation sole, like
petitioner herein, to register lands belonging to it is acknowledged, and title thereto may be
issued in its name (Bishop of Nueva Segovia vs. Insular Government, 26 Phil. 300-1913).
Indeed it is absurd that while the corporations sole that might be in need of acquiring lands for
the erection of temples where the faithful can pray, or schools and cemeteries which they are
expressly authorized by law to acquire in connection with the propagation of the Roman
Catholic Apostolic faith or in furtherance of their freedom of religion they could not register
said properties in their name. As professor Javier J. Nepomuceno very well says "Man in his
search for the immortal and imponderable, has, even before the dawn of recorded history,
erected temples to the Unknown God, and there is no doubt that he will continue to do so for
all time to come, as long as he continues 'imploring the aid of Divine Providence'"
(Nepomuceno's Corporation Sole, VI Ateneo Law Journal, No. 1, p. 41, September, 1956).
Under the circumstances of this case, We might safely state that even before the
establishment of the Philippine Commonwealth and of the Republic of the Philippines every
corporation sole then organized and registered had by express provision of law the
necessary power and qualification to purchase in its name private lands located in the territory
in which it exercised its functions or ministry and for which it was created, independently of
the nationality of its incumbent unique and single member and head, the bishop of the
dioceses. It can be also maintained without fear of being gainsaid that the Roman Catholic
Apostolic Church in the Philippines has no nationality and that the framers of the Constitution,
as will be hereunder explained, did not have in mind the religious corporations sole when they
provided that 60 per centum of the capital thereof be owned by Filipino citizens.

There could be no controversy as to the fact that a duly registered corporation sole is an
artificial being having the right of succession and the power, attributes, and properties
expressly authorized by law or incident to its existence (section 1, Corporation Law). In
outlining the general powers of a corporation. Public Act. No. 1459 provides among others:

SEC. 13. Every corporation has the power:

(5) To purchase, hold, convey, sell, lease, lot, mortgage, encumber, and otherwise
deal with such real and personal property as the purpose for which the corporation
was formed may permit, and the transaction of the lawful business of the corporation
may reasonably and necessarily require, unless otherwise prescribed in this Act: . . .

In implementation of the same and specially made applicable to a form of corporation

recognized by the same law, Section 159 aforequoted expressly allowed the corporation sole
to purchase and hold real as well as personal properties necessary for the promotion of the
objects for which said corporation sole is created. Respondent Land Registration
Commissioner, however, maintained that since the Philippine Constitution is a later
enactment than public Act No. 1459, the provisions of Section 159 in amplification of Section
13 thereof, as regard real properties, should be considered repealed by the former.

There is a reason to believe that when the specific provision of the Constitution invoked by
respondent Commissioner was under consideration, the framers of the same did not have in
mind or overlooked this particular form of corporation. It is undeniable that the naturalization
and conservation of our national resources was one of the dominating objectives of the
Convention and in drafting the present Article XII of the Constitution, the delegates were
goaded by the desire (1) to insure their conservation for Filipino posterity; (2) to serve as an
instrument of national defense, helping prevent the extension into the country of foreign
control through peaceful economic penetration; and (3) to prevent making the Philippines a
source of international conflicts with the consequent danger to its internal security and
independence (See The Framing of the Philippine Constitution by Professor Jose M. Aruego,
a Delegate to the Constitutional Convention, Vol. II. P. 592-604). In the same book Delegate
Aruego, explaining the reason behind the first consideration, wrote:

At the time of the framing of Philippine Constitution, Filipino capital had been to be
rather shy. Filipinos hesitated s a general rule to invest a considerable sum of their
capital for the development, exploitation and utilization of the natural resources of the
country. They had not as yet been so used to corporate as the peoples of the west.
This general apathy, the delegates knew, would mean the retardation of the
development of the natural resources, unless foreign capital would be encouraged to
come and help in that development. They knew that the naturalization of the natural
resources would certainly not encourage the INVESTMENT OF FOREIGN CAPITAL
into them. But there was a general feeling in the Convention that it was better to have
such a development retarded or even postpone together until such time when the
Filipinos would be ready and willing to undertake it rather than permit the natural
resources to be placed under the ownership or control of foreigners in order that they
might be immediately be developed, with the Filipinos of the future serving not as
owners but utmost as tenants or workers under foreign masters. By all means, the
delegates believed, the natural resources should be conserved for Filipino posterity.

It could be distilled from the foregoing that the farmers of the Constitution intended said
provisions as barrier for foreigners or corporations financed by such foreigners to acquire,
exploit and develop our natural resources, saving these undeveloped wealth for our people to
clear and enrich when they are already prepared and capable of doing so. But that is not the
case of corporations sole in the Philippines, for, We repeat, they are mere administrators of
the "temporalities" or properties titled in their name and for the benefit of the members of their
respective religion composed of an overwhelming majority of Filipinos. No mention nor
allusion whatsoever is made in the Constitution as to the prohibition against or the liability of
the Roman Catholic Church in the Philippines to acquire and hold agricultural lands. Although
there were some discussions on landholdings, they were mostly confined in the inclusion of
the provision allowing the Government to break big landed estates to put an end to absentee
landlordism.

But let us suppose, for the sake of argument, that the above referred to inhibitory clause of
Section 1 of Article XIII of the constitution does have bearing on the petitioner's case; even so
the clause requiring that at least 60 per centum of the capital of the corporation be owned by
Filipinos is subordinated to the petitioner's aforesaid right already existing at the time of the
inauguration of the Commonwealth and the Republic of the Philippines. In the language of Mr.
Justice Jose P. Laurel (a delegate to the Constitutional Convention), in his concurring opinion
of the case of Gold Creek mining Corporation, petitioner vs. Eulogio Rodriguez, Secretary of
Agriculture and Commerce, and Quirico Abadilla, Director of the Bureau of Mines,
respondent, 66 Phil. 259:

The saving clause in the section involved of the Constitution was originally embodied
in the report submitted by the Committee on Naturalization and Preservation of Land
and Other Natural Resources to the Constitutional Convention on September 17,
1954. It was later inserted in the first draft of the Constitution as section 13 of Article
XIII thereof, and finally incorporated as we find it now. Slight have been the changes
undergone by the proviso from the time when it comes out of the committee until it
was finally adopted. When first submitted and as inserted to the first draft of the
Constitution it reads: 'subject to any right, grant, lease, or concession existing in
respect thereto on the date of the adoption of the Constitution'. As finally adopted, the
proviso reads: 'subject to any existing right, grant, lease, or concession at the time of
the inauguration of the Government established under this Constitution'. This
recognition is not mere graciousness but springs form the just character of the
government established. The framers of the Constitution were not obscured by the
rhetoric of democracy or swayed to hostility by an intense spirit of nationalism. They
well knew that conservation of our natural resources did not mean destruction or
annihilation of acquired property rights. Withal, they erected a government neither
episodic nor stationary but well-nigh conservative in the protection of property rights.
This notwithstanding nationalistic and socialistic traits discoverable upon even a
sudden dip into a variety of the provisions embodied in the instrument.

The writer of this decision wishes to state at this juncture that during the deliberation of this
case he submitted to the consideration of the Court the question that may be termed the
"vested right saving clause" contained in Section 1, Article XII of the Constitution, but some of
the members of this Court either did not agree with the theory of the writer, or were not ready
to take a definite stand on the particular point I am now to discuss deferring our ruling on such
debatable question for a better occasion, inasmuch as the determination thereof is not
absolutely necessary for the solution of the problem involved in this case. In his desire to face
the issues squarely, the writer will endeavor, at least as a disgression, to explain and develop
his theory, not as a lucubration of the Court, but of his own, for he deems it better and
convenient to go over the cycle of reasons that are linked to one another and that step by
step lead Us to conclude as We do in the dispositive part of this decision.

It will be noticed that Section 1 of Article XIII of the Constitution provides, among other things,
that "all agricultural lands of the public domain and their disposition shall be limited to citizens
of the Philippines or to corporations at least 60 per centum of the capital of which is owned by
such citizens, SUBJECT TO ANY EXISTING RIGHT AT THE TIME OF THE
INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER THIS CONSTITUTION."

As recounted by Mr. Justice Laurel in the aforementioned case of Gold Creek Mining
Corporation vs. Rodriguez et al., 66 Phil. 259, "this recognition (in the clause already quoted),
is not mere graciousness but springs from the just character of the government established.
The farmers of the Constitution were not obscured by the rhetoric of democracy or swayed to
hostility by an intense spirit of nationalism. They well knew that conservation of our natural
resources did not mean destruction or annihilation of ACQUIRED PROPERTY RIGHTS".

But respondents' counsel may argue that the preexisting right of acquisition of public or
private lands by a corporation which does not fulfill this 60 per cent requisite, refers to
purchases of the Constitution and not to later transactions. This argument would imply that
even assuming that petitioner had at the time of the enactment of the Constitution the right to
purchase real property or right could not be exercised after the effectivity of our Constitution,
because said power or right of corporations sole, like the herein petitioner, conferred in virtue
of the aforequoted provisions of the Corporation Law, could no longer be exercised in view of
the requisite therein prescribed that at least 60 per centum of the capital of the corporation
had to be Filipino. It has been shown before that: (1) the corporation sole, unlike the ordinary
corporations which are formed by no less than 5 incorporators, is composed of only one
persons, usually the head or bishop of the diocese, a unit which is not subject to expansion
for the purpose of determining any percentage whatsoever; (2) the corporation sole is only
the administrator and not the owner of the temporalities located in the territory comprised by
said corporation sole; (3) such temporalities are administered for and on behalf of the faithful
residing in the diocese or territory of the corporation sole; and (4) the latter, as such, has no
nationality and the citizenship of the incumbent Ordinary has nothing to do with the operation,
management or administration of the corporation sole, nor effects the citizenship of the faithful
connected with their respective dioceses or corporation sole.

In view of these peculiarities of the corporation sole, it would seem obvious that when the
specific provision of the Constitution invoked by respondent Commissioner (section 1, Art.
XIII), was under consideration, the framers of the same did not have in mind or overlooked
this particular form of corporation. If this were so, as the facts and circumstances already
indicated tend to prove it to be so, then the inescapable conclusion would be that this
requirement of at least 60 per cent of Filipino capital was never intended to apply to
corporations sole, and the existence or not a vested right becomes unquestionably
immaterial.

But let us assumed that the questioned proviso is material. yet We might say that a reading of
said Section 1 will show that it does not refer to any actual acquisition of land up to the right,
qualification or power to acquire and hold private real property. The population of the
Philippines, Catholic to a high percentage, is ever increasing. In the practice of religion of their
faithful the corporation sole may be in need of more temples where to pray, more schools
where the children of the congregation could be taught in the principles of their religion, more
hospitals where their sick could be treated, more hallow or consecrated grounds or
cemeteries where Catholics could be buried, many more than those actually existing at the
time of the enactment of our Constitution. This being the case, could it be logically maintained
that because the corporation sole which, by express provision of law, has the power to hold
and acquire real estate and personal property of its churches, charitable benevolent, or
educational purposes (section 159, Corporation Law) it has to stop its growth and restrain its
necessities just because the corporation sole is a non-stock corporation composed of only
one person who in his unity does not admit of any percentage, especially when that person is
not the owner but merely an administrator of the temporalities of the corporation sole? The
writer leaves the answer to whoever may read and consider this portion of the decision.

Anyway, as stated before, this question is not a decisive factor in disposing the case, for even
if We were to disregard such saving clause of the Constitution, which reads: subject to any
existing right, grant, etc., at the same time of the inauguration of the Government established
under this Constitution, yet We would have, under the evidence on record, sufficient grounds
to uphold petitioner's contention on this matter.

In this case of the Register of Deeds of Rizal vs. Ung Sui Si Temple, 2 G.R. No. L-6776,
promulgated May 21, 1955, wherein this question was considered from a different angle, this
Court through Mr. Justice J.B.L. Reyes, said:
 The fact that the appellant religious organization has no capital stock does not suffice
to escape the Constitutional inhibition, since it is admitted that its members are of
foreign nationality. The purpose of the sixty per centum requirement is obviously to
ensure that corporation or associations allowed to acquire agricultural land or to
exploit natural resources shall be controlled by Filipinos; and the spirit of the
Constitution demands that in the absence of capital stock, the controlling membership
should be composed of Filipino citizens.

In that case respondent-appellant Ung Siu Si Temple was not a corporation sole but a
corporation aggregate, i.e., an unregistered organization operating through 3 trustees, all of
Chinese nationality, and that is why this Court laid down the doctrine just quoted. With regard
to petitioner, which likewise is a non-stock corporation, the case is different, because it is a
registered corporation sole, evidently of no nationality and registered mainly to administer the
temporalities and manage the properties belonging to the faithful of said church residing in
Davao. But even if we were to go over the record to inquire into the composing membership
to determine whether the citizenship requirement is satisfied or not, we would find undeniable
proof that the members of the Roman Catholic Apostolic faith within the territory of Davao are
predominantly Filipino citizens. As indicated before, petitioner has presented evidence to
establish that the clergy and lay members of this religion fully covers the percentage of
Filipino citizens required by the Constitution. These facts are not controverted by respondents
and our conclusion in this point is sensibly obvious.

Dissenting Opinion—Discussed. — After having developed our theory in the case and arrived
at the findings and conclusions already expressed in this decision. We now deem it proper to
analyze and delve into the basic foundation on which the dissenting opinion stands up. Being
aware of the transcendental and far-reaching effects that Our ruling on the matter might have,
this case was thoroughly considered from all points of view, the Court sparing no effort to
solve the delicate problems involved herein.

At the deliberations had to attain this end, two ways were open to a prompt dispatch of the
case: (1) the reversal of the doctrine We laid down in the celebrated Krivenko case by
excluding urban lots and properties from the group of the term "private agricultural lands" use
in this section 5, Article XIII of the Constitution; and (2) by driving Our reasons to a point that
might indirectly cause the appointment of Filipino bishops or Ordinary to head the
corporations sole created to administer the temporalities of the Roman Catholic Church in the
Philippines. With regard to the first way, a great majority of the members of this Court were
not yet prepared nor agreeable to follow that course, for reasons that are obvious. As to the
second way, it seems to be misleading because the nationality of the head of a diocese
constituted as a corporation sole has no material bearing on the functions of the latter, which
are limited to the administration of the temporalities of the Roman Catholic Apostolic Church
in the Philippines.

Upon going over the grounds on which the dissenting opinion is based, it may be noticed that
its author lingered on the outskirts of the issues, thus throwing the main points in controversy
out of focus. Of course We fully agree, as stated by Professor Aruego, that the framers of our
Constitution had at heart to insure the conservation of the natural resources of Our
motherland of Filipino posterity; to serve them as an instrument of national defense, helping
prevent the extension into the country of foreign control through peaceful economic
penetration; and to prevent making the Philippines a source of international conflicts with the
consequent danger to its internal security and independence. But all these precautions
adopted by the Delegates to Our Constitutional Assembly could have not been intended for or
directed against cases like the one at bar. The emphasis and wonderings on the statement
that once the capacity of a corporation sole to acquire private agricultural lands is admitted
there will be no limit to the areas that it may hold and that this will pave the way for the
"revival or revitalization of religious landholdings that proved so troublesome in our past",
cannot even furnish the "penumbra" of a threat to the future of the Filipino people. In the first
place, the right of Filipino citizens, including those of foreign extraction, and Philippine
corporations, to acquire private lands is not subject to any restriction or limit as to quantity or
area, and We certainly do not see any wrong in that. The right of Filipino citizens and
corporations to acquire public agricultural lands is already limited by law. In the second place,
corporations sole cannot be considered as aliens because they have no nationality at all.
Corporations sole are, under the law, mere administrators of the temporalities of the Roman
Catholic Church in the Philippines. In the third place, every corporation, be it aggregate or
sole, is only entitled to purchase, convey, sell, lease, let, mortgage, encumber and otherwise
deal with real properties when it is pursuant to or in consonance with the purposes for which
the corporation was formed, and when the transactions of the lawful business of the
corporation reasonably and necessarily require such dealing — section 13-(5) of the
Corporation Law, Public Act No. 1459 — and considering these provisions in conjunction with
Section 159 of the same law which provides that a corporation sole may only "purchase and
hold real estate and personal properties for its church, charitable, benevolent or educational
purposes", the above mentioned fear of revitalization of religious landholdings in the
Philippines is absolutely dispelled. The fact that the law thus expressly authorizes the
corporations sole to receive bequests or gifts of real properties (which were the main source
that the friars had to acquire their big haciendas during the Spanish regime), is a clear
indication that the requisite that bequests or gifts of real estate be for charitable, benevolent,
or educational purposes, was, in the opinion of the legislators, considered sufficient and
adequate protection against the revitalization of religious landholdings.

Finally, and as previously stated, We have reason to believe that when the Delegates to the
Constitutional Convention drafted and approved Article XIII of the Constitution they do not
have in mind the corporation sole. We come to this finding because the Constitutional
Assembly, composed as it was by a great number of eminent lawyers and jurists, was like any
other legislative body empowered to enact either the Constitution of the country or any public
statute, presumed to know the conditions existing as to particular subject matter when it
enacted a statute (Board of Commerce of Orange Country vs. Bain, 92 S.E. 176; N. C. 377).

Immemorial customs are presumed to have been always in the mind of the
Legislature in enacting legislation. (In re Kruger's Estate, 121 A. 109; 277 P. 326).

The Legislative is presumed to have a knowledge of the state of the law on the
subjects upon which it legislates. (Clover Valley Land and Stock Co. vs. Lamb et al.,
187, p. 723,726.)

The Court in construing a statute, will assume that the legislature acted with full
knowledge of the prior legislation on the subject and its construction by the courts.
(Johns vs. Town of Sheridan, 89 N. E. 899, 44 Ind. App. 620.).

The Legislature is presumed to have been familiar with the subject with which it was
dealing . . . . (Landers vs. Commonwealth, 101 S. E. 778, 781.).

The Legislature is presumed to know principles of statutory construction. (People vs.

Lowell, 230 N. W. 202, 250 Mich. 349, followed in P. vs. Woodworth, 230 N.W. 211,
250 Mich. 436.).

It is not to be presumed that a provision was inserted in a constitution or statute

without reason, or that a result was intended inconsistent with the judgment of men of
common sense guided by reason" (Mitchell vs. Lawden, 123 N.E. 566, 288 Ill. 326.)
See City of Decatur vs. German, 142 N. E. 252, 310 Ill. 591, and may other
authorities that can be cited in support hereof.

Consequently, the Constitutional Assembly must have known:

1. That a corporation sole is organized by and composed of a single individual, the

head of any religious society or church operating within the zone, area or jurisdiction
covered by said corporation sole (Article 155, Public Act No. 1459);

2. That a corporation sole is a non-stock corporation;

 3. That the Ordinary ( the corporation sole proper) does not own the temporalities
which he merely administers;

4. That under the law the nationality of said Ordinary or of any administrator has
absolutely no bearing on the nationality of the person desiring to acquire real property
in the Philippines by purchase or other lawful means other than by hereditary
succession, who according to the Constitution must be a Filipino (sections 1 and 5,
Article XIII).

5. That section 159 of the Corporation Law expressly authorized the corporation
sole to purchase and holdreal estate for its church, charitable, benevolent or
educational purposes, and to receive bequests or gifts for such purposes;

6. That in approving our Magna Carta the Delegates to the Constitutional Convention,
almost all of whom were Roman Catholics, could not have intended to curtail the
propagation of the Roman Catholic faith or the expansion of the activities of their
church, knowing pretty well that with the growth of our population more places of
worship, more schools where our youth could be taught and trained; more hallow
grounds where to bury our dead would be needed in the course of time.

Long before the enactment of our Constitution the law authorized the corporations sole even
to receive bequests or gifts of real estates and this Court could not, without any clear and
specific provision of the Constitution, declare that any real property donated, let as say this
year, could no longer be registered in the name of the corporation sole to which it was
conveyed. That would be an absurdity that should not receive our sanction on the pretext that
corporations sole which have no nationality and are non-stock corporations composed of only
one person in the capacity of administrator, have to establish first that at least sixty per
centum of their capital belong to Filipino citizens. The new Civil Code even provides:

ART. 10. — In case of doubt in the interpretation or application of laws, it is presumed

that the lawmaking body intended right and justice to prevail.

Moreover, under the laws of the Philippines, the administrator of the properties of a Filipino
can acquire, in the name of the latter, private lands without any limitation whatsoever, and
that is so because the properties thus acquired are not for and would not belong to the
administrator but to the Filipino whom he represents. But the dissenting Justice inquires: If the
Ordinary is only the administrator, for whom does he administer? And who can alter or
overrule his acts? We will forthwith proceed to answer these questions. The corporations sole
by reason of their peculiar constitution and form of operation have no designed owner of its
temporalities, although by the terms of the law it can be safely implied that the Ordinary holds
them in trust for the benefit of the Roman Catholic faithful to their respective locality or
diocese. Borrowing the very words of the law, We may say that the temporalities of every
corporation sole are held in trust for the use, purpose, behalf and benefit of the religious
society, or order so incorporated or of the church to which the diocese, synod, or district
organization is an organized and constituent part (section 163 of the Corporation Law).

In connection with the powers of the Ordinary over the temporalities of the corporation sole,
let us see now what is the meaning and scope of the word "control". According to the
Merriam-Webster's New International Dictionary, 2nd ed., p. 580, on of the acceptations of
the word "control" is:

4. To exercise restraining or directing influence over; to dominate; regulate; hence, to

hold from action; to curb; subject; also, Obs. — to overpower.

SYN: restrain, rule, govern, guide, direct; check, subdue.

It is true that under section 159 of the Corporation Law, the intervention of the courts is not
necessary, to mortgageor sell real property held by the corporation sole where the rules,
regulations and discipline of the religious denomination, society or church concerned
presented by such corporation sole regulates the methods of acquiring, holding, selling and
mortgaging real estate, and that the Roman Catholic faithful residing in the jurisdiction of the
corporation sole has no say either in the manner of acquiring or of selling real property. It may
be also admitted that the faithful of the diocese cannot govern or overrule the acts of the
Ordinary, but all this does not mean that the latter can administer the temporalities of the
corporation sole without check or restraint. We must not forget that when a corporation sole is
incorporated under Philippine laws, the head and only member thereof subjects himself to the
jurisdiction of the Philippine courts of justice and these tribunals can thus entertain grievances
arising out of or with respect to the temporalities of the church which came into the
possession of the corporation sole as administrator. It may be alleged that the courts cannot
intervene as to the matters of doctrine or teachings of the Roman Catholic Church. That is
correct, but the courts may step in, at the instance of the faithful for whom the temporalities
are being held in trust, to check undue exercise by the corporation sole of its power as
administrator to insure that they are used for the purpose or purposes for which the
corporation sole was created.

American authorities have these to say:

It has been held that the courts have jurisdiction over an action brought by persons
claiming to be members of a church, who allege a wrongful and fraudulent diversion
of the church property to uses foreign to the purposes of the church, since no
ecclesiastical question is involved and equity will protect from wrongful diversion of
the property (Hendryx vs. Peoples United Church, 42 Wash. 336, 4 L.R.A. — n.s. —
1154).

The courts of the State have no general jurisdiction and control over the officers of
such corporations in respect to the performance of their official duties; but as in
respect to the property which they hold for the corporation, they stand in position of
TRUSTEES and the courts may exercise the same supervision as in other cases of
trust (Ramsey vs. Hicks, 174 Ind. 428, 91 N.E. 344, 92 N.E. 164, 30 L.R.A. — n.s. —
665; Hendryx vs. Peoples United Church, supra.).

Courts of the state do not interfere with the administration of church rules or discipline
unless civil rights become involved and which must be protected (Morris St., Baptist
Church vs. Dart, 67 S.C. 338, 45 S.E. 753, and others). (All cited in Vol. II, Cooley's
Constitutional Limitations, p. 960-964.).

If the Constitutional Assembly was aware of all the facts above enumerated and of the
provisions of law relative to existing conditions as to management and operation of
corporations sole in the Philippines, and if, on the other hand, almost all of the Delegates
thereto embraced the Roman Catholic faith, can it be imagined even for an instant that when
Article XIII of the Constitution was approved the framers thereof intended to prevent or curtail
from then on the acquisition sole, either by purchase or donation, of real properties that they
might need for the propagation of the faith and for there religious and Christian activities such
as the moral education of the youth, the care, attention and treatment of the sick and the
burial of the dead of the Roman Catholic faithful residing in the jurisdiction of the respective
corporations sole? The mere indulgence in said thought would impress upon Us a feeling of
apprehension and absurdity. And that is precisely the leit motiv that permeates the whole
fabric of the dissenting opinion.

It seems from the foregoing that the main problem We are confronted with in this appeal,
hinges around the necessity of a proper and adequate interpretation of sections 1 and 5 of
Article XIII of the Constitution. Let Us then be guided by the principles of statutory
construction laid down by the authorities on the matter:

The most important single factor in determining the intention of the people from whom
the constitution emanated is the language in which it is expressed. The words
employed are to be taken in their natural sense, except that legal or technical terms
 are to be given their technical meaning. The imperfections of language as a vehicle
for conveying meanings result in ambiguities that must be resolved by result to
extraneous aids for discovering the intent of the framers. Among the more important
of these are a consideration of the history of the times when the provision was
adopted and of the purposes aimed at in its adoption. The debates of constitutional
convention, contemporaneous construction, and practical construction by the
legislative and executive departments, especially if long continued, may be resorted
to resolve, but not to create, ambiguities. . . . Consideration of the consequences
flowing from alternative constructions of doubtful provisions constitutes an important
interpretative device. . . . The purposes of many of the broadly phrased constitutional
limitations were the promotion of policies that do not lend themselves to definite and
specific formulation. The courts have had to define those policies and have often
drawn on natural law and natural rights theories in doing so. The interpretation of
constitutions tends to respond to changing conceptions of political and social values.
The extent to which these extraneous aids affect the judicial construction of
constitutions cannot be formulated in precise rules, but their influence cannot be
ignored in describing the essentials of the process (Rottschaeffer on Constitutional
Law, 1939 ed., p. 18-19).

There are times that when even the literal expression of legislation may be
inconsistent with the general objectives of policy behind it, and on the basis of equity
or spirit of the statute the courts rationalize a restricted meaning of the latter. A
restricted interpretation is usually applied where the effect of literal interpretation will
make for injustice and absurdity or, in the words of one court, the language must be
so unreasonable 'as to shock general common sense'. (Vol. 3, Sutherland on
Statutory Construction, 3rd ed., 150.).

A constitution is not intended to be a limitation on the development of a country nor

an obstruction to its progress and foreign relations (Moscow Fire Ins. Co. of Moscow,
Russia vs. Bank of New York and Trust Co., 294 N. Y. S.648; 56 N.E. 2d. 745, 293
N.Y. 749).

Although the meaning or principles of a constitution remain fixed and unchanged from
the time of its adoption, a constitution must be construed as if intended to stand for a
great length of time, and it is progressive and not static. Accordingly, it should not
receive too narrow or literal an interpretation but rather the meaning given it should
be applied in such manner as to meet new or changed conditions as they arise (U.S.
vs. Lassic, 313 U.S. 299, 85 L. Ed., 1368).

Effect should be given to the purpose indicated by a fair interpretation of the language
used and that construction which effectuates, rather than that which destroys a plain
intent or purpose of a constitutional provision, is not only favored but will be adopted
(State ex rel. Randolph Country vs. Walden, 206 S.W. 2d 979).

It is quite generally held that in arriving at the intent and purpose the construction
should be broad or liberal or equitable, as the better method of ascertaining that
intent, rather than technical (Great Southern Life Ins. Co. vs. City of Austin, 243 S.W.
778).

All these authorities uphold our conviction that the framers of the Constitution had not in mind
the corporations sole, nor intended to apply them the provisions of section 1 and 5 of said
Article XIII when they passed and approved the same. And if it were so as We think it is,
herein petitioner, the Roman Catholic Apostolic Administrator of Davao, Inc., could not be
deprived of the right to acquire by purchase or donation real properties for charitable,
benevolent and educational purposes, nor of the right to register the same in its name with
the Register of Deeds of Davao, an indispensable requisite prescribed by the Land
Registration Act for lands covered by the Torrens system.
We leave as the last theme for discussion the much debated question above referred to as
"the vested right saving clause" contained in section 1, Article XIII of the Constitution. The
dissenting Justice hurls upon the personal opinion expressed on the matter by the writer of
the decision the most pointed darts of his severe criticism. We think, however, that this strong
dissent should have been spared, because as clearly indicated before, some members of this
Court either did not agree with the theory of the writer or were not ready to take a definite
stand on that particular point, so that there being no majority opinion thereon there was no
need of any dissension therefrom. But as the criticism has been made the writer deems it
necessary to say a few words of explanation.

The writer fully agrees with the dissenting Justice that ordinarily "a capacity to acquire
(property) in futuro, is not in itself a vested or existing property right that the Constitution
protects from impairment. For a property right to be vested (or acquired) there must be a
transition from the potential or contingent to the actual, and the proprietary interest must have
attached to a thing; it must have become 'fixed and established'" (Balboa vs. Farrales, 51
Phil. 498). But the case at bar has to be considered as an exception to the rule because
among the rights granted by section 159 of the Corporation Law was the right to receive
bequests or gifts of real properties for charitable, benevolent and educational purposes. And
this right to receive such bequests or gifts (which implies donations in futuro), is not a mere
potentiality that could be impaired without any specific provision in the Constitution to that
effect, especially when the impairment would disturbingly affect the propagation of the
religious faith of the immense majority of the Filipino people and the curtailment of the
activities of their Church. That is why the writer gave us a basis of his contention what
Professor Aruego said in his book "The Framing of the Philippine Constitution" and the
enlightening opinion of Mr. Justice Jose P. Laurel, another Delegate to the Constitutional
Convention, in his concurring opinion in the case of Goldcreek Mining Co. vs. Eulogio
Rodriguez et al., 66 Phil. 259. Anyway the majority of the Court did not deem necessary to
pass upon said "vested right saving clause" for the final determination of this case.

JUDGMENT

Wherefore, the resolution of the respondent Land Registration Commission of September 21,
1954, holding that in view of the provisions of sections 1 and 5 of Article XIII of the Philippine
Constitution the vendee (petitioner) is not qualified to acquire lands in the Philippines in the
absence of proof that at least 60 per centum of the capital, properties or assets of the Roman
Catholic Apostolic Administrator of Davao, Inc. is actually owned or controlled by Filipino
citizens, and denying the registration of the deed of sale in the absence of proof of
compliance with such requisite, is hereby reversed. Consequently, the respondent Register of
Deeds of the City of Davao is ordered to register the deed of sale executed by Mateo L. Rodis
in favor of the Roman Catholic Apostolic Administrator of Davao, Inc., which is the subject of
the present litigation. No pronouncement is made as to costs. It is so ordered.
FOREIGN INVESTMENTS ACT

G.R. No. L-6055 June 12, 1953

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
WILLIAM H. QUASHA, defendant-appellant.

REYES, J.:

William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance
of Manila with the crime of falsification of a public and commercial document in that, having
been entrusted with the preparation and registration of the article of incorporation of the
Pacific Airways Corporation, a domestic corporation organized for the purpose of engaging in
business as a common carrier, he caused it to appear in said article of incorporation that one
Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of 60.005 per cent of
the subscribed capital stock of the corporation when in reality, as the accused well knew,
such was not the case, the truth being that the owner of the portion of the capital stock
subscribed to by Baylon and the money paid thereon were American citizen whose name did
not appear in the article of incorporation, and that the purpose for making this false statement
was to circumvent the constitutional mandate that no corporation shall be authorize to operate
as a public utility in the Philippines unless 60 per cent of its capital stock is owned by
Filipinos.

Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has
appealed to this Court.

The essential facts are not in dispute. On November 4,1946, the Pacific Airways Corporation
registered its articles of incorporation with the Securities and Exchanged Commission. The
article were prepared and the registration was effected by the accused, who was in fact the
organizer of the corporation. The article stated that the primary purpose of the corporation
was to carry on the business of a common carrier by air, land or water; that its capital stock
was P1,000,000, represented by 9,000 preferred and 100,000 common shares, each
preferred share being of the par value of p100 and entitled to 1/3 vote and each common
share, of the par value of P1 and entitled to one vote; that the amount capital stock actually
subscribed was P200,000, and the names of the subscribers were Arsenio Baylon, Eruin E.
Shannahan, Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha,
the first being a Filipino and the other five all Americans; that Baylon's subscription was for
1,145 preferred shares, of the total value of P114,500, and for 6,500 common shares, of the
total par value of P6,500, while the aggregate subscriptions of the American subscribers were
for 200 preferred shares, of the total par value of P20,000, and 59,000 common shares, of the
total par value of P59,000; and that Baylon and the American subscribers had already paid 25
per cent of their respective subscriptions. Ostensibly the owner of, or subscriber to, 60.005
per cent of the subscribed capital stock of the corporation, Baylon nevertheless did not have
the controlling vote because of the difference in voting power between the preferred shares
and the common shares. Still, with the capital structure as it was, the article of incorporation
were accepted for registration and a certificate of incorporation was issued by the Securities
and Exchange Commission.

There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed
capital stock of the corporation. But it is admitted that the money paid on his subscription did
not belong to him but to the Americans subscribers to the corporate stock. In explanation, the
accused testified, without contradiction, that in the process of organization Baylon was made
a trustee for the American incorporators, and that the reason for making Baylon such trustee
was as follows:
 Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135
preferred shares with a total value of P1,135. Do you know how that came to be?

A. Yes.

The people who were desirous of forming the corporation, whose names are listed on page 7
of this certified copy came to my house, Messrs. Shannahan, Onstott, O'Bannon, Caven,
Perry and Anastasakas one evening. There was considerable difficulty to get them all
together at one time because they were pilots. They had difficulty in deciding what their
respective share holdings would be. Onstott had invested a certain amount of money in
airplane surplus property and they had obtained a considerable amount of money on those
planes and as I recall they were desirous of getting a corporation formed right away. And they
wanted to have their respective shares holdings resolved at a latter date. They stated that
they could get together that they feel that they had no time to settle their respective share
holdings. We discussed the matter and finally it was decided that the best way to handle the
things was not to put the shares in the name of anyone of the interested parties and to have
someone act as trustee for their respective shares holdings. So we looked around for a
trustee. And he said "There are a lot of people whom I trust." He said, "Is there someone
around whom we could get right away?" I said, "There is Arsenio. He was my boy during the
liberation and he cared for me when i was sick and i said i consider him my friend." I said.
They all knew Arsenio. He is a very kind man and that was what was done. That is how it
came about.

Defendant is accused under article 172 paragraph 1, in connection with article 171, paragraph
4, of the Revised Penal Code, which read:

ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister.

— The penalty of prision mayor and a fine not to exceed 5,000 pesos shall be
imposed upon any public officer, employee, or notary who, taking advantage of his
official position, shall falsify a document by committing any of the following acts:

xxx xxx xxx

4. Making untruthful statements in a narration of facts.

ART. 172. Falsification by private individuals and use of falsified documents. — The
penalty of prision correccional in its medium and maximum period and a fine of not
more than 5,000 pesos shall be imposed upon:

xxx xxx xxx

1. Any private individual who shall commit any of the falsifications enumerated in the
next preceding article in any public or official document or letter of exchange or any
other kind of commercial document.

Commenting on the above provision, Justice Albert, in his well-known work on the Revised
Penal Code ( new edition, pp. 407-408), observes, on the authority of U.S. vs. Reyes, (1 Phil.,
341), that the perversion of truth in the narration of facts must be made with the wrongful
intent of injuring a third person; and on the authority of U.S. vs. Lopez (15 Phil., 515), the
same author further maintains that even if such wrongful intent is proven, still the untruthful
statement will not constitute the crime of falsification if there is no legal obligation on the part
of the narrator to disclose the truth. Wrongful intent to injure a third person and obligation on
the part of the narrator to disclose the truth are thus essential to a conviction for a crime of
falsification under the above article of the Revised Penal Code.

Now, as we see it, the falsification imputed in the accused in the present case consists in not
disclosing in the articles of incorporation that Baylon was a mere trustee ( or dummy as the
prosecution chooses to call him) of his American co-incorporators, thus giving the impression
that Baylon was the owner of the shares subscribed to by him which, as above stated,
amount to 60.005 per cent of the sub-scribed capital stock. This, in the opinion of the trial
court, is a malicious perversion of the truth made with the wrongful intent circumventing
section 8, Article XIV of the Constitution, which provides that " no franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporation or other entities organized under the law of the
Philippines, sixty per centum of the capital of which is owned by citizens of the Philippines . . .
." Plausible though it may appear at first glance, this opinion loses validity once it is noted that
it is predicated on the erroneous assumption that the constitutional provision just quoted was
meant to prohibit the mere formation of a public utility corporation without 60 per cent of its
capital being owned by the Filipinos, a mistaken belief which has induced the lower court to
that the accused was under obligation to disclose the whole truth about the nationality of the
subscribed capital stock of the corporation by revealing that Baylon was a mere trustee or
dummy of his American co-incorporators, and that in not making such disclosure defendant's
intention was to circumvent the Constitution to the detriment of the public interests. Contrary
to the lower court's assumption, the Constitution does not prohibit the mere formation of a
public utility corporation without the required formation of Filipino capital. What it does prohibit
is the granting of a franchise or other form of authorization for the operation of a public utility
to a corporation already in existence but without the requisite proportion of Filipino capital.
This is obvious from the context, for the constitutional provision in question qualifies the terms
" franchise", "certificate", or "any other form of authorization" with the phrase "for the
operation of a public utility," thereby making it clear that the franchise meant is not the
"primary franchise" that invest a body of men with corporate existence but the "secondary
franchise" or the privilege to operate as a public utility after the corporation has already come
into being.

If the Constitution does not prohibit the mere formation of a public utility corporation with the
alien capital, then how can the accused be charged with having wrongfully intended to
circumvent that fundamental law by not revealing in the articles of incorporation that Baylon
was a mere trustee of his American co-incorporation and that for that reason the subscribed
capital stock of the corporation was wholly American? For the mere formation of the
corporation such revelation was not essential, and the Corporation Law does not require it.
Defendant was, therefore, under no obligation to make it. In the absence of such obligation
and of the allege wrongful intent, defendant cannot be legally convicted of the crime with
which he is charged.

It is urged, however, that the formation of the corporation with 60 per cent of its subscribed
capital stock appearing in the name of Baylon was an indispensable preparatory step to the
subversion of the constitutional prohibition and the laws implementing the policy expressed
therein. This view is not correct. For a corporation to be entitled to operate a public utility it is
not necessary that it be organized with 60 per cent of its capital owned by Filipinos from the
start. A corporation formed with capital that is entirely alien may subsequently change the
nationality of its capital through transfer of shares to Filipino citizens. conversely, a
corporation originally formed with Filipino capital may subsequently change the national
status of said capital through transfer of shares to foreigners. What need is there then for a
corporation that intends to operate a public utility to have, at the time of its formation, 60 per
cent of its capital owned by Filipinos alone? That condition may anytime be attained thru the
necessary transfer of stocks. The moment for determining whether a corporation is entitled to
operate as a public utility is when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can be done after the corporation has already come
into being and not while it is still being formed. And at that moment, the corporation must
show that it has complied not only with the requirement of the Constitution as to the
nationality of its capital, but also with the requirements of the Civil Aviation Law if it is a
common carrier by air, the Revised Administrative Code if it is a common carrier by water,
and the Public Service Law if it is a common carrier by land or other kind of public service.

Equally untenable is the suggestion that defendant should at least be held guilty of an
"impossible crime" under article 59 of the Revised Penal Code. It not being possible to
suppose that defendant had intended to commit a crime for the simple reason that the alleged
constitutional prohibition which he is charged for having tried to circumvent does not exist,
conviction under that article is out of the question.

The foregoing consideration can not but lead to the conclusion that the defendant can not be
held guilty of the crime charged. The majority of the court, however, are also of the opinion
that, even supposing that the act imputed to the defendant constituted falsification at the time
it was perpetrated, still with the approval of the Party Amendment to the Constitution in
March, 1947, which placed Americans on the same footing as Filipino citizens with respect to
the right to operate public utilities in the Philippines, thus doing away with the prohibition in
section 8, Article XIV of the Constitution in so far as American citizens are concerned, the
said act has ceased to be an offense within the meaning of the law, so that defendant can no
longer be held criminally liable therefor.

In view of the foregoing, the judgment appealed from is reversed and the defendant William
H. Quasha acquitted, with costs de oficio.
FOREIGN INVESTMENTS ACT

G.R. No. L-2294 May 25, 1951

FILIPINAS COMPAÑIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.

PARAS, C.J.:

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc., after
payment of corresponding premium, obtained from the petitioner ,Filipinas Cia. de Seguros,
fire policy No. 29333 in the sum of P1000,000, covering merchandise contained in a building
located at No. 711 Roman Street, Binondo Manila. On February 27, 1942, or during the
Japanese military occupation, the building and insured merchandise were burned. In due time
the respondent submitted to the petitioner its claim under the policy. The salvage goods were
sold at public auction and, after deducting their value, the total loss suffered by the
respondent was fixed at P92,650. The petitioner refused to pay the claim on the ground that
the policy in favor of the respondent had ceased to be in force on the date the United States
declared war against Germany, the respondent Corporation (though organized under and by
virtue of the laws of the Philippines) being controlled by the German subjects and the
petitioner being a company under American jurisdiction when said policy was issued on
October 1, 1941. The petitioner, however, in pursuance of the order of the Director of Bureau
of Financing, Philippine Executive Commission, dated April 9, 1943, paid to the respondent
the sum of P92,650 on April 19, 1943.

The present action was filed on August 6, 1946, in the Court of First Instance of Manila for the
purpose of recovering from the respondent the sum of P92,650 above mentioned. The theory
of the petitioner is that the insured merchandise were burned up after the policy issued in
1941 in favor of the respondent corporation has ceased to be effective because of the
outbreak of the war between the United States and Germany on December 10, 1941, and that
the payment made by the petitioner to the respondent corporation during the Japanese
military occupation was under pressure. After trial, the Court of First Instance of Manila
dismissed the action without pronouncement as to costs. Upon appeal to the Court of
Appeals, the judgment of the Court of First Instance of Manila was affirmed, with costs. The
case is now before us on appeal by certiorari from the decision of the Court of Appeals.

The Court of Appeals overruled the contention of the petitioner that the respondent
corporation became an enemy when the United States declared war against Germany, relying
on English and American cases which held that a corporation is a citizen of the country or
state by and under the laws of which it was created or organized. It rejected the theory that
nationality of private corporation is determine by the character or citizenship of its controlling
stockholders.

There is no question that majority of the stockholders of the respondent corporation were
German subjects. This being so, we have to rule that said respondent became an enemy
corporation upon the outbreak of the war between the United States and Germany. The
English and American cases relied upon by the Court of Appeals have lost their force in view
of the latest decision of the Supreme Court of the United States in Clark vs. Uebersee Finanz
Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp. 148-
153, in which the controls test has been adopted. In "Enemy Corporation" by Martin Domke, a
paper presented to the Second International Conference of the Legal Profession held at the
Hague (Netherlands) in August. 1948 the following enlightening passages appear:

Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies, namely managed under the
 influence of individuals or corporations, themselves considered as enemies. It was
the English courts which first the Daimler case applied this new concept of "piercing
the corporate veil," which was adopted by the peace of Treaties of 1919 and the
Mixed Arbitral established after the First World War.

The United States of America did not adopt the control test during the First World
War. Courts refused to recognized the concept whereby American-registered
corporations could be considered as enemies and thus subject to domestic legislation
and administrative measures regarding enemy property.

World War II revived the problem again. It was known that German and other enemy
interests were cloaked by domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be exercised on the management
of the corporation but also by long term loans and other factual situations. For that
reason, legislation on enemy property enacted in various countries during World War
II adopted by statutory provisions to the control test and determined, to various
degrees, the incidents of control. Court decisions were rendered on the basis of such
newly enacted statutory provisions in determining enemy character of domestic
corporation.

The United States did not, in the amendments of the Trading with the Enemy Act
during the last war, include as did other legislations the applications of the control test
and again, as in World War I, courts refused to apply this concept whereby the enemy
character of an American or neutral-registered corporation is determined by the
enemy nationality of the controlling stockholders.

Measures of blocking foreign funds, the so called freezing regulations, and other
administrative practice in the treatment of foreign-owned property in the United States
allowed to large degree the determination of enemy interest in domestic corporations
and thus the application of the control test. Court decisions sanctioned such
administrative practice enacted under the First War Powers Act of 1941, and more
recently, on December 8, 1947, the Supreme Court of the United States definitely
approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A. G.,
dealing with a Swiss corporation allegedly controlled by German interest, the Court:
"The property of all foreign interest was placed within the reach of the vesting power
(of the Alien Property Custodian) not to appropriate friendly or neutral assets but to
reach enemy interest which masqueraded under those innocent fronts. . . . The power
of seizure and vesting was extended to all property of any foreign country or national
so that no innocent appearing device could become a Trojan horse."

It becomes unnecessary, therefore, to dwell at length on the authorities cited in support of the
appealed decision. However, we may add that, in Haw Pia vs. China Banking
Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held that China Banking Corporation
came within the meaning of the word "enemy" as used in the Trading with the Enemy Acts of
civilized countries not only because it was incorporated under the laws of an enemy country
but because it was controlled by enemies.

The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides that
"anyone except a public enemy may be insured." It stands to reason that an insurance policy
ceases to be allowable as soon as an insured becomes a public enemy.

Effect of war, generally. — All intercourse between citizens of belligerent powers

which is inconsistent with a state of war is prohibited by the law of nations. Such
prohibition includes all negotiations, commerce, or trading with the enemy; all acts
which will increase, or tend to increase, its income or resources; all acts of voluntary
submission to it; or receiving its protection; also all acts concerning the transmission
of money or goods; and all contracts relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the enemy, upon the life or lives of aliens
engaged in service with the enemy; this for the reason that the subjects of one
 country cannot be permitted to lend their assistance to protect by insurance the
commerce or property of belligerent, alien subjects, or to do anything detrimental too
their country's interest. The purpose of war is to cripple the power and exhaust the
resources of the enemy, and it is inconsistent that one country should destroy its
enemy's property and repay in insurance the value of what has been so destroyed, or
that it should in such manner increase the resources of the enemy, or render it aid,
and the commencement of war determines, for like reasons, all trading intercourse
with the enemy, which prior thereto may have been lawful. All individuals therefore,
who compose the belligerent powers, exist, as to each other, in a state of utter
exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)

In the case of an ordinary fire policy, which grants insurance only from year, or for
some other specified term it is plain that when the parties become alien enemies, the
contractual tie is broken and the contractual rights of the parties, so far as not vested.
lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)

The respondent having become an enemy corporation on December 10, 1941, the insurance
policy issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had
ceased to be valid and enforcible, and since the insured goods were burned after December
10, 1941, and during the war, the respondent was not entitled to any indemnity under said
policy from the petitioner. However, elementary rules of justice (in the absence of specific
provision in the Insurance Law) require that the premium paid by the respondent for the
period covered by its policy from December 11, 1941, should be returned by the petitioner.

The Court of Appeals, in deciding the case, stated that the main issue hinges on the question
of whether the policy in question became null and void upon the declaration of war between
the United States and Germany on December 10, 1941, and its judgment in favor of the
respondent corporation was predicated on its conclusion that the policy did not cease to be in
force. The Court of Appeals necessarily assumed that, even if the payment by the petitioner
to the respondent was involuntary, its action is not tenable in view of the ruling on the validity
of the policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted to
by the appellee was not unjust but the exercise of its lawful right to claim for and received the
payment of the insurance policy," and that the ruling of the Bureau of Financing to the effect
that "the appellee was entitled to payment from the appellant was, well founded." Factually,
there can be no doubt that the Director of the Bureau of Financing, in ordering the petitioner
to pay the claim of the respondent, merely obeyed the instruction of the Japanese Military
Administration, as may be seen from the following: "In view of the findings and conclusion of
this office contained in its decision on Administrative Case dated February 9, 1943 copy of
which was sent to your office and the concurrence therein of the Financial Department of the
Japanese Military Administration, and following the instruction of said authority, you are
hereby ordered to pay the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of
said claim, however, should be made by means of crossed check." (Emphasis supplied.)

It results that the petitioner is entitled to recover what paid to the respondent under the
circumstances on this case. However, the petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943, in accordance
with the rate fixed in the Ballantyne scale.

Wherefore, the appealed decision is hereby reversed and the respondent corporation is
ordered to pay to the petitioner the sum of P77,208.33, Philippine currency, less the amount
of the premium, in Philippine currency, that should be returned by the petitioner for the
unexpired term of the policy in question, beginning December 11, 1941. Without costs. So
ordered.
FOREIGN INVESTMENTS ACT

G.R. No. L-14441 December 17, 1966

PEDRO R. PALTING, petitioner,

vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.

BARRERA, J.:

This is a petition for review of the order of August 29, 1958, later supplemented and amplified
by another dated September 9, 1958, of the Securities and Exchange Commission denying
the opposition to, and instead, granting the registration, and licensing the sale in the
Philippines, of 5,000,000 shares of the capital stock of the respondent-appellee San Jose
Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a corporation organized
and existing in the Republic of Panama.

On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and
Exchange Commission a sworn registration statement, for the registration and licensing for
sale in the Philippines Voting Trust Certificates representing 2,000,000 shares of its capital
stock of a par value of $0.35 a share, at P1.00 per share. It was alleged that the entire
proceeds of the sale of said securities will be devoted or used exclusively to finance the
operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be
referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an
area of a little less than 1,000,000 hectares, located in the provinces of Pangasinan, Tarlac,
Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the express condition of
the sale that every purchaser of the securities shall not receive a stock certificate, but a
registered or bearer-voting-trust certificate from the voting trustees named therein James L.
Buckley and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in
New York City. While this application for registration was pending consideration by the
Securities and Exchange Commission, SAN JOSE PETROLEUM filed an amended
Statement on June 20, 1958, for registration of the sale in the Philippines of its shares of
capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced offering price of
from P1.00 to P0.70 per share. At this time the par value of the shares has also been reduced
from $.35 to $.01 per share.1

Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE
PETROLEUM, filed with the Securities and Exchange Commission an opposition to
registration and licensing of the securities on the grounds that (1) the tie-up between the
issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic
corporation, violates the Constitution of the Philippines, the Corporation Law and the
Petroleum Act of 1949; (2) the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the shares of the issuer is fraudulent, and works or tends to work a
fraud upon Philippine purchasers; and (4) the issuer as an enterprise, as well as its business,
is based upon unsound business principles. Answering the foregoing opposition of Palting, et
al., the registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise"
enjoying parity rights under the Ordinance appended to the Constitution, which parity right,
with respect to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-
Langley Agreement, only through the medium of a corporation organized under the laws of
the Philippines. Thus, registrant which is allegedly qualified to exercise rights under the Parity
Amendment, had to do so through the medium of a domestic corporation, which is the SAN
JOSE OIL. It refused the contention that the Corporation Law was being violated, by alleging
that Section 13 thereof applies only to foreign corporations doing business in the Philippines,
and registrant was not doing business here. The mere fact that it was a holding company of
SAN JOSE OIL and that registrant undertook the financing of and giving technical assistance
to said corporation did not constitute transaction of business in the Philippines. Registrant
also denied that the offering for sale in the Philippines of its shares of capital stock was
fraudulent or would work or tend to work fraud on the investors. On August 29, 1958, and on
September 9, 1958 the Securities and Exchange Commissioner issued the orders object of
the present appeal.

The issues raised by the parties in this appeal are as follows:

1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in

respondent's securities, has personality to file the present petition for review of the
order of the Securities and Exchange Commission;

2. Whether or not the issue raised herein is already moot and academic;

3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a
foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining
corporation, is violative of the Constitution, the Laurel-Langley Agreement, the
Petroleum Act of 1949, and the Corporation Law; and

4. Whether or not the sale of respondent's securities is fraudulent, or would work or

tend to work fraud to purchasers of such securities in the Philippines.

1. In answer to the notice and order of the Securities and Exchange Commissioner, published
in 2 newspapers of general circulation in the Philippines, for "any person who is opposed" to
the petition for registration and licensing of respondent's securities, to file his opposition in 7
days, herein petitioner so filed an opposition. And, the Commissioner, having denied his
opposition and instead, directed the registration of the securities to be offered for sale,
oppositor Palting instituted the present proceeding for review of said order.

Respondent raises the question of the personality of petitioner to bring this appeal,
contending that as a mere "prospective investor", he is not an "Aggrieved" or "interested"
person who may properly maintain the suit. Citing a 1931 ruling of Utah State Supreme
Court2 it is claimed that the phrase "party aggrieved" used in the Securities Act 3and the Rules
of Court4 as having the right to appeal should refer only to issuers, dealers and salesmen of
securities.

It is true that in the cited case, it was ruled that the phrase "person aggrieved" is that party
"aggrieved by the judgment or decree where it operates on his rights of property or bears
directly upon his interest", that the word "aggrieved" refers to "a substantial grievance, a
denial of some personal property right or the imposition upon a party of a burden or
obligation." But a careful reading of the case would show that the appeal therein was
dismissed because the court held that an order of registration was not final and therefore not
appealable. The foregoing pronouncement relied upon by herein respondent was made in
construing the provision regarding an order of revocation which the court held was the one
appealable. And since the law provides that in revoking the registration of any security, only
the issuer and every registered dealer of the security are notified, excluding any person or
group of persons having no such interest in the securities, said court concluded that the
phrase "interested person" refers only to issuers, dealers or salesmen of securities.

We cannot consider the foregoing ruling by the Utah State Court as controlling on the issue in
this case. Our Securities Act in Section 7(c) thereof, requires the publication and notice of the
registration statement. Pursuant thereto, the Securities and Exchange Commissioner caused
the publication of an order in part reading as follows:

. . . Any person who is opposed with this petition must file his written opposition with
this Commission within said period (2 weeks). . . .

In other words, as construed by the administrative office entrusted with the enforcement of the
Securities Act, any person (who may not be "aggrieved" or "interested" within the legal
acceptation of the word) is allowed or permitted to file an opposition to the registration of
securities for sale in the Philippines. And this is in consonance with the generally accepted
principle that Blue Sky Laws are enacted to protect investors and prospective purchasers and
to prevent fraud and preclude the sale of securities which are in fact worthless or worth
substantially less than the asking price. It is for this purpose that herein petitioner duly filed his
opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM was required to
reply to the opposition. Subsequently both the petition and the opposition were set for hearing
during which the petitioner was allowed to actively participate and did so by cross-examining
the respondent's witnesses and filing his memorandum in support of his opposition. He
therefore to all intents and purposes became a party to the proceedings. And under the New
Rules of Court,5 such a party can appeal from a final order, ruling or decision of the Securities
and Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the
old Rule, being procedural in nature,6 and in view of the express provision of Rule 144 that
the new rules made effective on January 1, 1964 shall govern not only cases brought after
they took effect but all further proceedings in cases then pending, except to the extent that in
the opinion of the Court their application would not be feasible or would work injustice, in
which event the former procedure shall apply, we hold that the present appeal is properly
within the appellate jurisdiction of this Court.

The order allowing the registration and sale of respondent's securities is clearly a final order
that is appealable. The mere fact that such authority may be later suspended or revoked,
depending on future developments, does not give it the character of an interlocutory or
provisional ruling. And the fact that seven days after the publication of the order, the securities
are deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality of the order.
Rights and obligations necessarily arise therefrom if not reviewed on appeal.

Our position on this procedural matter — that the order is appealable and the appeal taken
here is proper — is strengthened by the intervention of the Solicitor General, under Section
23 of Rule 3 of the Rules of Court, as the constitutional issues herein presented affect the
validity of Section 13 of the Corporation Law, which, according to the respondent, conflicts
with the Parity Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its
right to exploit our petroleum resources notwithstanding said provisions of the Corporation
Law.

2. Respondent likewise contends that since the order of Registration/Licensing dated

September 9, 1958 took effect 30 days from September 3, 1958, and since no stay order has
been issued by the Supreme Court, respondent's shares became registered and licensed
under the law as of October 3, 1958. Consequently, it is asserted, the present appeal has
become academic. Frankly we are unable to follow respondent's argumentation. First it claims
that the order of August 29 and that of September 9, 1958 are not final orders and therefor
are not appealable. Then when these orders, according to its theory became final and were
implemented, it argues that the orders can no longer be appealed as the question of
registration and licensing became moot and academic.

But the fact is that because of the authority to sell, the securities are, in all probabilities, still
being traded in the open market. Consequently the issue is much alive as to whether
respondent's securities should continue to be the subject of sale. The purpose of the inquiry
on this matter is not fully served just because the securities had passed out of the hands of
the issuer and its dealers. Obviously, so long as the securities are outstanding and are placed
in the channels of trade and commerce, members of the investing public are entitled to have
the question of the worth or legality of the securities resolved one way or another.

But more fundamental than this consideration, we agree with the late Senator Claro M. Recto,
who appeared as amicus curiae in this case, that while apparently the immediate issue in this
appeal is the right of respondent SAN JOSE PETROLEUM to dispose of and sell its securities
to the Filipino public, the real and ultimate controversy here would actually call for the
construction of the constitutional provisions governing the disposition, utilization, exploitation
and development of our natural resources. And certainly this is neither moot nor academic.

3. We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on
the one hand, and the respondent SAN JOSE PETROLEUM and its associates, on the other.
The relationship of these corporations involved or affected in this case is admitted and
established through the papers and documents which are parts of the records: SAN JOSE
OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is owned
by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority
interest of which is owned by OIL INVESTMENTS, Inc., another foreign (Panamanian)
company. This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL
COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A., both organized and
existing under the laws of Venezuela. As of September 30, 1956, there were 9,976
stockholders of PANCOASTAL PETROLEUM found in 49 American states and U.S.
territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956,
PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders
scattered in 49 American state. In the two lists of stockholders, there is no indication of the
citizenship of these stockholders,7 or of the total number of authorized stocks of each
corporation, for the purpose of determining the corresponding percentage of these listed
stockholders in relation to the respective capital stock of said corporation.

Petitioner, as well as the amicus curiae and the Solicitor General8 contend that the
relationship between herein respondent SAN JOSE PETROLEUM and its subsidiary, SAN
JOSE OIL, violates the Petroleum Law of 1949, the Philippine Constitution, and Section 13 of
the Corporation Law, which inhibits a mining corporation from acquiring an interest in another
mining corporation. It is respondent's theory, on the other hand, that far from violating the
Constitution; such relationship between the two corporations is in accordance with the Laurel-
Langley Agreement which implemented the Ordinance Appended to the Constitution, and that
Section 13 of the Corporation Law is not applicable because respondent is not licensed to do
business, as it is not doing business, in the Philippines.

Article XIII, Section 1 of the Philippine Constitution provides:

SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters,
minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and
other natural resources of the Philippines belong to the State, and their disposition,
exploitation, development, or utilization shall be limited to citizens of the Philippines,
or to corporations or associations at least sixty per centum of the capital of which is
owned by such citizens, subject to any existing right, grant, lease or concession at the
time of the inauguration of this Government established under this Constitution. . . .
(Emphasis supplied)

In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our
natural resources) was extended to citizens of the United States, thus:

Notwithstanding the provisions of section one, Article Thirteen, and section eight,
Article Fourteen, of the foregoing Constitution, during the effectivity of the Executive
Agreement entered into by the President of the Philippines with the President of the
United States on the fourth of July, nineteen hundred and forty-six, pursuant to the
provisions of Commonwealth Act Numbered Seven hundred and thirty-three, but in
no case to extend beyond the third of July, nineteen hundred and seventy-four, the
disposition, exploitation, development, and utilization of all agricultural, timber, and
mineral lands of the public domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, and other natural resources of the
Philippines, and the operation of public utilities shall, if open to any person, be open
to citizens of the United States, and to all forms of business enterprises owned or
controlled, directly or indirectly, by citizens of the United States in the same manner
as to, and under the same conditions imposed upon, citizens of the Philippines or
corporations or associations owned or controlled by citizens of the
Philippines (Emphasis supplied.)

In the 1954 Revised Trade Agreement concluded between the United States and the
Philippines, also known as the Laurel-Langley Agreement, embodied in Republic Act 1355,
the following provisions appear:
ARTICLE VI

1. The disposition, exploitation, development and utilization of all agricultural, timber,

and mineral lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces and sources of potential energy, and other natural resources of
either Party, and the operation of public utilities, shall, if open to any person, be open
to citizens of the other Party and to all forms of business enterprise owned or
controlled, directly or indirectly, by citizens of such other Party in the same manner as
to and under the same conditions imposed upon citizens or corporations or
associations owned or controlled by citizens of the Party granting the right.

2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens
of the United States, with respect to natural resources in the public domain in the
Philippines, only through the medium of a corporation organized under the laws of the
Philippines and at least 60% of the capital stock of which is owned or controlled by
citizens of the United States. . . .

3. The United States of America reserves the rights of the several States of the
United States to limit the extent to which citizens or corporations or associations
owned or controlled by citizens of the Philippines may engage in the activities
specified in this Article. The Republic of the Philippines reserves the power to deny
any of the rights specified in this Article to citizens of the United States who are
citizens of States, or to corporations or associations at least 60% of whose capital
stock or capital is owned or controlled by citizens of States, which deny like rights to
citizens of the Philippines, or to corporations or associations which are owned or
controlled by citizens of the Philippines. . . . (Emphasis supplied.)

Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country
was granted, by Article XIII of the Constitution, to Filipino citizens or to corporations or
associations 60% of the capital of which is owned by such citizens. With the Parity
Amendment to the Constitution, the same right was extended to citizens of the United States
and business enterprises owned or controlled directly or indirectly, by citizens of the United
States.

There could be no serious doubt as to the meaning of the word "citizens" used in the
aforementioned provisions of the Constitution. The right was granted to 2 types of persons:
natural persons (Filipino or American citizens) and juridical persons (corporations 60% of
which capital is owned by Filipinos and business enterprises owned or controlled directly or
indirectly, by citizens of the United States). In American law, "citizen" has been defined as
"one who, under the constitution and laws of the United States, has a right to vote for
representatives in congress and other public officers, and who is qualified to fill offices in the
gift of the people. (1 Bouvier's Law Dictionary, p. 490.) A citizen is —

One of the sovereign people. A constituent member of the sovereignty, synonymous

with the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)

A member of the civil state entitled to all its privileges. (Cooley, Const. Lim. 77. See
U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.]
162, 22 L. Ed. 627.)

These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American

business enterprise entitled to parity rights in the Philippines? The answer must be in the
negative, for the following reasons:

Firstly — It is not owned or controlled directly by citizens of the United States, because it is
owned and controlled by a corporation, the OIL INVESTMENTS, another foreign
(Panamanian) corporation.
Secondly — Neither can it be said that it is indirectly owned and controlled by American
citizens through the OIL INVESTMENTS, for this latter corporation is in turn owned and
controlled, not by citizens of the United States, but still by two foreign (Venezuelan)
corporations, the PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.

Thirdly — Although it is claimed that these two last corporations are owned and controlled
respectively by 12,373 and 9,979 stockholders residing in the different American states, there
is no showing in the certification furnished by respondent that the stockholders of
PANCOASTAL or those of them holding the controlling stock, are citizens of the United
States.

Fourthly — Granting that these individual stockholders are American citizens, it is yet
necessary to establish that the different states of which they are citizens, allow Filipino
citizens or corporations or associations owned or controlled by Filipino citizens, to engage in
the exploitation, etc. of the natural resources of these states (see paragraph 3, Article VI of
the Laurel-Langley Agreement, supra). Respondent has presented no proof to this effect.

Fifthly — But even if the requirements mentioned in the two immediately preceding
paragraphs are satisfied, nevertheless to hold that the set-up disclosed in this case, with a
long chain of intervening foreign corporations, comes within the purview of the Parity
Amendment regarding business enterprises indirectly owned or controlled by citizens of the
United States, is to unduly stretch and strain the language and intent of the law. For, to what
extent must the word "indirectly" be carried? Must we trace the ownership or control of these
various corporations ad infinitum for the purpose of determining whether the American
ownership-control-requirement is satisfied? Add to this the admitted fact that the shares of
stock of the PANTEPEC and PANCOASTAL which are allegedly owned or
controlled directly by citizens of the United States, are traded in the stock exchange in New
York, and you have a situation where it becomes a practical impossibility to determine at any
given time, the citizenship of the controlling stock required by the law. In the circumstances,
we have to hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is
not a business enterprise that is authorized to exercise the parity privileges under the Parity
Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE
OIL is, consequently, illegal.

What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by
SAN JOSE PETROLEUM? This is a query which we need not resolve in this case as SAN
JOSE OIL is not a party and it is not necessary to do so to dispose of the present controversy.
But it is a matter that probably the Solicitor General would want to look into.

There is another issue which has been discussed extensively by the parties. This is whether
or not an American mining corporation may lawfully "be in anywise interested in any other
corporation (domestic or foreign) organized for the purpose of engaging in agriculture or in
mining," in the Philippines or whether an American citizen owning stock in more than one
corporation organized for the purpose of engaging in agriculture or in mining, may own more
than 15% of the capital stock then outstanding and entitled to vote, of each of such
corporations, in view of the express prohibition contained in Section 13 of the Philippine
Corporation Law. The petitioner in this case contends that the provisions of the Corporation
Law must be applied to American citizens and business enterprise otherwise entitled to
exercise the parity privileges, because both the Laurel-Langley Agreement (Art. VI, par. 1)
and the Petroleum Act of 1948 (Art. 31), specifically provide that the enjoyment by them of the
same rights and obligations granted under the provisions of both laws shall be "in the same
manner as to, and under the same conditions imposed upon, citizens of the Philippines or
corporations or associations owned or controlled by citizens of the Philippines." The petitioner
further contends that, as the enjoyment of the privilege of exploiting mineral resources in the
Philippines by Filipino citizens or corporations owned or controlled by citizens of the
Philippines (which corporation must necessarily be organized under the Corporation Law), is
made subject to the limitations provided in Section 13 of the Corporation Law, so necessarily
the exercise of the parity rights by citizens of the United States or business enterprise owned
or controlled, directly or indirectly, by citizens of the United States, must equally be subject to
the same limitations contained in the aforesaid Section 13 of the Corporation Law.

In view of the conclusions we have already arrived at, we deem it not indispensable for us to
pass upon this legal question, especially taking into account the statement of the respondent
(SAN JOSE PETROLEUM) that it is essentially a holding company, and as found by the
Securities and Exchange Commissioner, its principal activity is limited to the financing and
giving technical assistance to SAN JOSE OIL.

4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for
sale in the Philippines, was incorporated under the laws of Panama in April, 1956 with an
authorized capital stock of $500,000.00, American currency, divided into 50,000,000 shares
at par value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956,
respondent was supposed to have received from OIL INVESTMENTS 8,000,000 shares of
the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note for
$250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS
16,000,000 shares of its capital stock, at $0.01 per share or with a value of $160,000.00, plus
a note for $230,297.97 maturing in 2 years at 6% per annum interest,9 and the assumption of
payment of the unpaid price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).

On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from
$500,000.00 to $17,500,000.00 by increasing the par value of the same 50,000,000 shares,
from $0.01 to $0.35. Without any additional consideration, the 16,000,000 shares of $0.01
previously issued to OIL INVESTMENTS with a total value of $160,000.00 were changed with
16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at $5,600,000.00.
And, to make it appear that cash was received for these re-issued 16,000,000 shares, the
board of directors of respondent corporation placed a valuation of $5,900,000.00 on the
8,000,000 shares of SAN JOSE OIL (still having par value of $0.10 per share) which were
received from OIL INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01
per share.

In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly
the value of the 8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was
deducted, corresponding to the alleged difference between the "value" of the said shares and
the subscription price thereof which is $800,000.00 (at $0.10 per share). From this
$800,000.00, the subscription price of the SAN JOSE OIL shares, the amount of $319,702.03
was deducted, as allegedly unpaid subscription price, thereby giving a difference of
$480,297.97, which was placed as the amount allegedly paid in on the subscription price of
the 8,000,000 SAN JOSE OIL shares. Then, by adding thereto the note receivable from OIL
INVESTMENTS, for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE
PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN JOSE
PETROLEUM appeared to have assets in the sum of $736,814.18.

These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on
the 8,000,000 shares of SAN JOSE OIL. There appears no basis for such valuation other
than belief by the board of directors of respondent that "should San Jose Oil Company be
granted the bulk of the concessions applied for upon reasonable terms, that it would have a
reasonable value of approximately $10,000,000." 10 Then, of this amount, the subscription
price of $800,000.00 was deducted and called it "difference between the (above) valuation
and the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price,
they deducted the sum of $480,297.97 and the difference was placed as the unpaid portion of
the subscription price. In other words, it was made to appear that they paid in $480,297.97 for
the 8,000,000 shares of SAN JOSE OIL. This amount ($480,297.97) was supposedly that
$250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied in
the June 14 Agreement, and a sum of $230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's
liabilities, for $230,297.97 appearing as note payable to Oil Investments, maturing in two (2)
years at six percent (6%) per annum. 11 As far as it appears from the records, for the
16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS, respondent SAN JOSE
PETROLEUM received from OIL INVESTMENTS only the note for $250,000.00 plus the
8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a total of
$1,050,000.00 — the only assets of the corporation. In other words, respondent actually lost
$4,550,000.00, which was received by OIL INVESTMENTS.

But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN
JOSE PETROLEUM are noteworthy; viz:

(1) the directors of the Company need not be shareholders;

(2) that in the meetings of the board of directors, any director may be represented
and may vote through a proxy who also need not be a director or stockholder; and

(3) that no contract or transaction between the corporation and any other association
or partnership will be affected, except in case of fraud, by the fact that any of the
directors or officers of the corporation is interested in, or is a director or officer of,
such other association or partnership, and that no such contract or transaction of the
corporation with any other person or persons, firm, association or partnership shall be
affected by the fact that any director or officer of the corporation is a party to or has
an interest in, such contract or transaction, or has in anyway connected with such
other person or persons, firm, association or partnership; and finally, that all and any
of the persons who may become director or officer of the corporation shall be relieved
from all responsibility for which they may otherwise be liable by reason of any
contract entered into with the corporation, whether it be for his benefit or for the
benefit of any other person, firm, association or partnership in which he may be
interested.

These provisions are in direct opposition to our corporation law and corporate practices in this
country. These provisions alone would outlaw any corporation locally organized or doing
business in this jurisdiction. Consider the unique and unusual provision that no contract or
transaction between the company and any other association or corporation shall be affected
except in case of fraud, by the fact that any of the directors or officers of the company may be
interested in or are directors or officers of such other association or corporation; and that
none of such contracts or transactions of this company with any person or persons, firms,
associations or corporations shall be affected by the fact that any director or officer of this
company is a party to or has an interest in such contract or transaction or has any connection
with such person or persons, firms associations or corporations; and that any and all persons
who may become directors or officers of this company are hereby relieved of all responsibility
which they would otherwise incur by reason of any contract entered into which this company
either for their own benefit, or for the benefit of any person, firm, association or corporation in
which they may be interested.

The impact of these provisions upon the traditional judiciary relationship between the directors
and the stockholders of a corporation is too obvious to escape notice by those who are called
upon to protect the interest of investors. The directors and officers of the company can do
anything, short of actual fraud, with the affairs of the corporation even to benefit themselves
directly or other persons or entities in which they are interested, and with immunity because of
the advance condonation or relief from responsibility by reason of such acts. This and the
other provision which authorizes the election of non-stockholders as directors, completely
disassociate the stockholders from the government and management of the business in which
they have invested.

To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability
of SAN JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of
the former corporation and acting "on behalf of all future holders of voting trust certificates,"
entered into a voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby
said Trustees were given authority to vote the shares represented by the outstanding trust
certificates (including those that may henceforth be issued) in the following manner:
 (a) At all elections of directors, the Trustees will designate a suitable proxy or
proxies to vote for the election of directors designated by the Trustees in their own
discretion, having in mind the best interests of the holders of the voting trust
certificates, it being understood that any and all of the Trustees shall be eligible for
election as directors;

(b) On any proposition for removal of a director, the Trustees shall designate a
suitable proxy or proxies to vote for or against such proposition as the Trustees in
their own discretion may determine, having in mind the best interest of the holders of
the voting trust certificates;

(c) With respect to all other matters arising at any meeting of stockholders, the
Trustees will instruct such proxy or proxies attending such meetings to vote the
shares of stock held by the Trustees in accordance with the written instructions of
each holder of voting trust certificates. (Emphasis supplied.)

It was also therein provided that the said Agreement shall be binding upon the parties thereto,
their successors, and upon all holders of voting trust certificates.

And these are the voting trust certificates that are offered to investors as authorized by
Security and Exchange Commissioner. It can not be doubted that the sale of respondent's
securities would, to say the least, work or tend to work fraud to Philippine investors.

FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this
appeal, is denied and the orders of the Securities and Exchange Commissioner, allowing the
registration of Respondent's securities and licensing their sale in the Philippines are hereby
set aside. The case is remanded to the Securities and Exchange Commission for appropriate
action in consonance with this decision. With costs. Let a copy of this decision be furnished
the Solicitor General for whatever action he may deem advisable to take in the premises. So
ordered.
FOREIGN INVESTMENTS ACT

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 Decision 1 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 owns 5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in turn,
owns 5,997 shares of Tesoro),5 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 Redmont’s 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 Redmont’s 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 Appeal8 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. McArthur’s FTAA was denominated as AFTA-IVB-
0912 on May 2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May
28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 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 Redmont’s 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

Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s 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 Reconsideration19 of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental
Motion for Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 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 Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration
of the MAB’s September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s 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 involved x x x is MBMI." 25 Thus, it concluded
that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest
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 POA’s 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 POA’s 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 Decision26 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 Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment
Act and E.O. 584."27 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 POA’s 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 Canada suggest that they are
conducting operation only through their local counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the
OP’s 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 Redmont’s
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 same.31

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 country’s 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 Country’s 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 CA’s 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 CA’s 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 Canada suggest that they are
conducting operation only through their local counterparts.36

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 deferred the
matter for the determination of the Secretary of the DENR and the President of the Republic
of the Philippines.37

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 OP’s 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, 2012,40 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 the applicable
rule."41 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
court’s 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 country’s 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 Chairman’s 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?

MR. VILLEGAS: Yes.42 (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 60-40% 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 corporation––MBMI, 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 Court’s 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

Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Corporation
MBMI Resources, Inc. Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar
structure and composition as McArthur. In fact, it would seem that MBMI is also a major
investor and "controls"45 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

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(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. MBMI’s 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% effective equity interest in
the Olympic Properties.46 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:

[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pd
f]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,17

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

 Total 10,000 PhP 10,000,000.00 PhP 2,708,17

(emphasis su

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 SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pd
f]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,809,90

(emphasis su

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the
glaring similarity between SMMI and MMC’s 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 Olympic’s participation in

SMMI’s 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 PLMDC’s
MPSA application, whose corporate structure’s 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:

[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pd
f]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,00

Mining &

Development

Corp.

MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,00

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

 Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP

(emphasis su

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 PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Palawan Alpha South Resources Development Filipino 6,596 PhP 6,596,000.00 PhP 0
Corporation

MBMI Resources, Canadian 3,396 PhP 3,396,000.00 PhP 2,796,000.00

Inc.

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis
supplied)

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 MBMI’s 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 Company’s 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 Group.48 (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,
MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––involves 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 CA’s 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 not apply to the other.51

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 Department’s
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 Department’s
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.

POA’s 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, POA’s
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 Redmont’s 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.1âwphi1 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 POA’s 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 v. Province of Batangas55 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 MBMI’s 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 with the State."57Petitioners 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.1âwphi1 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.
FOREIGN INVESTMENTS ACT

G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI
SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO
PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE
LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the
Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3)
Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission
(SEC)4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on
behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a
Consolidated Comment on behalf of the State,6declaring expressly that it agrees with the
Court's definition of the term "capital" in Section 11, Article XII of the Constitution. During the
Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's
28 June 2011 Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term
"capital" in Section 11, Article XII of the Constitution has far-reaching implications to the
national economy. In fact, a resolution of this issue will determine whether Filipinos are
masters, or second-class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the Philippine national economy. Indeed,
if ever there is a legal issue that has far-reaching implications to the entire nation, and to
future generations of Filipinos, it is the threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly
demand an immediate adjudication of this issue. Simply put, the far-reaching implications
of this issue justify the treatment of the petition as one for mandamus. 7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to
resolve the case although the petition for declaratory relief could be outrightly dismissed for
being procedurally defective. There, appellant admittedly had already committed a breach of
the Public Service Act in relation to the Anti-Dummy Law since it had been employing non-
American aliens long before the decision in a prior similar case. However, the main issue
in Luzon Stevedoring was of transcendental importance, involving the exercise or enjoyment
of rights, franchises, privileges, properties and businesses which only Filipinos and qualified
corporations could exercise or enjoy under the Constitution and the statutes. Moreover, the
same issue could be raised by appellant in an appropriate action. Thus, in Luzon
Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of
all concerned, despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of
the petition and the pivotal legal issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to the
Constitution, we opted to resolve this case for the guidance of the public and all concerned
parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long
been settled and defined to refer to the total outstanding shares of stock, whether voting or
non-voting. In fact, movants claim that the SEC, which is the administrative agency tasked to
enforce the 60-40 ownership requirement in favor of Filipino citizens in the Constitution and
various statutes, has consistently adopted this particular definition in its numerous opinions.
Movants point out that with the 28 June 2011 Decision, the Court in effect introduced a "new"
definition or "midstream redefinition"9 of the term "capital" in Section 11, Article XII of the
Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined
the term "capital" found in various economic provisions of the 1935, 1973 and 1987
Constitutions. There has never been a judicial precedent interpreting the term "capital" in the
1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly baseless
to claim that the Court in defining the term "capital" in its 28 June 2011 Decision modified,
reversed, or set aside the purported long-standing definition of the term "capital," which
supposedly refers to the total outstanding shares of stock, whether voting or non-voting. To
repeat, until the present case there has never been a Court ruling categorically defining the
term "capital" found in the various economic provisions of the 1935, 1973 and 1987 Philippine
Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of
the term "capital" as referring to both voting and non-voting shares (combined total of
common and preferred shares) are, in the first place, conflicting and inconsistent. There is no
basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly
adopted a definition of the term "capital" contrary to the definition that this Court adopted in its
28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in
Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term "capital"
includes "both preferred and common stocks." The issue was raised in relation to a stock-
swap transaction between a Filipino and a Japanese corporation, both stockholders of a
domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P.
Mendoza ruled that the resulting ownership structure of the corporation would
be unconstitutional because 60% of the voting stock would be owned by Japanese while
Filipinos would own only 40% of the voting stock, although when the non-voting stock is
added, Filipinos would own 60% of the combined voting and non-voting stock. This
ownership structure is remarkably similar to the current ownership structure of PLDT.
Minister Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common
and preferred) while the Japanese investors control sixty percent (60%) of the common
(voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the
word "capital," which is construed "to include both preferred and common shares" and
"that where the law does not distinguish, the courts shall not distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in

question may not be constitutionally upheld. While it may be ordinary corporate practice
to classify corporate shares into common voting shares and preferred non-voting shares, any
arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus,
the resultant equity arrangement which would place ownership of 60%11 of the common
(voting) shares in the Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to circumvention of the
principle of control by Philippine stockholders that is implicit in the 60% Philippine
nationality requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section
9, Article XIV of the 1973 Constitution includes "both preferred and common stocks" treated
as the same class of shares regardless of differences in voting rights and privileges. Minister
Mendoza stressed that the 60-40 ownership requirement in favor of Filipino citizens in the
Constitution is not complied with unless the corporation "satisfies the criterion of beneficial
ownership" and that in applying the same "the primordial consideration is situs of
control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman
Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied
the Voting Control Test, that is, using only the voting stock to determine whether a
corporation is a Philippine national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine
national because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is
owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF
will accrue to the benefit of Philippine nationals. Still pursuant to the Control Test, MLRC’s
investment in 60% of BFDC’s outstanding capital stock entitled to vote shall be
deemed as of Philippine nationality, thereby qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals,
considering that: (1) sixty percent (60%) of their respective outstanding capital
stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in the case of
MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their respective board of
directors are Filipino citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-
40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. At the same time, these opinions highlight the conflicting, contradictory,
and inconsistent positions taken by the DOJ and the SEC on the definition of the term
"capital" found in the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly
provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any
of its individual Commissioner or staff the power to adopt any rule or regulation.
Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and not
any of its legal officers, that is empowered to issue opinions and approve rules and
regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of the
Commission except its review or appellate authority and its power to adopt, alter and
supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested
party any action of any department or office, individual Commissioner, or staff member of the
Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code, Presidential
Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions
that have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of
the Code, only the SEC en banc can "issue opinions" that have the force and effect of rules or
regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any individual
Commissioner or staff the power to adopt rules or regulations. In short, any opinion of
individual Commissioners or SEC legal officers does not constitute a rule or regulation
of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its
individual commissioners or legal staff, is empowered to issue opinions which have the same
binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc

to a commissioner or an individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend

rules and regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power,
can issue an opinion but that opinion does not constitute a rule or
regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and
regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular
situation and will not constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue
rules and opinions on behalf of the SEC, has adopted even the Grandfather Rule in
determining compliance with the 60-40 ownership requirement in favor of Filipino citizens
mandated by the Constitution for certain economic activities. This prevailing SEC ruling,
which the SEC correctly adopted to thwart any circumvention of the required Filipino
"ownership and control," is laid down in the 25 March 2010 SEC en banc ruling in Redmont
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of
our natural resources. Necessarily, therefore, the Rule interpreting the constitutional
provision should not diminish that right through the legal fiction of corporate
ownership and control. But the constitutional provision, as interpreted and practiced via the
1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence,
the Grandfather Rule must be applied to accurately determine the actual participation,
both direct and indirect, of foreigners in a corporation engaged in a nationalized
activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be

determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is
owned by "Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such
investing corporation is in turn owned to some extent by another investing corporation, the
same process must be observed. One must not stop until the citizenships of the individual or
natural stockholders of layer after layer of investing corporations have been established, the
very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
Grandfather Rule. In one of the discussions on what is now Article XII of the present
Constitution, the framers made the following exchange:

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 a draft. The phrase that is contained here which we adopted
from the UP draft is ‘60 percent of 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?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain economic
activities applies not only to voting control of the corporation, but also to the beneficial
ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional mandate. Otherwise, the corporation is
"considered as non-Philippine national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine
whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various
opinions which respondents relied upon, is merely preliminary and an opinion only of such
officers. To repeat, any such opinion does not constitute an SEC rule or regulation. In fact,
many of these opinions contain a disclaimer which expressly states: "x x x the foregoing
opinion is based solely on facts disclosed in your query and relevant only to the particular
issue raised therein and shall not be used in the nature of a standing rule binding upon
the Commission in other cases whether of similar or dissimilar circumstances."16 Thus,
the opinions clearly make a caveat that they do not constitute binding precedents on any one,
not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are
neither conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that
any interpretation of the law that administrative or quasi-judicial agencies make is only
preliminary, never conclusive on the Court. The power to make a final interpretation of the
law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with
this Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals 17 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission18 in arguing that the Court
has already defined the term "capital" in Section 11, Article XII of the 1987 Constitution. 19

The PSE President is grossly mistaken. In both cases of National Telecommunications v.

Court of Appeals20 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission,21 the Court did not define the term "capital" as found in
Section 11, Article XII of the 1987 Constitution. In fact, these two cases never mentioned,
discussed or cited Section 11, Article XII of the Constitution or any of its economic
provisions, and thus cannot serve as precedent in the interpretation of Section 11,
Article XII of the Constitution. These two cases dealt solely with the determination of the
correct regulatory fees under Section 40(e) and (f) of the Public Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision
of other public services and/or in the regulation or fixing of their rates, twenty centavos for
each one hundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no
shares have been issued, of the capital invested, or of the property and equipment whichever
is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or
fraction thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid,"
"capital stock" and "capital" does not pertain to, and cannot control, the definition of the term
"capital" as used in Section 11, Article XII of the Constitution, or any of the economic
provisions of the Constitution where the term "capital" is found. The definition of the term
"capital" found in the Constitution must not be taken out of context. A careful reading of these
two cases reveals that the terms "capital stock subscribed or paid," "capital stock" and
"capital" were defined solely to determine the basis for computing the supervision and
regulation fees under Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land,
embodies the ideals that the Constitution intends to achieve. 22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just
and humane society, and establish a Government that shall embody our ideals and
aspirations, promote the common good, conserve and develop our patrimony, and secure
to ourselves and our posterity, the blessings of independence and democracy under the rule
of law and a regime of truth, justice, freedom, love, equality, and peace, do ordain and
promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State
policy the development of a national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency,
when the national interest dictates, reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by such citizens, or such
higher percentage as Congress may prescribe, certain areas of investments. The Congress
shall enact measures that will encourage the formation and operation of enterprises whose
capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national
jurisdiction and in accordance with its national goals and priorities. 23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose capital is
owned by such citizens, or such higher percentage as Congress may prescribe, certain areas
of investments." Thus, in numerous laws Congress has reserved certain areas of investments
to Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned
by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government
Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3)
Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development
Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No.
10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines. (Emphasis
supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of
authorization for the operation of public utilities shall be granted only to "citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such citizens." "The provision is [an
express] recognition of the sensitive and vital position of public utilities both in the
national economy and for national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to
(1) Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital"
is owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can
validly own and operate a public utility. In the case of corporations or associations, at least 60
percent of their "capital" must be owned by Filipino citizens. In other words, under Section
11, Article XII of the 1987 Constitution, to own and operate a public utility a
corporation’s capital must at least be 60 percent owned by Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress
enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended,
which defined a "Philippine national" as follows:

SEC. 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 citizens of the Philippines; or 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 owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) 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 where 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 of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national."
(Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine
citizen, or a domestic corporation at least "60% of the capital stock outstanding
and entitled to vote" is owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as
provided in its predecessor statute, Executive Order No. 226 or the Omnibus Investments
Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this
Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic
partnership or association wholly-owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; 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 per cent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and
its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote of both corporations must be owned and
held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine national. (Boldfacing, italicization and
underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is
not a ‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written
certificate to the effect that such business or economic activity x x x would not conflict with
the Constitution or laws of the Philippines."27 Thus, a "non-Philippine national" cannot own
and operate a reserved economic activity like a public utility. This means, of course, that only
a "Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments
Code of 1987 was a reiteration of the meaning of such term as provided in Article 14 of
the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; 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 per cent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and
its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote of both corporations must be owned and
held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine national. (Boldfacing, italicization and
underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is
not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first
securing a written certificate from the Board of Investments to the effect that such business or
economic activity x x x would not conflict with the Constitution or laws of the
Philippines."29 Thus, a "non-Philippine national" cannot own and operate a reserved economic
activity like a public utility. Again, this means that only a "Philippine national" can own and
operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment
Incentives Act, which took effect on 16 September 1967, contained a similar definition of a
"Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association
wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; 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 per cent of the fund will accrue to the benefit of Philippine
Nationals: Provided, That where a corporation and its non-Filipino stockholders own stock in a
registered enterprise, at least sixty per cent of the capital stock outstanding and entitled to
vote of both corporations must be owned and held by the citizens of the Philippines and at
least sixty per cent of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
National. (Boldfacing, italicization and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which
took effect on 30 September 1968, if the investment in a domestic enterprise by non-
Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise must obtain
prior approval from the Board of Investments before accepting such investment. Such
approval shall not be granted if the investment "would conflict with existing constitutional
provisions and laws regulating the degree of required ownership by Philippine nationals in the
enterprise."31 A "non-Philippine national" cannot own and operate a reserved economic
activity like a public utility. Again, this means that only a "Philippine national" can own and
operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a
Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital
stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic
corporation is a "Philippine national" only if at least 60% of its voting stock is owned by
Filipino citizens. This definition of a "Philippine national" is crucial in the present case because
the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution, which limits the
ownership and operation of public utilities to Filipino citizens or to corporations or associations
at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the
nature of business and area of investment. The FIA spells out the procedures by which non-
Philippine nationals can invest in the Philippines. Among the key features of this law is the
concept of a negative list or the Foreign Investments Negative List. 32 Section 8 of the law
states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment

Negative List]. - The Foreign Investment Negative List shall have two 2 component
lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by

mandate of the Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the
Department of National Defense [DND] to engage in such activity, such as the manufacture,
repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance,
explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is
specifically authorized, with a substantial export component, to a non-Philippine national by
the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance
halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring and
italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine

nationals." Foreign Investment Negative List A consists of "areas of activities reserved
to Philippine nationals by mandate of the Constitution and specific laws," where
foreign equity participation in any enterprise shall be limited to the maximum
percentage expressly prescribed by the Constitution and other specific laws. In short,
to own and operate a public utility in the Philippines one must be a "Philippine
national" as defined in the FIA. The FIA is abundant notice to foreign investors to what
extent they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment Negative List A
is the ownership and operation of public utilities, which the Constitution expressly reserves to
Filipino citizens and to corporations at least 60% owned by Filipino citizens. In other words,
Negative List A of the FIA reserves the ownership and operation of public utilities only
to "Philippine nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the
Philippines; x x x or (3) 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 owned and held by citizens of the Philippines; or (4) a corporation organized
abroad and registered as doing business in the Philippines under the Corporation Code of
which one hundred percent (100%) 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."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the
Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments Code of
1987, and to the passage of the present Foreign Investments Act of 1991, or for more than
four decades, the statutory definition of the term "Philippine national" has been
uniform and consistent: it means a Filipino citizen, or a domestic corporation at least
60% of the voting stock is owned by Filipinos. Likewise, these same statutes have
uniformly and consistently required that only "Philippine nationals" could own and
operate public utilities in the Philippines. The following exchange during the Oral
Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments
Act of 1991, x x x? And the FIA of 1991 took effect in 1991, correct? That’s
over twenty (20) years ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only
Philippine nationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national"
either as a citizen of the Philippines, or if it is a corporation at least sixty
percent (60%) of the voting stock is owned by citizens of the Philippines,
correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:
 And, you are also aware that under the predecessor law of the Foreign
Investments Act of 1991, the Omnibus Investments Act of 1987, the same
provisions apply: x x x only Philippine nationals can own and operate a public
utility and the Philippine national, if it is a corporation, x x x sixty percent
(60%) of the capital stock of that corporation must be owned by citizens of
the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the Omnibus
Investments Act of 1981, the same rules apply: x x x only a Philippine
national can own and operate a public utility and a Philippine national, if it is a
corporation, sixty percent (60%) of its x x x voting stock, must be owned by
citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the
Foreign Company Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent
– only a Philippine national can own and operate a public utility, and a
Philippine national, if it is a corporation, x x x at least sixty percent
(60%) of the voting stock must be owned by citizens of the Philippines,
correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of
public utilities, are reserved to corporations "at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines." Foreign
Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of
the Constitution and specific laws." The FIA is the basic statute regulating foreign
investments in the Philippines. Government agencies tasked with regulating or monitoring
foreign investments, as well as counsels of foreign investors, should start with the FIA in
determining to what extent a particular foreign investment is allowed in the Philippines.
Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign
investors and their counsels who rely on opinions of SEC legal officers that obviously
contradict the FIA do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal officers that
cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining whether a
particular corporation is qualified to own and operate a nationalized or partially nationalized
business in the Philippines. This shows that SEC legal officers are not only aware of, but also
rely on and invoke, the provisions of the FIA in ascertaining the eligibility of a corporation to
engage in partially nationalized industries. The following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine

Overseas Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and

Renato S. Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos &

Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De
Los Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard
S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term
"Philippine national" in the FIA signifies their lack of integrity and competence in resolving
issues on the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be
limited and interpreted to refer to corporations seeking to avail of tax and fiscal incentives
under investment incentives laws and cannot be equated with the term "capital" in Section 11,
Article XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its
predecessor statutes do not apply to "companies which have not registered and obtained
special incentives under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any
enterprise. Tax and fiscal incentives to investments are granted separately under the
Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed
Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles
previously regulated foreign investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments Code
of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or its
predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives under
the Code. The FIA and its predecessor statutes apply to investments in all domestic
enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the
Omnibus Investments Code of 1987 or its predecessor statutes. The reason is quite
obvious – mere non-availment of tax and fiscal incentives by a non-Philippine national
cannot exempt it from Section 11, Article XII of the Constitution regulating foreign
investments in public utilities. In fact, the Board of Investments’ Primer on Investment
Policies in the Philippines,34 which is given out to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for
incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least 70% of
their production) may go ahead and make the investments without seeking incentives. They
only have to be guided by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other
areas outside of this list are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. To repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial
ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional mandate. Otherwise, the corporation is
"considered as non-Philippine national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital
stock is held by "a trustee of funds for pension or other employee retirement or separation
benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing
Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights, is
essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only
to voting control of the corporation but also to the beneficial ownership of the corporation, it is
therefore imperative that such requirement apply uniformly and across the board to all classes
of shares, regardless of nomenclature and category, comprising the capital of a corporation.
Under the Corporation Code, capital stock 35 consists of all classes of shares issued to
stockholders, that is, common shares as well as preferred shares, which may have different
rights, privileges or restrictions as stated in the articles of incorporation. 36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares,
but disallows denial of the right to vote in specific corporate matters. Thus, common shares
have the right to vote in the election of directors, while preferred shares may be denied such
right. Nonetheless, preferred shares, even if denied the right to vote in the election of
directors, are entitled to vote on the following corporate matters: (1) amendment of articles of
incorporation; (2) increase and decrease of capital stock; (3) incurring, creating or increasing
bonded indebtedness; (4) sale, lease, mortgage or other disposition of substantially all
corporate assets; (5) investment of funds in another business or corporation or for a purpose
other than the primary purpose for which the corporation was organized; (6) adoption,
amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of
corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from
the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting
rights but also to shares without voting rights. Preferred shares, denied the right to vote in the
election of directors, are anyway still entitled to vote on the eight specific corporate matters
mentioned above. Thus, if a corporation, engaged in a partially nationalized industry,
issues a mixture of common and preferred non-voting shares, at least 60 percent of the
common shares and at least 60 percent of the preferred non-voting shares must be
owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least
60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must apply separately to each class
of shares, whether common, preferred non-voting, preferred voting or any other class
of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino
citizens clearly breathes life to the constitutional command that the ownership and operation
of public utilities shall be reserved exclusively to corporations at least 60 percent of whose
capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of
Filipino citizens to each class of shares, regardless of differences in voting rights, privileges
and restrictions, guarantees effective Filipino control of public utilities, as mandated by the
Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling
interest" in public utilities always lies in the hands of Filipino citizens. This addresses and
extinguishes Pangilinan’s worry that foreigners, owning most of the non-voting shares, will
exercise greater control over fundamental corporate matters requiring two-thirds or majority
vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total
outstanding shares of stock, whether voting or non-voting, the following excerpts of the
deliberations reveal otherwise. It is clear from the following exchange that the term "capital"
refers to controlling interest of a corporation, thus:

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 this 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 a draft. The phrase that is contained here which we
adopted from the UP draft is "60 percent of 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?

MR. VILLEGAS. Yes.39

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting
stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital
to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority.
Let us say 40 percent of the capital is owned by them, but it is the voting capital,
whereas, the Filipinos own the nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the minority because they have
the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973
and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed. 40 (Boldfacing and

underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the
corporation.

The use of the term "capital" was intended to replace the word "stock" because associations
without stocks can operate public utilities as long as they meet the 60-40 ownership
requirement in favor of Filipino citizens prescribed in Section 11, Article XII of the Constitution.
However, this did not change the intent of the framers of the Constitution to reserve
exclusively to Philippine nationals the "controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the
nationalists in the Convention."41 The same battle-cry resulted in the nationalization of the
public utilities.42 This is also the same intent of the framers of the 1987 Constitution who
adopted the exact formulation embodied in the 1935 and 1973 Constitutions on foreign equity
limitations in partially nationalized industries.

The OSG, in its own behalf and as counsel for the State, 43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that the
deletion of the phrase "controlling interest" and replacement of the word "stock" with the term
"capital" were intended specifically to extend the scope of the entities qualified to operate
public utilities to include associations without stocks. The framers’ omission of the phrase
"controlling interest" did not mean the inclusion of all shares of stock, whether voting or non-
voting. The OSG reiterated essentially the Court’s declaration that the Constitution reserved
exclusively to Philippine nationals the ownership and operation of public utilities consistent
with the State’s policy to "develop a self-reliant and independent national
economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of
shares, grossly contravenes the intent and letter of the Constitution that the "State shall
develop a self-reliant and independent national economy effectively controlled by Filipinos."
We illustrated the glaring anomaly which would result in defining the term "capital" as the total
outstanding capital stock of a corporation, treated as a single class of shares regardless of
the actual classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share having
a par value of one peso (₱ 1.00) per share. Under the broad definition of the term "capital,"
such corporation would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more than 99.999 percent,
of the total outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule
equity of less than 0.001 percent, exercise control over the public utility. On the other hand,
the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of
directors and hence, have no control over the public utility. This starkly circumvents the intent
of the framers of the Constitution, as well as the clear language of the Constitution, to place
the control of public utilities in the hands of Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-
Filipino board of directors, this situation does not guarantee Filipino control and does not in
any way cure the violation of the Constitution. The independence of the Filipino board
members so elected by such foreign shareholders is highly doubtful. As the OSG pointed out,
quoting Justice George Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite
evident that one who holds his office only during the pleasure of another cannot be depended
upon to maintain an attitude of independence against the latter’s will." Allowing foreign
shareholders to elect a controlling majority of the board, even if all the directors are Filipinos,
grossly circumvents the letter and intent of the Constitution and defeats the very purpose of
our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the
intent of the framers of the Constitution to limit foreign ownership, and assure majority Filipino
ownership and control of public utilities. The OSG argued, "while the delegates disagreed as
to the percentage threshold to adopt, x x x the records show they clearly understood that
Filipino control of the public utility corporation can only be and is obtained only through the
election of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission
on 23 August 1986 was the extent of majority Filipino control of public utilities. This is evident
from the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the
phrase "two thirds of whose voting stock or controlling interest," and instead substitute the
words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No
franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is owned
by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous
sections in which we fixed the Filipino equity to 60 percent as against 40 percent for
foreigners. It is only in this Section 15 with respect to public utilities that the committee
proposal was increased to two-thirds. I think it would be better to harmonize this provision by
providing that even in the case of public utilities, the minimum equity for Filipino citizens
should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have
had with representatives of the Filipino majority owners of the international record carriers,
and the subsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a
corporation is vested in the board of directors, not in the officers but in the board of directors.
The officers are only agents of the board. And they believe that with 60 percent of the equity,
the Filipino majority stockholders undeniably control the board. Only on important corporate
acts can the 40-percent foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications on why they
would like to maintain the present equity, I am referring to the 66 2/3. They would prefer to
have a 75-25 ratio but would settle for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of
two-thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of
Filipino citizens.

x x x x46
While they had differing views on the percentage of Filipino ownership of capital, it is clear
that the framers of the Constitution intended public utilities to be majority Filipino-owned and
controlled. To ensure that Filipinos control public utilities, the framers of the Constitution
approved, as additional safeguard, the inclusion of the last sentence of Section 11, Article XII
of the Constitution commanding that "[t]he participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate share in its capital,
and all the executive and managing officers of such corporation or association must be
citizens of the Philippines." In other words, the last sentence of Section 11, Article XII of the
Constitution mandates that (1) the participation of foreign investors in the governing body of
the corporation or association shall be limited to their proportionate share in the capital of
such entity; and (2) all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing
officers of the corporation or association to be Filipino citizens specifically to prevent
management contracts, which were designed primarily to circumvent the Filipinization of
public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding
a phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned – Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however,
also have management contracts with these foreign companies – Philcom with RCA, ETPI
with Cable and Wireless PLC, and GMCR with ITT. Up to the present time, the general
managers of these carriers are foreigners. While the foreigners in these common carriers are
only minority owners, the foreign multinationals are the ones managing and controlling their
operations by virtue of their management contracts and by virtue of their strength in the
governing bodies of these carriers.47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to
propose an amendment with respect to the operating management of public utilities, and in
this amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by Filipino citizens. Will the
committee assure us that this amendment will insure that past activities such as management
contracts will no longer be possible under this amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which
reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF
ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH

CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING

BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the
copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that
correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We
accept the amendment. Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx
The results show 29 votes in favor and none against; so the proposed amendment is
approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by such citizens." May I
request Commissioner Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING

BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND
MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST BE
CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION

BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE
YEARS RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by Congress when the common good so requires. The State
shall encourage equity participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision
on the limited participation of foreign investors in the governing body of public utilities, is a
reiteration of the last sentence of Section 5, Article XIV of the 1973 Constitution, 49 signifying
its importance in reserving ownership and control of public utilities to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own
64.27% of the common shares of PLDT, which class of shares exercises the sole right to vote
in the election of directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of
PLDT’s common shares, constituting a minority of the voting stock, and thus Filipinos do not
control PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn; 50 (5) preferred
shares have twice the par value of common shares; and (6) preferred shares constitute
77.85% of the authorized capital stock of PLDT and common shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the
question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the 1987 Constitution. Such question indisputably calls for
a presentation and determination of evidence through a hearing, which is generally outside
the province of the Court’s jurisdiction, but well within the SEC’s statutory powers. Thus, for
obvious reasons, the Court limited its decision on the purely legal and threshold issue on the
definition of the term "capital" in Section 11, Article XII of the Constitution and directed the
SEC to apply such definition in determining the exact percentage of foreign ownership in
PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting
shares is the sole basis in determining foreign equity in a public utility and that any other
government rulings, opinions, and regulations inconsistent with this declaratory relief be
declared unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners
in excess of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and
Philippine Stock Exchange to require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to
perform its statutory duty to investigate whether "the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has been complied with [by PLDT] as
required by x x x the Constitution."51 Such plea clearly negates SEC’s argument that it was
not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample
powers to order the SEC’s compliance with its directive contained in the 28 June 2011
Decision in view of the far-reaching implications of this case. In Domingo v. Scheer,52 the
Court dispensed with the amendment of the pleadings to implead the Bureau of Customs
considering (1) the unique backdrop of the case; (2) the utmost need to avoid further delays;
and (3) the issue of public interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The
petition should not be dismissed because the second action would only be a repetition of the
first. In Salvador, et al., v. Court of Appeals, et al., we held that this Court has full powers,
apart from that power and authority which is inherent, to amend the processes, pleadings,
proceedings and decisions by substituting as party-plaintiff the real party-in-interest. The
Court has the power to avoid delay in the disposition of this case, to order its
amendment as to implead the BOC as party-respondent. Indeed, it may no longer be
necessary to do so taking into account the unique backdrop in this case, involving as
it does an issue of public interest. After all, the Office of the Solicitor General has
represented the petitioner in the instant proceedings, as well as in the appellate court, and
maintained the validity of the deportation order and of the BOC’s Omnibus Resolution. It
cannot, thus, be claimed by the State that the BOC was not afforded its day in court, simply
because only the petitioner, the Chairperson of the BOC, was the respondent in the CA, and
the petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents. Their
sole purpose is to facilitate the application of justice to the rival claims of contending
parties. They were created, not to hinder and delay, but to facilitate and promote, the
administration of justice. They do not constitute the thing itself, which courts are always
striving to secure to litigants. They are designed as the means best adapted to obtain that
thing. In other words, they are a means to an end. When they lose the character of the one
and become the other, the administration of justice is at fault and courts are correspondingly
remiss in the performance of their obvious duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s
decision and defer to the Court’s definition of the term "capital" in Section 11, Article
XII of the Constitution. Further, the SEC entered its special appearance in this case and
argued during the Oral Arguments, indicating its submission to the Court’s
jurisdiction. It is clear, therefore, that there exists no legal impediment against the
proper and immediate implementation of the Court’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual
questions, are concerned. In other words, PLDT must be impleaded in order to fully resolve
the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of PLDT; (2) whether the sale of common shares to
foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3) whether the total
percentage of the PLDT common shares with voting rights complies with the 60-40 ownership
requirement in favor of Filipino citizens under the Constitution for the ownership and operation
of PLDT. These issues indisputably call for an examination of the parties’ respective
evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT must be
impleaded, and must necessarily be heard, in the proceedings before the SEC where the
factual issues will be thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on
the factual issues raised by Gamboa, except the single and purely legal issue on the definition
of the term "capital" in Section 11, Article XII of the Constitution. The Court confined the
resolution of the instant case to this threshold legal issue in deference to the fact-finding
power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal
issue in this case even without the participation of PLDT since defining the term "capital" in
Section 11, Article XII of the Constitution does not, in any way, depend on whether PLDT was
impleaded. Simply put, PLDT is not indispensable for a complete resolution of the purely legal
question in this case.55 In fact, the Court, by treating the petition as one for
mandamus,56 merely directed the SEC to apply the Court’s definition of the term "capital" in
Section 11, Article XII of the Constitution in determining whether PLDT committed any
violation of the said constitutional provision. The dispositive portion of the Court’s ruling is
addressed not to PLDT but solely to the SEC, which is the administrative agency
tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term
"capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC to
investigate any violation by PLDT of the 60-40 ownership requirement in favor of Filipino
citizens under the Constitution,57 there is no deprivation of PLDT’s property or denial of
PLDT’s right to due process, contrary to Pangilinan and Nazareno’s misimpression. Due
process will be afforded to PLDT when it presents proof to the SEC that it complies, as it
claims here, with Section 11, Article XII of the Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may
result in a sudden flight of existing foreign investors to "friendlier" countries and
simultaneously deterring new foreign investors to our country. In particular, the PSE claims
that the 28 June 2011 Decision may result in the following: (1) loss of more than ₱ 630 billion
in foreign investments in PSE-listed shares; (2) massive decrease in foreign trading
transactions; (3) lower PSE Composite Index; and (4) local investors not investing in PSE-
listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’
apprehension. Without providing specific details, he pointed out the depressing state of the
Philippine economy compared to our neighboring countries which boast of growing
economies. Further, Dr. Villegas explained that the solution to our economic woes is for the
government to "take-over" strategic industries, such as the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this
high FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities,
so that we can compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry
strategic, their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is
to make sure that those industries are in the hands of state enterprises. So, in these
countries, nationalization means the government takes over. And because their
governments are competent and honest enough to the public, that is the solution. x x
x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our
public utilities serve no purpose. Obviously, there can never be foreign investments in public
utilities if, as Dr. Villegas claims, the "solution is to make sure that those industries are in the
hands of state enterprises." Dr. Villegas’s argument that foreign investments in
telecommunication companies like PLDT are badly needed to save our ailing economy
contradicts his own theory that the solution is for government to take over these companies.
Dr. Villegas is barking up the wrong tree since State ownership of public utilities and foreign
investments in such industries are diametrically opposed concepts, which cannot possibly be
reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to
decide the present case differently for two reasons. First, the governments of our neighboring
countries have, as claimed by Dr. Villegas, taken over ownership and control of their strategic
public utilities like the telecommunications industry. Second, our Constitution has specific
provisions limiting foreign ownership in public utilities which the Court is sworn to uphold
regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public
utilities to Filipino citizens, or corporations or associations at least 60 percent of whose capital
belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears to be more liberal
in allowing foreign investors to own 40 percent of public utilities, unlike in other Asian
countries whose governments own and operate such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the
application and imposition of appropriate sanctions against PLDT if found violating Section
11, Article XII of the Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and determine whether PLDT
violated Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after
the SEC has determined PLDT’s violation, if any exists at the time of the commencement of
the administrative case or investigation, that the SEC may impose the statutory sanctions
against PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC shall
impose the appropriate sanctions only if it finds after due hearing that, at the start of the
administrative case or investigation, there is an existing violation of Section 11, Article XII of
the Constitution. Under prevailing jurisprudence, public utilities that fail to comply with the
nationality requirement under Section 11, Article XII and the FIA can cure their deficiencies
prior to the start of the administrative case or investigation.61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy

"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals, who
are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or
associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The
FIA’s implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is
essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting
rights, as well as with full beneficial ownership. This is precisely because the right to vote
in the election of directors, coupled with full beneficial ownership of stocks, translates to
effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term "capital"
openly invites alien domination of economic activities reserved exclusively to Philippine
nationals. Therefore, respondents’ interpretation will ultimately result in handing over effective
control of our national economy to foreigners in patent violation of the Constitution, making
Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity
Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural
resources, and in the ownership and control of public utilities, in the Philippines. To do this the
1935 Constitution, which contained the same 60 percent Filipino ownership and control
requirement as the present 1987 Constitution, had to be amended to give Americans parity
rights with Filipinos. There was bitter opposition to the Parity Amendment62 and many
Filipinos eagerly awaited its expiration. In late 1968, PLDT was one of the American-
controlled public utilities that became Filipino-controlled when the controlling American
stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July
1974.63 No economic suicide happened when control of public utilities and mining
corporations passed to Filipinos’ hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned
by the Parity Amendment, effectively giving foreigners parity rights with Filipinos, but
this time even without any amendment to the present Constitution. Worse, movants’
interpretation opens up our national economy to effective control not only by Americans but
also by all foreigners, be they Indonesians, Malaysians or Chinese, even in the absence
of reciprocal treaty arrangements. At least the Parity Amendment, as implemented by the
Laurel-Langley Agreement, gave the capital-starved Filipinos theoretical parity – the same
rights as Americans to exploit natural resources, and to own and control public utilities, in the
United States of America. Here, movants’ interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without any reciprocal
arrangements. That would mean that Indonesians, Malaysians and Chinese nationals could
effectively control our mining companies and public utilities while Filipinos, even if they have
the capital, could not control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and
control requirement for public utilities like PLOT. Any deviation from this requirement
necessitates an amendment to the Constitution as exemplified by the Parity Amendment. This
Court has no power to amend the Constitution for its power and duty is only to faithfully apply
and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further

pleadings shall be entertained.

SO ORDERED.
G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI
SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO
PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE
LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity
of the sale of shares of stock of Philippine Telecommunications Investment Corporation
(PTIC) by the government of the Republic of the Philippines to Metro Pacific Assets Holdings,
Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long

Distance Telephone Company (PLDT), are as follows: 1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT
a franchise and the right to engage in telecommunications business. In 1969, General
Telephone and Electronics Corporation (GTE), an American company and a major PLDT
stockholder, sold 26 percent of the outstanding common shares of PLDT to PTIC. In 1977,
Prime Holdings, Inc. (PHI) was incorporated by several persons, including Roland Gapud and
Jose Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC
by virtue of three Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco
and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were
sequestered by the Presidential Commission on Good Government (PCGG). The 111,415
PTIC shares, which represent about 46.125 percent of the outstanding capital stock of PTIC,
were later declared by this Court to be owned by the Republic of the Philippines. 2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the
Inter-Agency Privatization Council (IPC) of the Philippine Government announced that it
would sell the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of
PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently, the
public bidding was reset to 8 December 2006, and only two bidders, Parallax Venture Fund
XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won with a bid
of ₱25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However,
First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded
its right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC
shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a
Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of
the outstanding capital stock of PTIC, with the Philippine Government for the price of
₱25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125
percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of
the outstanding common shares of PLDT. With the sale, First Pacific’s common
shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing
the common shareholdings of foreigners in PLDT to about 81.47 percent. This violates
Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the
capital of a public utility to not more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary
John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of
investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the
total PLDT outstanding common shares. PHI, on the other hand, was incorporated in 1977,
and became the owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital
stock of PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and
Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the
PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former
President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the Republic
of the Philippines in accordance with this Court’s decision4 which became final and executory
on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4
percent of the outstanding common shares of stock of PLDT, and designated the Inter-
Agency Privatization Council (IPC), composed of the Department of Finance and the PCGG,
as the disposing entity. An invitation to bid was published in seven different newspapers from
13 to 24 November 2006. On 20 November 2006, a pre-bid conference was held, and the
original deadline for bidding scheduled on 4 December 2006 was reset to 8 December 2006.
The extension was published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the
highest bidder with a bid of ₱25,217,556,000. The government notified First Pacific, the
majority owner of PTIC shares, of the bidding results and gave First Pacific until 1 February
2007 to exercise its right of first refusal in accordance with PTIC’s Articles of Incorporation.
First Pacific announced its intention to match Parallax’s bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government

conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC
shares. Respondents Teves and Sevilla were among those who attended the public hearing.
The HR Committee Report No. 2270 concluded that: (a) the auction of the government’s
111,415 PTIC shares bore due diligence, transparency and conformity with existing legal
procedures; and (b) First Pacific’s intended acquisition of the government’s 111,415
PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate the 40
percent constitutional limit on foreign ownership of a public utility since PTIC holds
only 13.847 percent of the total outstanding common shares of PLDT. 5 On 28 February
2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public
bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of
PTIC (the remaining 54 percent of PTIC shares was already owned by First Pacific and its
affiliates); (b) Parallax offered the highest bid amounting to ₱25,217,556,000; (c) pursuant to
the right of first refusal in favor of PTIC and its shareholders granted in PTIC’s Articles of
Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the
highest bid offered for PTIC shares on 13 February 2007; and (d) on 28 February 2007, the
sale was consummated when MPAH paid IPC ₱25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the
other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory
relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among
others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s
common shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with
Japanese NTT DoCoMo’s common shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional
limit.6 Petitioner asserts:

If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent
to 37.0 percent of its common – or voting- stockholdings, x x x. Hence, the consummation of
the sale will put the two largest foreign investors in PLDT – First Pacific and Japan’s NTT
DoCoMo, which is the world’s largest wireless telecommunications firm, owning 51.56 percent
of PLDT common equity. x x x With the completion of the sale, data culled from the official
website of the New York Stock Exchange (www.nyse.com) showed that those foreign entities,
which own at least five percent of common equity, will collectively own 81.47 percent of
PLDT’s common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the period 2003-2005, revealed that First
Pacific and several other foreign entities breached the constitutional limit of 40 percent
ownership as early as 2003. x x x"7

Petitioner raises the following issues: (1) whether the consummation of the then impending
sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign
ownership of a public utility; (2) whether public respondents committed grave abuse of
discretion in allowing the sale of the 111,415 PTIC shares to First Pacific; and (3) whether the
sale of common shares to foreigners in excess of 40 percent of the entire subscribed common
capital stock violates the constitutional limit on foreign ownership of a public utility. 8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to
Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007,
the Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to

enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or
assignee." Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in
the outcome of the controversy x x x where the Philippine Government is completing the sale
of government owned assets in [PLDT], unquestionably a public utility, in violation of the
nationality restrictions of the Philippine Constitution."

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner, 9 which
indisputably demand a thorough examination of the evidence of the parties, are generally
beyond this Court’s jurisdiction. Adhering to this well-settled principle, the Court shall confine
the resolution of the instant controversy solely on the threshold and purely legal issue of
whether the term "capital" in Section 11, Article XII of the Constitution refers to the total
common shares only or to the total outstanding capital stock (combined total of common and
non-voting preferred shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner
seeks, only the petition for prohibition is within the original jurisdiction of this court, which
however is not exclusive but is concurrent with the Regional Trial Court and the Court of
Appeals. The actions for declaratory relief,10 injunction, and annulment of sale are not
embraced within the original jurisdiction of the Supreme Court. On this ground alone, the
petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition, 11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since
on 28 February 2007, the questioned sale was consummated when MPAH paid IPC
₱25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution has far-reaching implications to the national
economy, the Court treats the petition for declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory
relief as one for mandamus considering the grave injustice that would result in the
interpretation of a banking law. In that case, which involved the crime of rape committed by a
foreign tourist against a Filipino minor and the execution of the final judgment in the civil case
for damages on the tourist’s dollar deposit with a local bank, the Court declared Section 113
of Central Bank Circular No. 960, exempting foreign currency deposits from attachment,
garnishment or any other order or process of any court, inapplicable due to the peculiar
circumstances of the case. The Court held that "injustice would result especially to a citizen
aggrieved by a foreign guest like accused x x x" that would "negate Article 10 of the Civil
Code which provides that ‘in case of doubt in the interpretation or application of laws, it is
presumed that the lawmaking body intended right and justice to prevail.’" The Court therefore
required respondents Central Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil case for damages and to release the dollar
deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside
the procedural infirmity of the petition for declaratory relief and treated the same as one for
mandamus. In Alliance, the issue was whether the government unlawfully excluded
petitioners, who were government employees, from the enjoyment of rights to which they
were entitled under the law. Specifically, the question was: "Are the branches, agencies,
subdivisions, and instrumentalities of the Government, including government owned or
controlled corporations included among the four ‘employers’ under Presidential Decree No.
851 which are required to pay their employees x x x a thirteenth (13th) month pay x x x ?" The
Constitutional principle involved therein affected all government employees, clearly justifying
a relaxation of the technical rules of procedure, and certainly requiring the interpretation of the
assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory
relief. However, exceptions to this rule have been recognized. Thus, where the petition
has far-reaching implications and raises questions that should be resolved, it may be
treated as one for mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section
11, Article XII of the Constitution. He prays that this Court declare that the term "capital" refers
to common shares only, and that such shares constitute "the sole basis in determining foreign
equity in a public utility." Petitioner further asks this Court to declare any ruling inconsistent
with such interpretation unconstitutional.
The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-
reaching implications to the national economy. In fact, a resolution of this issue will determine
whether Filipinos are masters, or second class citizens, in their own country. What is at stake
here is whether Filipinos or foreigners will have effective control of the national economy.
Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation, and
to future generations of Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11,
Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No.
157360.16 That case involved the same public utility (PLDT) and substantially the same
private respondents. Despite the importance and novelty of the constitutional issue raised
therein and despite the fact that the petition involved a purely legal question, the Court
declined to resolve the case on the merits, and instead denied the same for disregarding the
hierarchy of courts.17There, petitioner Fernandez assailed on a pure question of law the
Regional Trial Court’s Decision of 21 February 2003 via a petition for review under Rule 45.
The Court’s Resolution, denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle
this purely legal issuewhich is of transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith
seize such opportunity, not only for the benefit of the litigants, but more significantly for the
benefit of the entire Filipino people, to ensure, in the words of the Constitution, "a self-reliant
and independent national economy effectively controlled by Filipinos."18 Besides, in the light
of vague and confusing positions taken by government agencies on this purely legal issue,
present and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of public
utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has
remained unresolved for over 75 years since the 1935 Constitution. There is no reason for
this Court to evade this ever recurring fundamental issue and delay again defining the term
"capital," which appears not only in Section 11, Article XII of the Constitution, but also in
Section 2, Article XII on co-production and joint venture agreements for the development of
our natural resources,19 in Section 7, Article XII on ownership of private lands,20 in Section 10,
Article XII on the reservation of certain investments to Filipino citizens, 21 in Section 4(2),
Article XIV on the ownership of educational institutions, 22 and in Section 11(2), Article XVI on
the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to
question the subject sale, which he claims to violate the nationality requirement prescribed in
Section 11, Article XII of the Constitution. If the sale indeed violates the Constitution, then
there is a possibility that PLDT’s franchise could be revoked, a dire consequence directly
affecting petitioner’s interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in this
case, involving the national economy and the economic welfare of the Filipino people, far
outweighs any perceived impediment in the legal personality of the petitioner to bring this
action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public, thus:

In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and
the object of mandamus is to obtain the enforcement of a public duty, the people are
regarded as the real parties in interest; and because it is sufficient that petitioner is a
citizen and as such is interested in the execution of the laws, he need not show that he
has any legal or special interest in the result of the action. In the aforesaid case, the
petitioners sought to enforce their right to be informed on matters of public concern, a right
then recognized in Section 6, Article IV of the 1973 Constitution, in connection with the rule
that laws in order to be valid and enforceable must be published in the Official Gazette or
otherwise effectively promulgated. In ruling for the petitioners’ legal standing, the Court
declared that the right they sought to be enforced ‘is a public right recognized by no less than
the fundamental law of the land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a
mandamus proceeding involves the assertion of a public right, the requirement of
personal interest is satisfied by the mere fact that petitioner is a citizen and, therefore,
part of the general ‘public’ which possesses the right.’

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have
been involved under the questioned contract for the development, management and
operation of the Manila International Container Terminal, ‘public interest [was] definitely
involved considering the important role [of the subject contract] . . . in the economic
development of the country and the magnitude of the financial consideration involved.’
We concluded that, as a consequence, the disclosure provision in the Constitution would
constitute sufficient authority for upholding the petitioner’s standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental
public importance, the petitioner has the requisite locus standi.

Definition of the Term "Capital" in

Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates
the Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines, at least sixty
per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines. (Emphasis
supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution,
thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least sixty
per centum of the capital of which is owned by such citizens, nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the National Assembly when the public interest
so requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in the capital thereof. (Emphasis
supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to
corporations or other entities organized under the laws of the Philippines sixty per
centum of the capital of which is owned by citizens of the Philippines,nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period than fifty
years. No franchise or right shall be granted to any individual, firm, or corporation, except
under the condition that it shall be subject to amendment, alteration, or repeal by the
Congress when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission,
reminds us that the Filipinization provision in the 1987 Constitution is one of the products of
the spirit of nationalism which gripped the 1935 Constitutional Convention. 25 The 1987
Constitution "provides for the Filipinization of public utilities by requiring that any form of
authorization for the operation of public utilities should be granted only to ‘citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such citizens.’ The provision is [an
express] recognition of the sensitive and vital position of public utilities both in the
national economy and for national security."26 The evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public utilities, which may be
inimical to the national interest.27 This specific provision explicitly reserves to Filipino citizens
control of public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
"conserve and develop our patrimony"28 and ensure "a self-reliant and independent national
economy effectively controlled by Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the
minimum nationality requirement prescribed in Section 11, Article XII of the Constitution.
Hence, for a corporation to be granted authority to operate a public utility, at least 60 percent
of its "capital" must be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in
Section 11, Article XII of the Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through voting that
control over a corporation is exercised. Petitioner posits that the term "capital" in Section 11,
Article XII of the Constitution refers to "the ownership of common capital stock subscribed and
outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and
elect members of the board of directors." It is undisputed that PLDT’s non-voting preferred
shares are held mostly by Filipino citizens.30 This arose from Presidential Decree No.
217,31 issued on 16 June 1973 by then President Ferdinand Marcos, requiring every applicant
of a PLDT telephone line to subscribe to non-voting preferred shares to pay for the
investment cost of installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s

definition of the term "capital."33 Petitioners-in-intervention allege that "the approximate
foreign ownership of common capital stock of PLDT x x x already amounts to at least 63.54%
of the total outstanding common stock," which means that foreigners exercise significant
control over PLDT, patently violating the 40 percent foreign equity limitation in public utilities
prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11,
Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan
of PLDT do not dispute that more than 40 percent of the common shares of PLDT are held by
foreigners.
In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on
the procedural infirmities of the petition and the supposed violation of the due process rights
of the "affected foreign common shareholders." Respondent Nazareno does not deny
petitioner’s allegation of foreigners’ dominating the common shareholdings of PLDT.
Nazareno stressed mainly that the petition "seeks to divest foreign common shareholders
purportedly exceeding 40% of the total common shareholdings in PLDT of their
ownership over their shares." Thus, "the foreign natural and juridical PLDT shareholders
must be impleaded in this suit so that they can be heard."34 Essentially, Nazareno invokes
denial of due process on behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among
the factual assertions that need to be established to counter petitioner’s allegations is
the uniform interpretation by government agencies (such as the SEC), institutions and
corporations (such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and common shares in
"controlling interest" in view of testing compliance with the 40% constitutional
limitation on foreign ownership in public utilities."35

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11,
Article XII of the Constitution. Neither does he refute petitioner’s claim of foreigners holding
more than 40 percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on
the procedural flaws of the petition and the alleged violation of the due process rights of
foreigners. Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this
Court’s jurisdiction over the petition; (2) petitioner’s lack of standing; (3) mootness of the
petition; (4) non-availability of declaratory relief; and (5) the denial of due process rights.
Moreover, respondent Pangilinan alleges that the issue should be whether "owners of shares
in PLDT as well as owners of shares in companies holding shares in PLDT may be required
to relinquish their shares in PLDT and in those companies without any law requiring them to
surrender their shares and also without notice and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution]
imposes no nationality requirement on the shareholders of the utility company as a
condition for keeping their shares in the utility company." According to him, "Section 11
does not authorize taking one person’s property (the shareholder’s stock in the utility
company) on the basis of another party’s alleged failure to satisfy a requirement that is a
condition only for that other party’s retention of another piece of property (the utility company
being at least 60% Filipino-owned to keep its franchise)."36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John
P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the
definition of the term "capital." In its Memorandum37 dated 24 September 2007, the OSG also
limits its discussion on the supposed procedural defects of the petition, i.e. lack of standing,
lack of jurisdiction, non-inclusion of interested parties, and lack of basis for injunction. The
OSG does not present any definition or interpretation of the term "capital" in Section 11,
Article XII of the Constitution. The OSG contends that "the petition actually partakes of a
collateral attack on PLDT’s franchise as a public utility," which in effect requires a "full-blown
trial where all the parties in interest are given their day in court."38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the
Philippine Stock Exchange (PSE), does not also define the term "capital" and seeks the
dismissal of the petition on the following grounds: (1) failure to state a cause of action against
Lim; (2) the PSE allegedly implemented its rules and required all listed companies, including
PLDT, to make proper and timely disclosures; and (3) the reliefs prayed for in the petition
would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a

stockholder of record of PLDT, contended that the term "capital" in the 1987 Constitution
refers to shares entitled to vote or the common shares. Fernandez explained thus:
The forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions
on fully nationalized and partially nationalized activities is for Filipino nationals to be always in
control of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling
upholding respondents’ arguments were to be given credence, it would be possible for the
ownership structure of a public utility corporation to be divided into one percent (1%) common
stocks and ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling
adopting respondents’ arguments, the common shares can be owned entirely by foreigners
thus creating an absurd situation wherein foreigners, who are supposed to be minority
shareholders, control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the
beneficial ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed
by the Constitution refers to ownership of shares of stock entitled to vote, i.e., common
shares. Furthermore, ownership of record of shares will not suffice but it must be shown that
the legal and beneficial ownership rests in the hands of Filipino citizens. Consequently, in the
case of petitioner PLDT, since it is already admitted that the voting interests of foreigners
which would gain entry to petitioner PLDT by the acquisition of SMART shares through the
Questioned Transactions is equivalent to 82.99%, and the nominee arrangements between
the foreign principals and the Filipino owners is likewise admitted, there is, therefore, a
violation of Section 11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial
Court to support the proposition that the meaning of the word "capital" as used in Section 11,
Article XII of the Constitution allegedly refers to the sum total of the shares subscribed and
paid-in by the shareholder and it allegedly is immaterial how the stock is classified, whether
as common or preferred, cannot stand in the face of a clear legislative policy as stated in the
FIA which took effect in 1991 or way after said opinions were rendered, and as clarified by the
above-quoted Amendments. In this regard, suffice it to state that as between the law and an
opinion rendered by an administrative agency, the law indubitably prevails. Moreover, said
Opinions are merely advisory and cannot prevail over the clear intent of the framers of the
Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at
best merely advisory for it is the courts that finally determine what a law means. 39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos
A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F.
Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea,
argued that the term "capital" in Section 11, Article XII of the Constitution includes preferred
shares since the Constitution does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s "capital,"
without distinction as to classes of shares. x x x

In this connection, the Corporation Code – which was already in force at the time the present
(1987) Constitution was drafted – defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as
used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and
preferred shares, nor exclude either class of shares, in determining the outstanding capital
stock (the "capital") of a corporation. Consequently, petitioner’s suggestion to reckon PLDT’s
foreign equity only on the basis of PLDT’s outstanding common shares is without legal basis.
The language of the Constitution should be understood in the sense it has in common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is
necessary, there is nothing in the Record of the Constitutional Commission (Vol. III) – which
petitioner misleadingly cited in the Petition x x x – which supports petitioner’s view that only
common shares should form the basis for computing a public utility’s foreign equity.

xxxx

18. In addition, the SEC – the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitution’s foreign equity restrictions as regards nationalized activities x x x – has
categorically ruled that both common and preferred shares are properly considered in
determining outstanding capital stock and the nationality composition thereof. 40

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11,
Article XII of the Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, 41 and not to the total
outstanding capital stock comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which classes or series of shares may have
such rights, privileges or restrictions as may be stated in the articles of incorporation:
Provided, That no share may be deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares which have complete
voting rights. Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided, however, That banks,
trust companies, insurance companies, public utilities, and building and loan associations
shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That preferred shares of stock may
be issued only with a stated par value. The Board of Directors, where authorized in the
articles of incorporation, may fix the terms and conditions of preferred shares of stock or any
series thereof: Provided, That such terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued for a
consideration less than the value of five (₱5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of
stock, each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially

all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other

corporations;

7. Investment of corporate funds in another corporation or business in accordance

with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with
voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation.43 This is exercised through his vote in the election of
directors because it is the board of directors that controls or manages the corporation. 44 In the
absence of provisions in the articles of incorporation denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the
election of directors and on other matters, on the theory that the preferred shareholders are
merely investors in the corporation for income in the same manner as bondholders. 45 In fact,
under the Corporation Code only preferred or redeemable shares can be deprived of the right
to vote.46 Common shares cannot be deprived of the right to vote in any corporate meeting,
and any provision in the articles of incorporation restricting the right of common shareholders
to vote is invalid.47

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article
XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term "capital" shall include such
preferred shares because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of directors. In short, the
term "capital" in Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the
hands of Filipino citizens the control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, "capital" refers to the voting stock
or controlling interest of a corporation, to wit:

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 this 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 a draft. The phrase that is contained here which we
adopted from the UP draft is "60 percent of 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?

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting
stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital
to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority.
Let us say 40 percent of the capital is owned by them, but it is the voting capital,
whereas, the Filipinos own the nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the minority because they have
the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973
and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Reinforcing this interpretation of the term "capital," as referring to controlling
interest or shares entitled to vote, is the definition of a "Philippine national" in the Foreign
Investments Act of 1991,50 to wit:

SEC. 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 citizens of the Philippines; or 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 owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) 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 where 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 of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national."
(Emphasis supplied)

In explaining the definition of a "Philippine national," the Implementing Rules and Regulations
of the Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or

association wholly owned by the citizens of the Philippines; or 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 owned and held by citizens of the Philippines;
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 the Philippine nationals; Provided, that where a corporation 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
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 of each of both corporation must be
citizens of the Philippines, in order that the corporation shall be considered a Philippine
national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined

on the basis of outstanding capital stock whether fully paid or not, but only such
stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights is essential. Thus,
stocks, the voting rights of which have been assigned or transferred to aliens cannot
be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is "considered as
non-Philippine national[s]."

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is
owned by such citizens, or such higher percentage as Congress may prescribe, certain areas
of investments." Thus, in numerous laws Congress has reserved certain areas of investments
to Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned
by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government
Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3)
Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development
Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No.
10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in Section
11, Article XII of the Constitution is also used in the same context in numerous
laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both
common and non-votingpreferred shares, grossly contravenes the intent and letter of the
Constitution that the "State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos." A broad definition unjustifiably disregards who
owns the all-important voting stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us
assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-
voting preferred shares owned by Filipinos, with both classes of share having a par value of
one peso (₱1.00) per share. Under the broad definition of the term "capital," such corporation
would be considered compliant with the 40 percent constitutional limit on foreign equity of
public utilities since the overwhelming majority, or more than 99.999 percent, of the total
outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule
equity of less than 0.001 percent, exercise control over the public utility. On the other hand,
the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of
directors and hence, have no control over the public utility. This starkly circumvents the intent
of the framers of the Constitution, as well as the clear language of the Constitution, to place
the control of public utilities in the hands of Filipinos. It also renders illusory the State policy of
an independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in
the present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of
directors. PLDT’s Articles of Incorporation expressly state that "the holders of Serial
Preferred Stock shall not be entitled to vote at any meeting of the stockholders for the
election of directors or for any other purpose or otherwise participate in any action taken
by the corporation or its stockholders, or to receive notice of any meeting of stockholders." 51

On the other hand, holders of common shares are granted the exclusive right to vote in the
election of directors. PLDT’s Articles of Incorporation 52 state that "each holder of Common
Capital Stock shall have one vote in respect of each share of such stock held by him on all
matters voted upon by the stockholders, and the holders of Common Capital Stock shall
have the exclusive right to vote for the election of directors and for all other
purposes."53

In short, only holders of common shares can vote in the election of directors, meaning only
common shareholders exercise control over PLDT. Conversely, holders of preferred shares,
who have no voting rights in the election of directors, do not have any control over PLDT. In
fact, under PLDT’s Articles of Incorporation, holders of common shares have voting rights for
all purposes, while holders of preferred shares have no voting right for any purpose
whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet
(GIS),54 which is a document required to be submitted annually to the Securities and
Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT whereas
Filipinos hold only 66,750,622 common shares.56 In other words, foreigners hold 64.27% of
the total number of PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a
majority of the common shares equates to control, it is clear that foreigners exercise control
over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit on
foreign ownership of public utilities expressly mandated in Section 11, Article XII of the
Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that
per share the SIP58preferred shares earn a pittance in dividends compared to the common
shares. PLDT declared dividends for the common shares at ₱70.00 per share, while the
declared dividends for the preferred shares amounted to a measly ₱1.00 per share. 59 So the
preferred shares not only cannot vote in the election of directors, they also have very little and
obviously negligible dividend earning capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common
shares is ₱5.00 per share, whereas the par value of preferred shares is ₱10.00 per share. In
other words, preferred shares have twice the par value of common shares but cannot elect
directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the
preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the
preferred shares.61 Worse, preferred shares constitute 77.85% of the authorized capital stock
of PLDT while common shares constitute only 22.15%.62 This undeniably shows that
beneficial interest in PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in
the hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership
of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State’s grant of authority to operate a public utility. The
undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting
and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in
Section 11, Article XII of the Constitution that "[n]o franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to x x x corporations x
x x organized under the laws of the Philippines, at least sixty per centum of whose capital
is owned by such citizens x x x."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over
PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the
voting stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44%
owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends
that common shares earn;63 (5) preferred shares have twice the par value of common shares;
and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and
common shares only 22.15%. This kind of ownership and control of a public utility is a
mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current
stock market value of ₱2,328.00 per share,64 while PLDT preferred shares with a par value of
₱10.00 per share have a current stock market value ranging from only ₱10.92 to ₱11.06 per
share,65 is a glaring confirmation by the market that control and beneficial ownership of PLDT
rest with the common shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to
include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the State’s
constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving certain areas of investment to
Filipino citizens, such as the exploitation of natural resources as well as the ownership of
land, educational institutions and advertising businesses. The Court should never open to
foreign control what the Constitution has expressly reserved to Filipinos for that would be a
betrayal of the Constitution and of the national interest. The Court must perform its solemn
duty to defend and uphold the intent and letter of the Constitution to ensure, in the words of
the Constitution, "a self-reliant and independent national economy effectively controlled by
Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly
reserving to Filipinos specific areas of investment, such as the development of natural
resources and ownership of land, educational institutions and advertising business, is self-
executing. There is no need for legislation to implement these self-executing provisions of
the Constitution. The rationale why these constitutional provisions are self-executing was
explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a

constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-
executing, the legislature would have the power to ignore and practically nullify the mandate
of the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has
always been, that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-
self-executing. . . . Unless the contrary is clearly intended, the provisions of the
Constitution should be considered self-executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they shall be effective. These
provisions would be subordinated to the will of the lawmaking body, which could make them
entirely meaningless by simply refusing to pass the needed implementing statute. (Emphasis
supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S.
Puno, later Chief Justice, agreed that constitutional provisions are presumed to be self-
executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as self-executing, rather than as
requiring future legislation for their enforcement. The reason is not difficult to discern. For if
they are not treated as self-executing, the mandate of the fundamental law ratified by
the sovereign people can be easily ignored and nullified by Congress. Suffused with
wisdom of the ages is the unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests,
searches and seizures, the rights of a person under custodial investigation, the rights of an
accused, and the privilege against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions guaranteeing the
fundamental rights of life, liberty and the protection of property. The same treatment is
accorded to constitutional provisions forbidding the taking or damaging of property for public
use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation,
applied directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land
ownership to Filipinos. In Soriano v. Ong Hoo,68this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of

his land to an alien, and as both the citizen and the alien have violated the law, none of them
should have a recourse against the other, and it should only be the State that should be
allowed to intervene and determine what is to be done with the property subject of the
violation. We have said that what the State should do or could do in such matters is a matter
of public policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee Bun
Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature has not definitely
decided what policy should be followed in cases of violations against the
constitutional prohibition, courts of justice cannot go beyond by declaring the
disposition to be null and void as violative of the Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since
the 1935 Constitution, or over the last 75 years, not one of the constitutional provisions
expressly reserving specific areas of investments to corporations, at least 60 percent of the
"capital" of which is owned by Filipinos, was enforceable. In short, the framers of the 1935,
1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos specific areas
of investment, like the operation by corporations of public utilities, the exploitation by
corporations of mineral resources, the ownership by corporations of real estate, and the
ownership of educational institutions. All the legislatures that convened since 1935 also
miserably failed to enact legislations to implement these vital constitutional provisions that
determine who will effectively control the national economy, Filipinos or foreigners. This Court
cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions." 69 Under its
regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty
when it unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial
functions, the SEC can be also be compelled by mandamus to hear and decide a possible
violation of any law it administers or enforces when it is mandated by law to investigate such
violation.1awphi1

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject
or disapprove the Articles of Incorporation of any corporation where "the required
percentage of ownership of the capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws or the Constitution." Thus, the
SEC is the government agency tasked with the statutory duty to enforce the nationality
requirement prescribed in Section 11, Article XII of the Constitution on the ownership of public
utilities. This Court, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, can direct the SEC to perform its statutory duty under the
law, a duty that the SEC has apparently unlawfully neglected to do based on the 2010 GIS
that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the "power
and function" to "suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations, upon any of
the grounds provided by law." The SEC is mandated under Section 5(d) of the same Code
with the "power and function" to "investigate x x x the activities of persons to ensure
compliance" with the laws and regulations that SEC administers or enforces. The GIS that all
corporations are required to submit to SEC annually should put the SEC on guard against
violations of the nationality requirement prescribed in the Constitution and existing laws. This
Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of Section 11,
Article XII of the Constitution in view of the ownership structure of PLDT’s voting shares, as
admitted by respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section
11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares). Respondent
Chairperson of the Securities and Exchange Commission is DIRECTED to apply this
definition of the term "capital" in determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.
FOREIGN INVESTMENTS ACT

April 18, 2017

G.R. No. 207246

JOSE M. ROY III, Petitioner

vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE
COMMISSION, and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,,
Respondents

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

WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,

ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C.
EREBAREN, Petitioners-in-Intervention,

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

PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,

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

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-

Intervention.

RESOLUTION

CAGUIOA, J.:

Before the Court is the Motion for Reconsideration dated January 19, 20171 (the Motion) filed
by petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the Decision
dated November 22, 20162 (the Decision) which denied the movant's petition, and declared
that the Securities and Exchange Commission (SEC) did not commit grave abuse of
discretion in issuing Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the
same was in compliance with, and in fealty to, the decision of the Court in Gamboa v. Finance
Secretary Teves,3(Gamboa Decision) and the resolution4 denying the Motion for
Reconsideration therein (Gamboa Resolution).

The Motion presents no compelling and new arguments to justify the reconsideration of the
Decision.

The grounds raised by movant are: (1) He has the requisite standing because this case is one
of transcendental importance; (2) The Court has the constitutional duty to exercise judicial
review over any grave abuse of discretion by any instrumentality of government; (3) He did
not rely on an obiter dictum; and (4) The Court should have treated the petition as the
appropriate device to explain the Gamboa Decision.

The Decision has already exhaustively discussed and directly passed upon these grounds.
Movant's petition was dismissed based on both procedural and substantive grounds.

Regarding the procedural grounds, the Court ruled that petitioners (movant and petitioners-in-
intervention) failed to sufficiently allege and establish the existence of a case or controversy
and locus standi on their part to warrant the Court's exercise of judicial review; the rule on the
hierarchy of courts was violated; and petitioners failed to implead indispensable parties such
as the Philippine Stock Exchange, Inc. and Shareholders' Association of the Philippines, Inc. 5

In connection with the failure to implead indispensable parties, the Court's Decision held:

Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest

without whom there can be no final determination of an action. Indispensable parties are
those with such a material and direct interest in the controversy that a final decree would
necessarily affect their rights, so that the court cannot proceed without their presence. The
interests of such indispensable parties in the subject matter of the suit and the relief are so
bound with those of the other parties that their legal presence as parties to the proceeding is
an absolute necessity and a complete and efficient determination of the equities and rights of
the parties is not possible if they are not joined.

Other than PLDT, the petitions failed to join or implead other public utility corporations subject
to the same restriction imposed by Section 11, Article XII of the Constitution. These
corporations are in danger of losing their franchise and property if they are found not
compliant with the restrictive interpretation of the constitutional provision under review which
is being espoused by petitioners. They should be afforded due notice and opportunity to be
heard, lest they be deprived of their property without due process.

Not only are public utility corporations other than PLDT directly and materially affected by the
outcome of the petitions, their shareholders also stand to suffer in case they will be forced to
divest their shareholdings to ensure compliance with the said restrictive interpretation of the
term "capital". As explained by SHAREPHIL, in five corporations alone, more than Php158
Billion worth of shares must be divested by foreign shareholders and absorbed by Filipino
investors if petitioners' position is upheld.

Petitioners' disregard of the rights of these other corporations and numerous shareholders
constitutes another fatal procedural flaw, justifying the dismissal of their petitions. Without
giving all of them their day in court, they will definitely be deprived of their property
without due process of law. 6

This is highlighted to clear any misimpression that the Gamboa Decision

and Gamboa Resolution made a categorical ruling on the meaning of the word "capital" under
Section 11, Article XII of the Constitution only in respect of, or only confined to, respondent
Philippine Long Distance Telephone Company (PLDT). Nothing is further from the truth.
Indeed, a fair reading of the Gamboa Decision and Gamboa Resolution shows that the
Court's pronouncements therein would affect all public utilities, and not just respondent PLDT.

On the substantive grounds, the Court disposed of the issue on whether the SEC gravely
abused its discretion in ruling that respondent PLDT is compliant with the limitation on foreign
ownership under the Constitution and other relevant laws as without merit. The Court
reasoned that "in the absence of a definitive ruling by the SEC on PLDT's compliance with the
capital requirement pursuant to the Gamboa Decision and Resolution, any question relative to
the inexistent ruling is premature."7

In resolving the other substantive issue raised by petitioners, the Court held that:

[E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the
petitions, being anchored on Rule 65, must nonetheless fail because the SEC did not commit
grave abuse of discretion amounting to lack or excess of jurisdiction when it issued SEC-MC
No. 8. To the contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to the
Gamboa Decision and Resolution.8

To belabor the point, movant's petition is not a continuation of the Gamboa case as
the Gamboa Decision attained finality on October 18, 2012, and thereafter Entry of Judgment
was issued on December 11, 2012.9
As regards movant's repeated invocation of the transcendental importance of
the Gamboa case, this does not ipso facto accord locus standi to movant. Being a new
petition, movant had the burden to justify his locus standi in his own petition. The Court,
however, was not persuaded by his justification.

Pursuant to the Court's constitutional duty to exercise judicial review, the Court has
conclusively found no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.

The Decision has painstakingly explained why it considered as obiter dictum that
pronouncement in the Gamboa Resolution that the constitutional requirement on Filipino
ownership should "apply uniformly and across the board to all classes of shares, regardless
of nomenclature and category, comprising the capital of a corporation."[[9-a]] The Court
stated that:

[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of
the Gamboa Resolution that might have appeared contrary to the fallo of
the Gamboa Decision x x x the definiteness and clarity of the fallo of the Gamboa Decision
must control over the obiter dictum in the Gamboa Resolution regarding the application of the
60-40 Filipino-foreign ownership requirement to "each class of shares, regardless of
differences in voting rights, privileges and restrictions." 10

To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive portion
of the Gamboa Decision was in no way modified by the Gamboa Resolution.

The heart of the controversy is the interpretation of Section 11, Article XII of the Constitution,
which provides: "No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose
capital is owned by such citizens x x x."

The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires
is "[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights x x x must rest in the hands of Filipino nationals x
x x." 11 And, precisely that is what SEC-MC No. 8 provides, viz.: "x x x For purposes of
determining compliance [with the constitutional or statutory ownership], the required
percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding
shares of stock entitled to vote in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote x x x." 12

In construing "full beneficial ownership," the Implementing Rules and Regulations of the
Foreign Investments Act of 1991 (FIA-IRR) provides:

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals. 13

In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and
Regulations of the Securities Regulation Code (SRC-IRR) as:

[A]ny person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power (which includes the power to vote or
direct the voting of such security) and/or investment returns or power (which includes the
power to dispose of, or direct the disposition of such security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in
the Decision, relevant in resolving only the question of who is the beneficial owner or has
beneficial ownership of each "specific stock" of the public utility company whose stocks are
under review. If the Filipino has the voting power of the "specific stock", i.e., he can vote the
stock or direct another to vote for him, or the Filipino has the investment power over the
"specific stock", i.e., he can dispose of the stock or direct another to dispose of it for him, or
both, i.e., he can vote and dispose of that "specific stock" or direct another to vote or
dispose it for him, then such Filipino is the "beneficial owner" of that "specific stock." Being
considered Filipino, that "specific stock" is then to be counted as part of the 60% Filipino
ownership requirement under the Constitution. The right to the dividends, jus fruendi - a right
emanating from ownership of that "specific stock" necessarily accrues to its Filipino "beneficial
owner."

Once more, this is emphasized anew to disabuse any notion that the dividends accruing to
any particular stock are determinative of that stock's "beneficial ownership." Dividend
declaration is dictated by the corporation's unrestricted retained earnings. On the other hand,
the corporation's need of capital for expansion programs and special reserve for probable
contingencies may limit retained earnings available for dividend declaration. 15 It bears
repeating here that the Court in the Gamboa Decision adopted the foregoing definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution in express recognition of the
sensitive and vital position of public utilities both in the national economy and for national
security, so that the evident purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the national interest. 16 This
purpose prescinds from the "benefits"/dividends that are derived from or accorded to the
particular stocks held by Filipinos vis-a-vis the stocks held by aliens. So long as Filipinos have
controlling interest of a public utility corporation, their decision to declare more dividends for a
particular stock over other kinds of stock is their sole prerogative - an act of ownership that
would presumably be for the benefit of the public utility corporation itself. Thus, as explained
in the Decision:

In this regard, it would be apropos to state that since Filipinos own at least 60% of the
outstanding shares of stock entitled to vote directors, which is what the Constitution precisely
requires, then the Filipino stockholders control the corporation, i.e., they dictate corporate
actions and decisions, and they have all the rights of ownership including, but not limited to,
offering certain preferred shares that may have greater economic interest to foreign investors
- as the need for capital for corporate pursuits (such as expansion), may be good for the
corporation that they own. Surely, these "true owners" will not allow any dilution of their
ownership and control if such move will not be beneficial to them. 17

Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a trust
fund that is created by the public entity whose compliance with the limitation on foreign
ownership under the Constitution is under scrutiny, and how the SEC will determine if such
public utility does, in fact, control how the said stocks will be voted, and whether, resultantly,
the trust fund would be considered as Philippine national or not - lengthily discussed in the
dissenting opinion of Justice Carpio - is speculative at this juncture. The Court cannot engage
in guesswork. Thus, there is need of an actual case or controversy before the Court may
exercise its power of judicial review. The movant's petition is not that actual case or
controversy.

Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred shares
created by respondent PLDT, their acquisition by BTF Holdings, Inc., which appears to be a
wholly-owned company of the PLDT Beneficial Trust Fund (BTF), and whether or not it is
respondent PLDT's management that controls BTF and BTF Holdings, Inc. - all these are
factual matters that are outside the ambit of this Court's review which, as stated in the
beginning, is confined to determining whether or not the SEC committed grave abuse of
discretion in issuing SEC-MC No. 8; that is, whether or not SEC-MC No. 8 violated the ruling
of the Court in Gamboa v. Finance Secretary Teves, 18 and the resolution in Heirs of Wilson
P. Gamboa v. Finance Sec. Teves19denying the Motion for Reconsideration therein as to the
proper understanding of "capital".

To be sure, it would be more prudent and advisable for the Court to await the SEC's prior
determination of the citizenship of specific shares of stock held in trust - based on proven
facts - before the Court proceeds to pass upon the legality of such determination.

As to whether respondent PLDT is currently in compliance with the Constitutional provision

regarding public utility entities, the Court must likewise await the SEC's determination thereof
applying SEC-MC No. 8. After all, as stated in the Decision, it is the SEC which is the
government agency with the competent expertise and the mandate of law to make such
determination.

In conclusion, the basic issues raised in the Motion having been duly considered and passed
upon by the Court in the Decision and no substantial argument having been adduced to
warrant the reconsideration sought, the Court resolves to DENY the Motion with FINALITY.

WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH

FINALITY. No further pleadings or motions shall be entertained in this case. Let entry of final
judgment be issued immediately.

SO ORDERED.
CLASSIFICATION OF CORPORATION

G.R. No. 169752 September 25, 2007

PHILIPPINE SOCIETY FOR THE PREVENTION OF CRUELTY TO ANIMALS, Petitioners,

vs.
COMMISSION ON AUDIT, DIR. RODULFO J. ARIESGA (in his official capacity as
Director of the Commission on Audit), MS. MERLE M. VALENTIN and MS. SUSAN
GUARDIAN (in their official capacities as Team Leader and Team Member, respectively,
of the audit Team of the Commission on Audit), Respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a special civil action for Certiorari and Prohibition under Rule 65 of the
Rules of Court, in relation to Section 2 of Rule 64, filed by the petitioner assailing Office Order
No. 2005-0211 dated September 14, 2005 issued by the respondents which constituted the
audit team, as well as its September 23, 2005 Letter2 informing the petitioner that
respondents’ audit team shall conduct an audit survey on the petitioner for a detailed audit of
its accounts, operations, and financial transactions. No temporary restraining order was
issued.

The petitioner was incorporated as a juridical entity over one hundred years ago by virtue of
Act No. 1285, enacted on January 19, 1905, by the Philippine Commission. The petitioner, at
the time it was created, was composed of animal aficionados and animal propagandists. The
objects of the petitioner, as stated in Section 2 of its charter, shall be to enforce laws relating
to cruelty inflicted upon animals or the protection of animals in the Philippine Islands, and
generally, to do and perform all things which may tend in any way to alleviate the suffering of
animals and promote their welfare.3

At the time of the enactment of Act No. 1285, the original Corporation Law, Act No. 1459, was
not yet in existence. Act No. 1285 antedated both the Corporation Law and the constitution of
the Securities and Exchange Commission. Important to note is that the nature of the petitioner
as a corporate entity is distinguished from the sociedad anonimas under the Spanish Code of
Commerce.

For the purpose of enhancing its powers in promoting animal welfare and enforcing laws for
the protection of animals, the petitioner was initially imbued under its charter with the power to
apprehend violators of animal welfare laws. In addition, the petitioner was to share one-half
(1/2) of the fines imposed and collected through its efforts for violations of the laws related
thereto. As originally worded, Sections 4 and 5 of Act No. 1285 provide:

SEC. 4. The said society is authorized to appoint not to exceed five agents in the City of
Manila, and not to exceed two in each of the provinces of the Philippine Islands who shall
have all the power and authority of a police officer to make arrests for violation of the
laws enacted for the prevention of cruelty to animals and the protection of animals, and to
serve any process in connection with the execution of such laws; and in addition thereto, all
the police force of the Philippine Islands, wherever organized, shall, as occasion requires,
assist said society, its members or agents, in the enforcement of all such laws.

SEC. 5. One-half of all the fines imposed and collected through the efforts of said society, its
members or its agents, for violations of the laws enacted for the prevention of cruelty to
animals and for their protection, shall belong to said society and shall be used to promote its
objects.

(emphasis supplied)
Subsequently, however, the power to make arrests as well as the privilege to retain a portion
of the fines collected for violation of animal-related laws were recalled by virtue of
Commonwealth Act (C.A.) No. 148,4 which reads, in its entirety, thus:

Be it enacted by the National Assembly of the Philippines:

Section 1. Section four of Act Numbered Twelve hundred and eighty-five as amended by Act
Numbered Thirty five hundred and forty-eight, is hereby further amended so as to read as
follows:

Sec. 4. The said society is authorized to appoint not to exceed ten agents in the City of
Manila, and not to exceed one in each municipality of the Philippines who shall have the
authority to denounce to regular peace officers any violation of the laws enacted for the
prevention of cruelty to animals and the protection of animals and to cooperate with said
peace officers in the prosecution of transgressors of such laws.

Sec. 2. The full amount of the fines collected for violation of the laws against cruelty to
animals and for the protection of animals, shall accrue to the general fund of the
Municipality where the offense was committed.

Sec. 3. This Act shall take effect upon its approval.

Approved, November 8, 1936. (Emphasis supplied)

Immediately thereafter, then President Manuel L. Quezon issued Executive Order (E.O.) No.
63 dated November 12, 1936, portions of which provide:

Whereas, during the first regular session of the National Assembly, Commonwealth Act
Numbered One Hundred Forty Eight was enacted depriving the agents of the Society for the
Prevention of Cruelty to Animals of their power to arrest persons who have violated the laws
prohibiting cruelty to animals thereby correcting a serious defect in one of the laws existing in
our statute books.

xxxx

Whereas, the cruel treatment of animals is an offense against the State, penalized under our
statutes, which the Government is duty bound to enforce;

Now, therefore, I, Manuel L. Quezon, President of the Philippines, pursuant to the authority
conferred upon me by the Constitution, hereby decree, order, and direct the Commissioner of
Public Safety, the Provost Marshal General as head of the Constabulary Division of the
Philippine Army, every Mayor of a chartered city, and every municipal president to detail and
organize special members of the police force, local, national, and the Constabulary to watch,
capture, and prosecute offenders against the laws enacted to prevent cruelty to animals.
(Emphasis supplied)

On December 1, 2003, an audit team from respondent Commission on Audit (COA) visited
the office of the petitioner to conduct an audit survey pursuant to COA Office Order No. 2003-
051 dated November 18, 20035addressed to the petitioner. The petitioner demurred on the
ground that it was a private entity not under the jurisdiction of COA, citing Section 2(1) of
Article IX of the Constitution which specifies the general jurisdiction of the COA, viz:

Section 1. General Jurisdiction. The Commission on Audit shall have the power, authority,
and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of,
and expenditures or uses of funds and property, owned or held in trust by, or pertaining to the
Government, or any of its subdivisions, agencies, or instrumentalities, including government-
owned and controlled corporations with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and officers that have been granted fiscal autonomy under
the Constitution; (b) autonomous state colleges and universities; (c) other government-owned
or controlled corporations and their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or through the government, which are
required by law or the granting institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the audited agencies is inadequate, the
Commission may adopt such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep the general accounts of
the Government, and for such period as may be provided by law, preserve the vouchers and
other supporting papers pertaining thereto. (Emphasis supplied)

Petitioner explained thus:

a. Although the petitioner was created by special legislation, this necessarily came
about because in January 1905 there was as yet neither a Corporation Law or any
other general law under which it may be organized and incorporated, nor a Securities
and Exchange Commission which would have passed upon its organization and
incorporation.

b. That Executive Order No. 63, issued during the Commonwealth period, effectively
deprived the petitioner of its power to make arrests, and that the petitioner lost its
operational funding, underscore the fact that it exercises no governmental function. In
fine, the government itself, by its overt acts, confirmed petitioner’s status as a private
juridical entity.

The COA General Counsel issued a Memorandum 6 dated May 6, 2004, asserting that the
petitioner was subject to its audit authority. In a letter dated May 17, 2004, 7 respondent COA
informed the petitioner of the result of the evaluation, furnishing it with a copy of said
Memorandum dated May 6, 2004 of the General Counsel.

Petitioner thereafter filed with the respondent COA a Request for Re-evaluation dated May
19, 2004,8 insisting that it was a private domestic corporation.

Acting on the said request, the General Counsel of respondent COA, in a Memorandum dated
July 13, 2004,9affirmed her earlier opinion that the petitioner was a government entity that
was subject to the audit jurisdiction of respondent COA. In a letter dated September 14, 2004,
the respondent COA informed the petitioner of the result of the re-evaluation, maintaining its
position that the petitioner was subject to its audit jurisdiction, and requested an initial
conference with the respondents.

In a Memorandum dated September 16, 2004, Director Delfin Aguilar reported to COA
Assistant Commissioner Juanito Espino, Corporate Government Sector, that the audit survey
was not conducted due to the refusal of the petitioner because the latter maintained that it
was a private corporation.

Petitioner received on September 27, 2005 the subject COA Office Order 2005-021 dated
September 14, 2005 and the COA Letter dated September 23, 2005.

Hence, herein Petition on the following grounds:

A.

RESPONDENT COMMISSION ON AUDIT COMMITTED GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
RULED THAT PETITIONER IS SUBJECT TO ITS AUDIT AUTHORITY.

B.
 PETITIONER IS ENTITLED TO THE RELIEF SOUGHT, THERE BEING NO
APPEAL, NOR ANY PLAIN, SPEEDY AND ADEQUATE REMEDY IN THE
ORDINARY COURSE OF LAW AVAILABLE TO IT.10

The essential question before this Court is whether the petitioner qualifies as a government
agency that may be subject to audit by respondent COA.

Petitioner argues: first, even though it was created by special legislation in 1905 as there was
no general law then existing under which it may be organized or incorporated, it exercises no
governmental functions because these have been revoked by C.A. No. 148 and E.O. No.
63; second, nowhere in its charter is it indicated that it is a public corporation, unlike, for
instance, C.A. No. 111 which created the Boy Scouts of the Philippines, defined its powers
and purposes, and specifically stated that it was "An Act to Create a Public Corporation" in
which, even as amended by Presidential Decree No. 460, the law still adverted to the Boy
Scouts of the Philippines as a "public corporation," all of which are not obtaining in the charter
of the petitioner; third, if it were a government body, there would have been no need for the
State to grant it tax exemptions under Republic Act No. 1178, and the fact that it was so
exempted strengthens its position that it is a private institution; fourth, the employees of the
petitioner are registered and covered by the Social Security System at the latter’s initiative
and not through the Government Service Insurance System, which should have been the
case had the employees been considered government employees; fifth, the petitioner does
not receive any form of financial assistance from the government, since C.A. No. 148,
amending Section 5 of Act No. 1285, states that the "full amount of the fines, collected for
violation of the laws against cruelty to animals and for the protection of animals, shall accrue
to the general fund of the Municipality where the offense was committed"; sixth, C.A. No. 148
effectively deprived the petitioner of its powers to make arrests and serve processes as these
functions were placed in the hands of the police force; seventh, no government appointee or
representative sits on the board of trustees of the petitioner; eighth, a reading of the
provisions of its charter (Act No. 1285) fails to show that any act or decision of the petitioner is
subject to the approval of or control by any government agency, except to the extent that it is
governed by the law on private corporations in general; and finally, ninth, the Committee on
Animal Welfare, under the Animal Welfare Act of 1998, includes members from both the
private and the public sectors.

The respondents contend that since the petitioner is a "body politic" created by virtue of a
special legislation and endowed with a governmental purpose, then, indubitably, the COA
may audit the financial activities of the latter. Respondents in effect divide their contentions
into six strains: first, the test to determine whether an entity is a government corporation lies
in the manner of its creation, and, since the petitioner was created by virtue of a special
charter, it is thus a government corporation subject to respondents’ auditing power; second,
the petitioner exercises "sovereign powers," that is, it is tasked to enforce the laws for the
protection and welfare of animals which "ultimately redound to the public good and welfare,"
and, therefore, it is deemed to be a government "instrumentality" as defined under the
Administrative Code of 1987, the purpose of which is connected with the administration of
government, as purportedly affirmed by American jurisprudence; third, by virtue of Section
23,11Title II, Book III of the same Code, the Office of the President exercises supervision or
control over the petitioner; fourth, under the same Code, the requirement under its special
charter for the petitioner to render a report to the Civil Governor, whose functions have been
inherited by the Office of the President, clearly reflects the nature of the petitioner as a
government instrumentality; fifth, despite the passage of the Corporation Code, the law
creating the petitioner had not been abolished, nor had it been re-incorporated under any
general corporation law; and finally, sixth, Republic Act No. 8485, otherwise known as the
"Animal Welfare Act of 1998," designates the petitioner as a member of its Committee on
Animal Welfare which is attached to the Department of Agriculture.

In view of the phrase "One-half of all the fines imposed and collected through the efforts of
said society," the Court, in a Resolution dated January 30, 2007, required the Office of the
Solicitor General (OSG) and the parties to comment on: a) petitioner's authority to impose
fines and the validity of the provisions of Act No. 1285 and Commonwealth Act No. 148
considering that there are no standard measures provided for in the aforecited laws as to the
manner of implementation, the specific violations of the law, the person/s authorized to
impose fine and in what amount; and, b) the effect of the 1935 and 1987 Constitutions on
whether petitioner continues to exist or should organize as a private corporation under the
Corporation Code, B.P. Blg. 68 as amended.

Petitioner and the OSG filed their respective Comments. Respondents filed a Manifestation
stating that since they were being represented by the OSG which filed its Comment, they
opted to dispense with the filing of a separate one and adopt for the purpose that of the OSG.

The petitioner avers that it does not have the authority to impose fines for violation of animal
welfare laws; it only enjoyed the privilege of sharing in the fines imposed and collected from
its efforts in the enforcement of animal welfare laws; such privilege, however, was
subsequently abolished by C.A. No. 148; that it continues to exist as a private corporation
since it was created by the Philippine Commission before the effectivity of the Corporation
law, Act No. 1459; and the 1935 and 1987 Constitutions.

The OSG submits that Act No. 1285 and its amendatory laws did not give petitioner the
authority to impose fines for violation of laws 12 relating to the prevention of cruelty to animals
and the protection of animals; that even prior to the amendment of Act No. 1285, petitioner
was only entitled to share in the fines imposed; C.A. No. 148 abolished that privilege to share
in the fines collected; that petitioner is a public corporation and has continued to exist since
Act No. 1285; petitioner was not repealed by the 1935 and 1987 Constitutions which contain
transitory provisions maintaining all laws issued not inconsistent therewith until amended,
modified or repealed.

The petition is impressed with merit.

The arguments of the parties, interlaced as they are, can be disposed of in five points.

First, the Court agrees with the petitioner that the "charter test" cannot be applied.

Essentially, the "charter test" as it stands today provides:

[T]he test to determine whether a corporation is government owned or controlled, or private in

nature is simple. Is it created by its own charter for the exercise of a public function, or by
incorporation under the general corporation law? Those with special charters are government
corporations subject to its provisions, and its employees are under the jurisdiction of the Civil
Service Commission, and are compulsory members of the Government Service Insurance
System. xxx (Emphasis supplied)13

The petitioner is correct in stating that the charter test is predicated, at best, on the legal
regime established by the 1935 Constitution, Section 7, Article XIII, which states:

Sec. 7. The National Assembly shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned or
controlled by the Government or any subdivision or instrumentality thereof. 14

The foregoing proscription has been carried over to the 1973 and the 1987 Constitutions.
Section 16 of Article XII of the present Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability.
Section 16 is essentially a re-enactment of Section 7 of Article XVI of the 1935 Constitution
and Section 4 of Article XIV of the 1973 Constitution.

During the formulation of the 1935 Constitution, the Committee on Franchises recommended
the foregoing proscription to prevent the pressure of special interests upon the lawmaking
body in the creation of corporations or in the regulation of the same. To permit the lawmaking
body by special law to provide for the organization, formation, or regulation of private
corporations would be in effect to offer to it the temptation in many cases to favor certain
groups, to the prejudice of others or to the prejudice of the interests of the country. 15

And since the underpinnings of the charter test had been introduced by the 1935 Constitution
and not earlier, it follows that the test cannot apply to the petitioner, which was incorporated
by virtue of Act No. 1285, enacted on January 19, 1905. Settled is the rule that laws in
general have no retroactive effect, unless the contrary is provided. 16 All statutes are to be
construed as having only a prospective operation, unless the purpose and intention of the
legislature to give them a retrospective effect is expressly declared or is necessarily implied
from the language used. In case of doubt, the doubt must be resolved against the
retrospective effect.17

There are a few exceptions. Statutes can be given retroactive effect in the following cases: (1)
when the law itself so expressly provides; (2) in case of remedial statutes; (3) in case of
curative statutes; (4) in case of laws interpreting others; and (5) in case of laws creating new
rights.18 None of the exceptions is present in the instant case.

The general principle of prospectivity of the law likewise applies to Act No. 1459, otherwise
known as the Corporation Law, which had been enacted by virtue of the plenary powers of
the Philippine Commission on March 1, 1906, a little over a year after January 19, 1905, the
time the petitioner emerged as a juridical entity. Even the Corporation Law respects the rights
and powers of juridical entities organized beforehand, viz:

SEC. 75. 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. (Emphasis supplied).

As pointed out by the OSG, both the 1935 and 1987 Constitutions contain transitory
provisions maintaining all laws issued not inconsistent therewith until amended, modified or
repealed.19

In a legal regime where the charter test doctrine cannot be applied, the mere fact that a
corporation has been created by virtue of a special law does not necessarily qualify it as a
public corporation.

What then is the nature of the petitioner as a corporate entity? What legal regime governs its
rights, powers, and duties?

As stated, at the time the petitioner was formed, the applicable law was the Philippine Bill of
1902, and, emphatically, as also stated above, no proscription similar to the charter test can
be found therein.

The textual foundation of the charter test, which placed a limitation on the power of the
legislature, first appeared in the 1935 Constitution. However, the petitioner was incorporated
in 1905 by virtue of Act No. 1258, a law antedating the Corporation Law (Act No. 1459) by a
year, and the 1935 Constitution, by thirty years. There being neither a general law on the
formation and organization of private corporations nor a restriction on the legislature to create
private corporations by direct legislation, the Philippine Commission at that moment in history
was well within its powers in 1905 to constitute the petitioner as a private juridical
entity.1âwphi1

Time and again the Court must caution even the most brilliant scholars of the law and all
constitutional historians on the danger of imposing legal concepts of a later date on facts of
an earlier date.20

The amendments introduced by C.A. No. 148 made it clear that the petitioner was a private
corporation and not an agency of the government. This was evident in Executive Order No.
63, issued by then President of the Philippines Manuel L. Quezon, declaring that the
revocation of the powers of the petitioner to appoint agents with powers of arrest "corrected a
serious defect" in one of the laws existing in the statute books.

As a curative statute, and based on the doctrines so far discussed, C.A. No. 148 has to be
given retroactive effect, thereby freeing all doubt as to which class of corporations the
petitioner belongs, that is, it is a quasi-public corporation, a kind of private domestic
corporation, which the Court will further elaborate on under the fourth point.

Second, a reading of petitioner’s charter shows that it is not subject to control or supervision
by any agency of the State, unlike government-owned and -controlled corporations. No
government representative sits on the board of trustees of the petitioner. Like all private
corporations, the successors of its members are determined voluntarily and solely by the
petitioner in accordance with its by-laws, and may exercise those powers generally accorded
to private corporations, such as the powers to hold property, to sue and be sued, to use a
common seal, and so forth. It may adopt by-laws for its internal operations: the petitioner shall
be managed or operated by its officers "in accordance with its by-laws in force." The pertinent
provisions of the charter provide:

Section 1. Anna L. Ide, Kate S. Wright, John L. Chamberlain, William F. Tucker, Mary S.
Fergusson, Amasa S. Crossfield, Spencer Cosby, Sealy B. Rossiter, Richard P. Strong, Jose
Robles Lahesa, Josefina R. de Luzuriaga, and such other persons as may be associated with
them in conformity with this act, and their successors, are hereby constituted and created a
body politic and corporate at law, under the name and style of "The Philippines Society for the
Prevention of Cruelty to Animals."

As incorporated by this Act, said society shall have the power to add to its organization such
and as many members as it desires, to provide for and choose such officers as it may deem
advisable, and in such manner as it may wish, and to remove members as it shall provide.

It shall have the right to sue and be sued, to use a common seal, to receive legacies and
donations, to conduct social enterprises for the purpose of obtaining funds, to levy dues upon
its members and provide for their collection to hold real and personal estate such as may be
necessary for the accomplishment of the purposes of the society, and to adopt such by-laws
for its government as may not be inconsistent with law or this charter.

xxxx

Sec. 3. The said society shall be operated under the direction of its officers, in accordance
with its by-laws in force, and this charter.

xxxx

Sec. 6. The principal office of the society shall be kept in the city of Manila, and the society
shall have full power to locate and establish branch offices of the society wherever it may
deem advisable in the Philippine Islands, such branch offices to be under the supervision and
control of the principal office.
Third. The employees of the petitioner are registered and covered by the Social Security
System at the latter’s initiative, and not through the Government Service Insurance System,
which should be the case if the employees are considered government employees. This is
another indication of petitioner’s nature as a private entity. Section 1 of Republic Act No.
1161, as amended by Republic Act No. 8282, otherwise known as the Social Security Act of
1997, defines the employer:

Employer – Any person, natural or juridical, domestic or foreign, who carries on in the
Philippines any trade, business, industry, undertaking or activity of any kind and uses the
services of another person who is under his orders as regards the employment, except the
Government and any of its political subdivisions, branches or instrumentalities, including
corporations owned or controlled by the Government: Provided, That a self-employed person
shall be both employee and employer at the same time. (Emphasis supplied)

Fourth. The respondents contend that the petitioner is a "body politic" because its primary
purpose is to secure the protection and welfare of animals which, in turn, redounds to the
public good.

This argument, is, at best, specious. The fact that a certain juridical entity is impressed with
public interest does not, by that circumstance alone, make the entity a public corporation,
inasmuch as a corporation may be private although its charter contains provisions of a public
character, incorporated solely for the public good. This class of corporations may be
considered quasi-public corporations, which are private corporations that render public
service, supply public wants,21 or pursue other eleemosynary objectives. While purposely
organized for the gain or benefit of its members, they are required by law to discharge
functions for the public benefit. Examples of these corporations are utility, 22 railroad,
warehouse, telegraph, telephone, water supply corporations and transportation
companies.23 It must be stressed that a quasi-public corporation is a species of private
corporations, but the qualifying factor is the type of service the former renders to the public: if
it performs a public service, then it becomes a quasi-public corporation.241âwphi1

Authorities are of the view that the purpose alone of the corporation cannot be taken as a safe
guide, for the fact is that almost all corporations are nowadays created to promote the
interest, good, or convenience of the public. A bank, for example, is a private corporation; yet,
it is created for a public benefit. Private schools and universities are likewise private
corporations; and yet, they are rendering public service. Private hospitals and wards are
charged with heavy social responsibilities. More so with all common carriers. On the other
hand, there may exist a public corporation even if it is endowed with gifts or donations from
private individuals.

The true criterion, therefore, to determine whether a corporation is public or private is found in
the totality of the relation of the corporation to the State. If the corporation is created by the
State as the latter’s own agency or instrumentality to help it in carrying out its governmental
functions, then that corporation is considered public; otherwise, it is private. Applying the
above test, provinces, chartered cities, and barangays can best exemplify public corporations.
They are created by the State as its own device and agency for the accomplishment of parts
of its own public works.25

It is clear that the amendments introduced by C.A. No. 148 revoked the powers of the
petitioner to arrest offenders of animal welfare laws and the power to serve processes in
connection therewith.

Fifth. The respondents argue that since the charter of the petitioner requires the latter to
render periodic reports to the Civil Governor, whose functions have been inherited by the
President, the petitioner is, therefore, a government instrumentality.

This contention is inconclusive. By virtue of the fiction that all corporations owe their very
existence and powers to the State, the reportorial requirement is applicable to all corporations
of whatever nature, whether they are public, quasi-public, or private corporations—as
creatures of the State, there is a reserved right in the legislature to investigate the activities of
a corporation to determine whether it acted within its powers. In other words, the reportorial
requirement is the principal means by which the State may see to it that its creature acted
according to the powers and functions conferred upon it. These principles were extensively
discussed in Bataan Shipyard & Engineering Co., Inc. v. Presidential Commission on Good
Government.26 Here, the Court, in holding that the subject corporation could not invoke the
right against self-incrimination whenever the State demanded the production of its corporate
books and papers, extensively discussed the purpose of reportorial requirements, viz:

x x x The corporation is a creature of the state. It is presumed to be incorporated for the

benefit of the public. It received certain special privileges and franchises, and holds them
subject to the laws of the state and the limitations of its charter. Its powers are limited by law.
It can make no contract not authorized by its charter. Its rights to act as a corporation are only
preserved to it so long as it obeys the laws of its creation. There is a reserve[d] right in the
legislature to investigate its contracts and find out whether it has exceeded its powers. It
would be a strange anomaly to hold that a state, having chartered a corporation to make use
of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises
had been employed, and whether they had been abused, and demand the production of the
corporate books and papers for that purpose. The defense amounts to this, that an officer of
the corporation which is charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To state this proposition is to
answer it. While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation vested with special
privileges and franchises may refuse to show its hand when charged with an abuse of such
privileges. (Wilson v. United States, 55 Law Ed., 771, 780.)27

WHEREFORE, the petition is GRANTED. Petitioner is DECLARED a private domestic

corporation subject to the jurisdiction of the Securities and Exchange Commission. The
respondents are ENJOINED from investigating, examining and auditing the petitioner's fiscal
and financial affairs.

SO ORDERED.
CLASSIFICATION OF CORPORATION

G.R. No. 193462 February 4, 2014

DENNIS A.B. FUNA, Petitioner,

vs.
MANILA ECONOMIC AND CULTURAL OFFICE and the COMMISSION ON
AUDIT, Respondents.

DECISION

PEREZ, J.:

This is a petition for mandamus1 to compel:

1.) the Commission on Audit (COA) to audit and examine the funds of the Manila
Economic and Cultural Office (MECO), and

2.) the MECO to submit to such audit and examination.

The antecedents:

Prelude

The aftermath of the Chinese civil war2 left the country of China with two (2) governments in a
stalemate espousing competing assertions of sovereignty.3 On one hand is the communist
People’s Republic of China (PROC) which controls the mainland territories, and on the other
hand is the nationalist Republic of China (ROC) which controls the island of Taiwan. For a
better part of the past century, both the PROC and ROC adhered to a policy of "One China"
i.e., the view that there is only one legitimate government in China, but differed in their
respective interpretation as to which that government is.4

With the existence of two governments having conflicting claims of sovereignty over one
country, came the question as to which of the two is deserving of recognition as that country’s
legitimate government. Even after its relocation to Taiwan, the ROC used to enjoy diplomatic
recognition from a majority of the world’s states, partly due to being a founding member of the
United Nations (UN).5 The number of states partial to the PROC’s version of the One China
policy, however, gradually increased in the 1960s and 70s, most notably after the UN General
Assembly adopted the monumental Resolution 2758 in 1971.6 Since then, almost all of the
states that had erstwhile recognized the ROC as the legitimate government of China,
terminated their official relations with the said government, in favor of establishing diplomatic
relations with the PROC.7 The Philippines is one of such states.

The Philippines formally ended its official diplomatic relations with the government in Taiwan
on 9 June 1975, when the country and the PROC expressed mutual recognition thru the Joint
Communiqué of the Government of the Republic of the Philippines and the Government of the
People’s Republic of China (Joint Communiqué).8

Under the Joint Communiqué, the Philippines categorically stated its adherence to the One
China policy of the PROC. The pertinent portion of the Joint Communiqué reads:9

The Philippine Government recognizes the Government of the People’s Republic of China as
the sole legal government of China, fully understands and respects the position of the
Chinese Government that there is but one China and that Taiwan is an integral part of
Chinese territory, and decides to remove all its official representations from Taiwan within one
month from the date of signature of this communiqué. (Emphasis supplied)
The Philippines’ commitment to the One China policy of the PROC, however, did not preclude
the country from keeping unofficial relations with Taiwan on a "people-to-people"
basis.10 Maintaining ties with Taiwan that is permissible by the terms of the Joint
Communiqué, however, necessarily required the Philippines, and Taiwan, to course any such
relations thru offices outside of the official or governmental organs.

Hence, despite ending their diplomatic ties, the people of Taiwan and of the Philippines
maintained an unofficial relationship facilitated by the offices of the Taipei Economic and
Cultural Office, for the former, and the MECO, for the latter.11

The MECO12 was organized on 16 December 1997 as a non-stock, non-profit corporation

under Batas Pambansa Blg. 68 or the Corporation Code.13 The purposes underlying the
incorporation of MECO, as stated in its articles of incorporation,14 are as follows:

1. To establish and develop the commercial and industrial interests of Filipino

nationals here and abroad, and assist on all measures designed to promote and
maintain the trade relations of the country with the citizens of other foreign countries;

2. To receive and accept grants and subsidies that are reasonably necessary in
carrying out the corporate purposes provided they are not subject to conditions
defeatist for or incompatible with said purpose;

3. To acquire by purchase, lease or by any gratuitous title real and personal

properties as may be necessary for the use and need of the corporation, and to
dispose of the same in like manner when they are no longer needed or useful; and

4. To do and perform any and all acts which are deemed reasonably necessary to
carry out the purposes. (Emphasis supplied)

From the moment it was incorporated, the MECO became the corporate entity "entrusted" by
the Philippine government with the responsibility of fostering "friendly" and "unofficial"
relations with the people of Taiwan, particularly in the areas of trade, economic cooperation,
investment, cultural, scientific and educational exchanges. 15To enable it to carry out such
responsibility, the MECO was "authorized" by the government to perform certain "consular
and other functions" that relates to the promotion, protection and facilitation of Philippine
interests in Taiwan.16

At present, it is the MECO that oversees the rights and interests of Overseas Filipino Workers
(OFWs) in Taiwan; promotes the Philippines as a tourist and investment destination for the
Taiwanese; and facilitates the travel of Filipinos and Taiwanese from Taiwan to the
Philippines, and vice versa.17

Facts Leading to the Mandamus Petition

On 23 August 2010, petitioner sent a letter18 to the COA requesting for a "copy of the latest
financial and audit report" of the MECO invoking, for that purpose, his "constitutional right to
information on matters of public concern." The petitioner made the request on the belief that
the MECO, being under the "operational supervision" of the Department of Trade and Industry
(DTI), is a government owned and controlled corporation (GOCC) and thus subject to the
audit jurisdiction of the COA.19

Petitioner’s letter was received by COA Assistant Commissioner Jaime P. Naranjo, the
following day.

On 25 August 2010, Assistant Commissioner Naranjo issued a memorandum 20 referring the

petitioner’s request to COA Assistant Commissioner Emma M. Espina for "further disposition."
In this memorandum, however, Assistant Commissioner Naranjo revealed that the MECO
was "not among the agencies audited by any of the three Clusters of the Corporate
Government Sector."21

On 7 September 2010, petitioner learned about the 25 August 2010 memorandum and its
contents.

Mandamus Petition

Taking the 25 August 2010 memorandum as an admission that the COA had never audited
and examined the accounts of the MECO, the petitioner filed the instant petition for
mandamus on 8 September 2010. Petitioner filed the suit in his capacities as "taxpayer,
concerned citizen, a member of the Philippine Bar and law book author." 22 He impleaded both
the COA and the MECO.

Petitioner posits that by failing to audit the accounts of the MECO, the COA is neglecting its
duty under Section 2(1), Article IX-D of the Constitution to audit the accounts of an otherwise
bona fide GOCC or government instrumentality. It is the adamant claim of the petitioner that
the MECO is a GOCC without an original charter or, at least, a government instrumentality,
the funds of which partake the nature of public funds.23

According to petitioner, the MECO possesses all the essential characteristics of a GOCC and
an instrumentality under the Executive Order No. (EO) 292, s. 1987 or the Administrative
Code: it is a non-stock corporation vested with governmental functions relating to public
needs; it is controlled by the government thru a board of directors appointed by the President
of the Philippines; and while not integrated within the executive departmental framework, it is
nonetheless under the operational and policy supervision of the DTI. 24 As petitioner
substantiates:

1. The MECO is vested with government functions. It performs functions that are
equivalent to those of an embassy or a consulate of the Philippine government. 25 A
reading of the authorized functions of the MECO as found in EO No. 15, s. 2001,
reveals that they are substantially the same functions performed by the Department
of Foreign Affairs (DFA), through its diplomatic and consular missions, per the
Administrative Code.26

2. The MECO is controlled by the government. It is the President of the Philippines

that actually appoints the directors of the MECO, albeit indirectly, by way of "desire
letters" addressed to the MECO’s board of directors. 27 An illustration of this exercise
is the assumption by Mr. Antonio Basilio as chairman of the board of directors of the
MECO in 2001, which was accomplished when former President Gloria Macapagal-
Arroyo, through a memorandum 28 dated 20 February 2001, expressed her "desire" to
the board of directors of the MECO for the election of Mr. Basilio as chairman. 29

3. The MECO is under the operational and policy supervision of the DTI. The MECO
was placed under the operational supervision of the DTI by EO No. 328, s. of 2004,
and again under the policy supervision of the same department by EO No. 426, s.
2005.30

To further bolster his position that the accounts of the MECO ought to be audited by the COA,
the petitioner calls attention to the practice, allegedly prevailing in the United States of
America, wherein the American Institute in Taiwan (AIT)—the counterpart entity of the MECO
in the United States—is supposedly audited by that country’s Comptroller
General.31 Petitioner claims that this practice had been confirmed in a decision of the United
States Court of Appeals for the District of Columbia Circuit, in the case of Wood, Jr., ex rel.
United States of America v. The American Institute in Taiwan, et al.32

The Position of the MECO

The MECO prays for the dismissal of the mandamus petition on procedural and substantial
grounds.

On procedure, the MECO argues that the mandamus petition was prematurely filed.33

The MECO posits that a cause of action for mandamus to compel the performance of a
ministerial duty required by law only ripens once there has been a refusal by the tribunal,
board or officer concerned to perform such a duty.34The MECO claims that there was, in this
case, no such refusal either on its part or on the COA’s because the petitioner never made
any demand for it to submit to an audit by the COA or for the COA to perform such an audit,
prior to filing the instant mandamus petition. 35 The MECO further points out that the only
"demand" that the petitioner made was his request to the COA for a copy of the MECO’s
latest financial and audit report— which request was not even finally disposed of by the time
the instant petition was filed.36

On the petition’s merits, the MECO denies the petitioner’s claim that it is a GOCC or a
government instrumentality.37While performing public functions, the MECO maintains that it is
not owned or controlled by the government, and its funds are private funds. 38 The MECO
explains:

1. It is not owned or controlled by the government. Contrary to the allegations of the

petitioner, the President of the Philippines does not appoint its board of
directors.39 The "desire letter" that the President transmits is merely recommendatory
and not binding on the corporation.40 As a corporation organized under the
Corporation Code, matters relating to the election of its directors and officers, as well
as its membership, are governed by the appropriate provisions of the said code, its
articles of incorporation and its by-laws.41 Thus, it is the directors who elect the
corporation’s officers; the members who elect the directors; and the directors who
admit the members by way of a unanimous resolution. All of its officers, directors, and
members are private individuals and are not government officials. 42

2. The government merely has policy supervision over it. Policy supervision is a
lesser form of supervision wherein the government’s oversight is limited only to
ensuring that the corporation’s activities are in tune with the country’s commitments
under the One China policy of the PROC.43 The day-to-day operations of the
corporation, however, remain to be controlled by its duly elected board of directors.44

The MECO emphasizes that categorizing it as a GOCC or a government instrumentality can

potentially violate the country’s commitment to the One China policy of the PROC.45 Thus, the
MECO cautions against applying to the present mandamus petition the pronouncement in the
Wood decision regarding the alleged auditability of the AIT in the United States.46

The Position of the COA

The COA, on the other hand, advances that the mandamus petition ought to be dismissed on
procedural grounds and on the ground of mootness.

The COA argues that the mandamus petition suffers from the following procedural defects:

1. The petitioner lacks locus standi to bring the suit. The COA claims that the
petitioner has not shown, at least in a concrete manner, that he had been aggrieved
or prejudiced by its failure to audit the accounts of the MECO.47

2. The petition was filed in violation of the doctrine of hierarchy of courts. The COA
faults the filing of the instant mandamus petition directly with this Court, when such
petition could have very well been presented, at the first instance, before the Court of
Appeals or any Regional Trial Court.48 The COA claims that the petitioner was not
able to provide compelling reasons to justify a direct resort to the Supreme Court. 49
At any rate, the COA argues that the instant petition already became moot when COA
Chairperson Maria Gracia M. Pulido-Tan (Pulido-Tan) issued Office Order No. 2011-69850 on
6 October 2011.51 The COA notes that under Office Order No. 2011-698, Chairperson Pulido-
Tan already directed a team of auditors to proceed to Taiwan, specifically for the purpose of
auditing the accounts of, among other government agencies based therein, the MECO. 52

In conceding that it has audit jurisdiction over the accounts of the MECO, however, the COA
clarifies that it does not consider the former as a GOCC or a government instrumentality. On
the contrary, the COA maintains that the MECO is a non-governmental entity.53

The COA argues that, despite being a non-governmental entity, the MECO may still be
audited with respect to the "verification fees" for overseas employment documents that it
collects from Taiwanese employers on behalf of the DOLE.54 The COA claims that, under
Joint Circular No. 3-99,55 the MECO is mandated to remit to the Department of Labor and
Employment (DOLE) a portion of such "verification fees." 56 The COA, therefore, classifies the
MECO as a non-governmental entity "required to pay xxx government share" subject to a
partial audit of its accounts under Section 26 of the Presidential Decree No. 1445 or the State
Audit Code of the Philippines (Audit Code).57

OUR RULING

We grant the petition in part. We declare that the MECO is a non-governmental entity.
However, under existing laws, the accounts of the MECO pertaining to the "verification fees" it
collects on behalf of the DOLE as well as the fees it was authorized to collect under Section
2(6) of EO No. 15, s. 2001, are subject to the audit jurisdiction of the COA. Such fees pertain
to the government and should be audited by the COA.

We begin with the preliminary issues.

Mootness of Petition

The first preliminary issue relates to the alleged mootness of the instant mandamus petition,
occasioned by the COA’s issuance of Office Order No. 2011-698. The COA claims that by
issuing Office Order No. 2011-698, it had already conceded its jurisdiction over the accounts
of the MECO and so fulfilled the objective of the instant petition. 58 The COA thus urges that
the instant petition be dismissed for being moot and academic.59

We decline to dismiss the mandamus petition on the ground of mootness.

A case is deemed moot and academic when, by reason of the occurrence of a supervening
event, it ceases to present any justiciable controversy. 60 Since they lack an actual controversy
otherwise cognizable by courts, moot cases are, as a rule, dismissible.61

The rule that requires dismissal of moot cases, however, is not absolute. It is subject to
exceptions. In David v. Macapagal-Arroyo,62 this Court comprehensively captured these
exceptions scattered throughout our jurisprudence:

The "moot and academic" principle is not a magical formula that can automatically dissuade
the courts in resolving a case. Courts will decide cases, otherwise moot and academic, if:
first, there is a grave violation of the Constitution;63second, the exceptional character of the
situation and the paramount public interest is involved;64 third, when constitutional issue
raised requires formulation of controlling principles to guide the bench, the bar, and the
public;65and fourth, the case is capable of repetition yet evading review. 66
In this case, We find that the issuance by the COA of Office Order No. 2011-698 indeed
qualifies as a supervening event that effectively renders moot and academic the main prayer
of the instant mandamus petition. A writ of mandamus to compel the COA to audit the
accounts of the MECO would certainly be a mere superfluity, when the former had already
obliged itself to do the same.

Be that as it may, this Court refrains from dismissing outright the petition. We believe that the
mandamus petition was able to craft substantial issues presupposing the commission of a
grave violation of the Constitution and involving paramount public interest, which need to be
resolved nonetheless:

First. The petition makes a serious allegation that the COA had been remiss in its
constitutional or legal duty to audit and examine the accounts of an otherwise auditable entity
in the MECO.

Second. There is paramount public interest in the resolution of the issue concerning the
failure of the COA to audit the accounts of the MECO. The propriety or impropriety of such a
refusal is determinative of whether the COA was able to faithfully fulfill its constitutional role
as the guardian of the public treasury, in which any citizen has an interest.

Third. There is also paramount public interest in the resolution of the issue regarding the legal
status of the MECO; a novelty insofar as our jurisprudence is concerned. We find that the
status of the MECO—whether it may be considered as a government agency or not—has a
direct bearing on the country’s commitment to the One China policy of the PROC.67

An allegation as serious as a violation of a constitutional or legal duty, coupled with the

pressing public interest in the resolution of all related issues, prompts this Court to pursue a
definitive ruling thereon, if not for the proper guidance of the government or agency
concerned, then for the formulation of controlling principles for the education of the bench, bar
and the public in general.68 For this purpose, the Court invokes its symbolic function.69

If the foregoing reasons are not enough to convince, We still add another:

Assuming that the allegations of neglect on the part of the COA were true, Office Order No.
2011-698 does not offer the strongest certainty that they would not be replicated in the future.
In the first place, Office Order No. 2011-698 did not state any legal justification as to why,
after decades of not auditing the accounts of the MECO, the COA suddenly decided to do so.
Neither does it state any determination regarding the true status of the MECO. The
justifications provided by the COA, in fact, only appears in the memorandum 70 it submitted to
this Court for purposes of this case.

Thus, the inclusion of the MECO in Office Order No. 2011-698 appears to be entirely
dependent upon the judgment of the incumbent chairperson of the COA; susceptible of being
undone, with or without reason, by her or even her successor. Hence, the case now before
this Court is dangerously capable of being repeated yet evading review.

Verily, this Court should not dismiss the mandamus petition on the ground of mootness.

Standing of Petitioner

The second preliminary issue is concerned with the standing of the petitioner to file the instant
mandamus petition. The COA claims that petitioner has none, for the latter was not able to
concretely establish that he had been aggrieved or prejudiced by its failure to audit the
accounts of the MECO.71

Related to the issue of lack of standing is the MECO’s contention that petitioner has no cause
of action to file the instant mandamus petition. The MECO faults petitioner for not making any
demand for it to submit to an audit by the COA or for the COA to perform such an audit, prior
to filing the instant petition.72

We sustain petitioner’s standing, as a concerned citizen, to file the instant petition.

The rules regarding legal standing in bringing public suits, or locus standi, are already well-
defined in our case law. Again, We cite David, which summarizes jurisprudence on this
point:73

By way of summary, the following rules may be culled from the cases decided by this
Court.1a\^/phi1 Taxpayers, voters, concerned citizens, and legislators may be accorded
standing to sue, provided that the following requirements are met:

(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that
the tax measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of the
election law in question;

(4) for concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early; and

(5) for legislators, there must be a claim that the official action complained of infringes
upon their prerogatives as legislators.

We rule that the instant petition raises issues of transcendental importance, involved as they
are with the performance of a constitutional duty, allegedly neglected, by the COA. Hence,
We hold that the petitioner, as a concerned citizen, has the requisite legal standing to file the
instant mandamus petition.

To be sure, petitioner does not need to make any prior demand on the MECO or the COA in
order to maintain the instant petition. The duty of the COA sought to be compelled by
mandamus, emanates from the Constitution and law, which explicitly require, or "demand,"
that it perform the said duty. To the mind of this Court, petitioner already established his
cause of action against the COA when he alleged that the COA had neglected its duty in
violation of the Constitution and the law.

Principle of Hierarchy of Courts

The last preliminary issue is concerned with the petition’s non-observance of the principle of
hierarchy of courts. The COA assails the filing of the instant mandamus petition directly with
this Court, when such petition could have very well been presented, at the first instance,
before the Court of Appeals or any Regional Trial Court.74 The COA claims that the petitioner
was not able to provide compelling reasons to justify a direct resort to the Supreme Court.75

In view of the transcendental importance of the issues raised in the mandamus petition, as
earlier mentioned, this Court waives this last procedural issue in favor of a resolution on the
merits.76

II

To the merits of this petition, then.

The single most crucial question asked by this case is whether the COA is, under prevailing
law, mandated to audit the accounts of the MECO. Conversely, are the accounts of the
MECO subject to the audit jurisdiction of the COA?

Law, of course, identifies which accounts of what entities are subject to the audit jurisdiction
of the COA.

Under Section 2(1) of Article IX-D of the Constitution,77 the COA was vested with the "power,
authority and duty" to "examine, audit and settle" the "accounts" of the following entities:

1. The government, or any of its subdivisions, agencies and instrumentalities;

2. GOCCs with original charters;

3. GOCCs without original charters;

4. Constitutional bodies, commissions and offices that have been granted fiscal
autonomy under the Constitution; and

5. Non-governmental entities receiving subsidy or equity, directly or indirectly, from or

through the government, which are required by law or the granting institution to
submit to the COA for audit as a condition of subsidy or equity.78

The term "accounts" mentioned in the subject constitutional provision pertains to the
"revenue," "receipts," "expenditures" and "uses of funds and property" of the foregoing
entities.79

Complementing the constitutional power of the COA to audit accounts of "non-governmental

entities receiving subsidy or equity xxx from or through the government" is Section 29(1) 80 of
the Audit Code, which grants the COA visitorial authority over the following non-governmental
entities:

1. Non-governmental entities "subsidized by the government";

2. Non-governmental entities "required to pay levy or government share";

3. Non-governmental entities that have "received counterpart funds from the

government"; and

4. Non-governmental entities "partly funded by donations through the government."

Section 29(1) of the Audit Code, however, limits the audit of the foregoing non-governmental
entities only to "funds xxx coming from or through the government."81 This section of the Audit
Code is, in turn, substantially reproduced in Section 14(1), Book V of the Administrative
Code.82

In addition to the foregoing, the Administrative Code also empowers the COA to examine and
audit "the books, records and accounts" of public utilities "in connection with the fixing of rates
of every nature, or in relation to the proceedings of the proper regulatory agencies, for
purposes of determining franchise tax."83

Both petitioner and the COA claim that the accounts of the MECO are within the audit
jurisdiction of the COA, but vary on the extent of the audit and on what type of auditable entity
the MECO is. The petitioner posits that all accounts of the MECO are auditable as the latter is
a bona fide GOCC or government instrumentality.84 On the other hand, the COA argues that
only the accounts of the MECO that pertain to the "verification fees" it collects on behalf of the
DOLE are auditable because the former is merely a non-governmental entity "required to pay
xxx government share" per the Audit Code.85

We examine both contentions.

The MECO Is Not a GOCC or

Government Instrumentality

We start with the petitioner’s contention.

Petitioner claims that the accounts of the MECO ought to be audited by the COA because the
former is a GOCC or government instrumentality. Petitioner points out that the MECO is a
non-stock corporation "vested with governmental functions relating to public needs"; it is
"controlled by the government thru a board of directors appointed by the President of the
Philippines"; and it operates "outside of the departmental framework," subject only to the
"operational and policy supervision of the DTI."86 The MECO thus possesses, petitioner
argues, the essential characteristics of a bona fide GOCC and government instrumentality. 87

We take exception to petitioner’s characterization of the MECO as a GOCC or government

instrumentality. The MECO is not a GOCC or government instrumentality.

Government instrumentalities are agencies of the national government that, by reason of

some "special function or jurisdiction" they perform or exercise, are allotted "operational
autonomy" and are "not integrated within the department framework."88 Subsumed under the
rubric "government instrumentality" are the following entities:89

1. regulatory agencies,

2. chartered institutions,

3. government corporate entities or government instrumentalities with corporate

powers (GCE/GICP),90 and

4. GOCCs

The Administrative Code defines a GOCC:91

(13) Government-owned or controlled corporation refers to any agency organized as a stock

or non-stock corporation, vested with functions relating to public needs whether governmental
or proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the extent of at
least fifty-one (51) per cent of its capital stock: x x x.

The above definition is, in turn, replicated in the more recent Republic Act No. 10149 or the
GOCC Governance Act of 2011, to wit:92

(o) Government-Owned or -Controlled Corporation (GOCC) refers to any agency organized

as a stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government of the Republic of the
Philippines directly or through its instrumentalities either wholly or, where applicable as in the
case of stock corporations, to the extent of at least a majority of its outstanding capital stock:
x x x.

GOCCs, therefore, are "stock or non-stock" corporations "vested with functions relating to
public needs" that are "owned by the Government directly or through its
instrumentalities."93 By definition, three attributes thus make an entity a GOCC: first, its
organization as stock or non-stock corporation;94 second, the public character of its function;
and third, government ownership over the same.

Possession of all three attributes is necessary to deem an entity a GOCC.

In this case, there is not much dispute that the MECO possesses the first and second
attributes. It is the third attribute, which the MECO lacks.

The MECO Is Organized as a Non-Stock Corporation

The organization of the MECO as a non-stock corporation cannot at all be denied. Records
disclose that the MECO was incorporated as a non-stock corporation under the Corporation
Code on 16 December 1977.95 The incorporators of the MECO were Simeon R. Roxas,
Florencio C. Guzon, Manuel K. Dayrit, Pio K. Luz and Eduardo B. Ledesma, who also served
as the corporation’s original members and directors.96

The purposes for which the MECO was organized also establishes its non-profit character, to
wit:97

1. To establish and develop the commercial and industrial interests of Filipino

nationals here and abroad and assist on all measures designed to promote and
maintain the trade relations of the country with the citizens of other foreign countries;

2. To receive and accept grants and subsidies that are reasonably necessary in
carrying out the corporate purposes provided they are not subject to conditions
defeatist for or incompatible with said purpose;

3. To acquire by purchase, lease or by any gratuitous title real and personal

properties as may be necessary for the use and need of the corporation, and in like
manner when they are

4. To do and perform any and all acts which are deemed reasonably necessary to
carry out the purposes. (Emphasis supplied)

The purposes for which the MECO was organized are somewhat analogous to those of a
trade, business or industry chamber,98 but only on a much larger scale i.e., instead of
furthering the interests of a particular line of business or industry within a local sphere, the
MECO seeks to promote the general interests of the Filipino people in a foreign land.

Finally, it is not disputed that none of the income derived by the MECO is distributable as
dividends to any of its members, directors or officers.

Verily, the MECO is organized as a non-stock corporation.

The MECO Performs Functions with a Public Aspect.

The public character of the functions vested in the MECO cannot be doubted either. Indeed,
to a certain degree, the functions of the MECO can even be said to partake of the nature of
governmental functions. As earlier intimated, it is the MECO that, on behalf of the people of
the Philippines, currently facilitates unofficial relations with the people in Taiwan.

Consistent with its corporate purposes, the MECO was "authorized" by the Philippine
government to perform certain "consular and other functions" relating to the promotion,
protection and facilitation of Philippine interests in Taiwan.99The full extent of such authorized
functions are presently detailed in Sections 1 and 2 of EO No. 15, s. 2001:
SECTION 1. Consistent with its corporate purposes and subject to the conditions stated in
Section 3 hereof, MECO is hereby authorized to assist in the performance of the following
functions:

1. Formulation and implementation of a program to attract and promote

investments from Taiwan to Philippine industries and businesses, especially
in manufacturing, tourism, construction and other preferred areas of
investments;

2. Promotion of the export of Philippine products and Filipino manpower

services, including Philippine management services, to Taiwan;

3. Negotiation and/or assistance in the negotiation and conclusion of

agreements or other arrangements concerning trade, investment, economic
cooperation, technology transfer, banking and finance, scientific, cultural,
educational and other modes of cooperative endeavors between the
Philippines and Taiwan, on a people-to-people basis, in accordance with
established rules and regulations;

4. Reporting on, and identification of, employment and business opportunities

in Taiwan for the promotion of Philippine exports, manpower and
management services, and tourism;

5. Dissemination in Taiwan of information on the Philippines, especially in the

fields of trade, tourism, labor, economic cooperation, and cultural,
educational and scientific endeavors;

6. Conduct of periodic assessment of market conditions in Taiwan, including

submission of trade statistics and commercial reports for use of Philippine
industries and businesses; and

7. Facilitation, fostering and cultivation of cultural, sports, social, and

educational exchanges between the peoples of the Philippines and Taiwan.

SECTION 2. In addition to the above-mentioned authority and subject to the conditions stated
in Section 3 hereof, MECO, through its branch offices in Taiwan, is hereby authorized to
perform the following functions:

1. Issuance of temporary visitors’ visas and transit and crew list visas, and
such other visa services as may be authorized by the Department of Foreign
Affairs;

2. Issuance, renewal, extension or amendment of passports of Filipino

citizens in accordance with existing regulations, and provision of such other
passport services as may be required under the circumstances;

3. Certification or affirmation of the authenticity of documents submitted for

authentication;

4. Providing translation services;

5. Assistance and protection to Filipino nationals and other legal/juridical

persons working or residing in Taiwan, including making representations to
the extent allowed by local and international law on their behalf before civil
and juridical authorities of Taiwan; and
 6. Collection of reasonable fees on the first four (4) functions enumerated
above to defray the cost of its operations.

A perusal of the above functions of the MECO reveals its uncanny similarity to some of the
functions typically performed by the DFA itself, through the latter’s diplomatic and consular
missions.100 The functions of the MECO, in other words, are of the kind that would otherwise
be performed by the Philippines’ own diplomatic and consular organs, if not only for the
government’s acquiescence that they instead be exercised by the MECO.

Evidently, the functions vested in the MECO are impressed with a public aspect.

The MECO Is Not Owned or Controlled by the Government Organization as a non-stock

corporation and the mere performance of functions with a public aspect, however, are not by
themselves sufficient to consider the MECO as a GOCC. In order to qualify as a GOCC, a
corporation must also, if not more importantly, be owned by the government.

The government owns a stock or non-stock corporation if it has controlling interest in the
corporation. In a stock corporation, the controlling interest of the government is assured by its
ownership of at least fifty-one percent (51%) of the corporate capital stock.101 In a non-stock
corporation, like the MECO, jurisprudence teaches that the controlling interest of the
government is affirmed when "at least majority of the members are government officials
holding such membership by appointment or designation"102 or there is otherwise "substantial
participation of the government in the selection" of the corporation’s governing board. 103

In this case, the petitioner argues that the government has controlling interest in the MECO
because it is the President of the Philippines that indirectly appoints the directors of the
corporation.104 The petitioner claims that the President appoints directors of the MECO thru
"desire letters" addressed to the corporation’s board. 105 As evidence, the petitioner cites the
assumption of one Mr. Antonio Basilio as chairman of the board of directors of the MECO in
2001, which was allegedly accomplished when former President Macapagal-Arroyo, through
a memorandum dated 20 February 2001, expressed her "desire" to the board of directors of
the MECO for the election of Mr. Basilio as chairman.106

The MECO, however, counters that the "desire letters" that the President transmits are merely
recommendatory and not binding on it.107 The MECO maintains that, as a corporation
organized under the Corporation Code, matters relating to the election of its directors and
officers, as well as its membership, are ultimately governed by the appropriate provisions of
the said code, its articles of incorporation and its by-laws.108

As between the contrasting arguments, We find the contention of the MECO to be the one
more consistent with the law.

The fact of the incorporation of the MECO under the Corporation Code is key. The MECO
was correct in postulating that, as a corporation organized under the Corporation Code, it is
governed by the appropriate provisions of the said code, its articles of incorporation and its
by-laws. In this case, it is the by-laws109 of the MECO that stipulates that its directors are
elected by its members; its officers are elected by its directors; and its members, other than
the original incorporators, are admitted by way of a unanimous board resolution, to wit:

SECTION II. MEMBERSHIP

Article 2. Members shall be classified as (a) Regular and (b) Honorary.

(a) Regular members – shall consist of the original incorporators and such other
members who, upon application for membership, are unanimously admitted by the
Board of Directors.
 (b) Honorary member – A person of distinction in business who as sympathizer of the
objectives of the corporation, is invited by the Board to be an honorary member.

SECTION III. BOARD OF DIRECTORS

Article 3. At the first meeting of the regular members, they shall organize and constitute
themselves as a Board composed of five (5) members, including its Chairman, each of whom
as to serve until such time as his own successor shall have been elected by the regular
members in an election called for the purpose. The number of members of the Board shall be
increased to seven (7) when circumstances so warrant and by means of a majority vote of the
Board members and appropriate application to and approval by the Securities and Exchange
Commission. Unless otherwise provided herein or by law, a majority vote of all Board
members present shall be necessary to carry out all Board resolutions.

During the same meeting, the Board shall also elect its own officers, including the designation
of the principal officer who shall be the Chairman. In line with this, the Chairman shall also
carry the title Chief Executive Officer. The officer who shall head the branch or office for the
agency that may be established abroad shall have the title of Director and Resident
Representative. He will also be the Vice-Chairman. All other members of the Board shall have
the title of Director.

xxxx

SECTION IV. EXECUTIVE COMMITTEE

Article 5. There shall be established an Executive Committee composed of at least three (3)
members of the Board. The members of the Executive Committee shall be elected by the
members of the Board among themselves.

xxxx

SECTION VI. OFFICERS: DUTIES, COMPENSATION

Article 8. The officers of the corporation shall consist of a Chairman of the Board, Vice-
Chairman, Chief Finance Officer, and a Secretary. Except for the Secretary, who is appointed
by the Chairman of the Board, other officers and employees of the corporation shall be
appointed by the Board.

The Deputy Representative and other officials and employees of a branch office or agency
abroad are appointed solely by the Vice Chairman and Resident Representative concerned.
All such appointments however are subject to ratification by the Board.

It is significant to note that none of the original incorporators of the MECO were shown to be
government officials at the time of the corporation’s organization. Indeed, none of the
members, officers or board of directors of the MECO, from its incorporation up to the present
day, were established as government appointees or public officers designated by reason of
their office. There is, in fact, no law or executive order that authorizes such an appointment or
designation. Hence, from a strictly legal perspective, it appears that the presidential "desire
letters" pointed out by petitioner—if such letters even exist outside of the case of Mr. Basilio—
are, no matter how strong its persuasive effect may be, merely recommendatory.

The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity.

The categorical exclusion of the MECO from a GOCC makes it easier to exclude the same
from any other class of government instrumentality. The other government instrumentalities
i.e., the regulatory agencies, chartered institutions and GCE/GICP are all, by explicit or
implicit definition, creatures of the law.110 The MECO cannot be any other instrumentality
because it was, as mentioned earlier, merely incorporated under the Corporation Code.

Hence, unless its legality is questioned, and in this case it was not, the fact that the MECO is
operating under the policy supervision of the DTI is no longer a relevant issue to be reckoned
with for purposes of this case.

For whatever it is worth, however, and without justifying anything, it is easy enough for this
Court to understand the rationale, or necessity even, of the executive branch placing the
MECO under the policy supervision of one of its agencies.

It is evident, from the peculiar circumstances surrounding its incorporation, that the MECO
was not intended to operate as any other ordinary corporation. And it is not. Despite its
private origins, and perhaps deliberately so, the MECO was "entrusted" 111 by the government
with the "delicate and precarious"112 responsibility of pursuing "unofficial"113 relations with the
people of a foreign land whose government the Philippines is bound not to recognize. The
intricacy involved in such undertaking is the possibility that, at any given time in fulfilling the
purposes for which it was incorporated, the MECO may find itself engaged in dealings or
activities that can directly contradict the Philippines’ commitment to the One China policy of
the PROC. Such a scenario can only truly be avoided if the executive department exercises
some form of oversight, no matter how limited, over the operations of this otherwise private
entity.

Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with other
private corporations. From its over-reaching corporate objectives, its special duty and
authority to exercise certain consular functions, up to the oversight by the executive
department over its operations—all the while maintaining its legal status as a non-
governmental entity—the MECO is, for all intents and purposes, sui generis.

Certain Accounts of the MECO May

Be Audited By the COA.

We now come to the COA’s contention.

The COA argues that, despite being a non-governmental entity, the MECO may still be
audited with respect to the "verification fees" for overseas employment documents that the
latter collects from Taiwanese employers on behalf of the DOLE. 114 The COA claims that,
under Joint Circular No. 3-99, the MECO is mandated to remit to the national government a
portion of such "verification fees."115 The COA, therefore, classifies the MECO as a non-
governmental entity "required to pay xxx government share" per the Audit Code. 116

We agree that the accounts of the MECO pertaining to its collection of "verification fees" is
subject to the audit jurisdiction of the COA. However, We digress from the view that such
accounts are the only ones that ought to be audited by the COA. Upon careful evaluation of
the information made available by the records vis-à-vis the spirit and the letter of the laws and
executive issuances applicable, We find that the accounts of the MECO pertaining to the fees
it was authorized to collect under Section 2(6) of EO No. 15, s. 2001, are likewise subject to
the audit jurisdiction of the COA.

Verification Fees Collected by the MECO

In its comment,117 the MECO admitted that roughly 9% of its income is derived from its share
in the "verification fees" for overseas employment documents it collects on behalf of the
DOLE.

The "verification fees" mentioned here refers to the "service fee for the verification of
overseas employment contracts, recruitment agreement or special powers of attorney" that
the DOLE was authorized to collect under Section 7 of EO No. 1022, 118 which was issued by
President Ferdinand E. Marcos on 1 May 1985. These fees are supposed to be collected by
the DOLE from the foreign employers of OFWs and are intended to be used for "the
promotion of overseas employment and for welfare services to Filipino workers within the
area of jurisdiction of [concerned] foreign missions under the administration of the [DOLE]." 119

Joint Circular 3-99 was issued by the DOLE, DFA, the Department of Budget Management,
the Department of Finance and the COA in an effort to implement Section 7 of Executive
Order No. 1022.120 Thus, under Joint Circular 3-99, the following officials have been tasked to
be the "Verification Fee Collecting Officer" on behalf of the DOLE:121

1. The labor attaché or duly authorized overseas labor officer at a given foreign post,
as duly designated by the DOLE Secretary;

2. In foreign posts where there is no labor attaché or duly authorized overseas labor
officer, the finance officer or collecting officer of the DFA duly deputized by the DOLE
Secretary as approved by the DFA Secretary;

3. In the absence of such finance officer or collecting officer, the alternate duly
designated by the head of the foreign post.

Since the Philippines does not maintain an official post in Taiwan, however, the DOLE
entered into a "series" of Memorandum of Agreements with the MECO, which made the latter
the former’s collecting agent with respect to the "verification fees" that may be due from
Taiwanese employers of OFWs.122 Under the 27 February 2004 Memorandum of Agreement
between DOLE and the MECO, the "verification fees" to be collected by the latter are to be
allocated as follows: (a) US$ 10 to be retained by the MECO as administrative fee, (b) US
$10 to be remitted to the DOLE, and (c) US$ 10 to be constituted as a common fund of the
MECO and DOLE.123

Evidently, the entire "verification fees" being collected by the MECO are receivables of the
DOLE.124 Such receipts pertain to the DOLE by virtue of Section 7 of EO No. 1022.

Consular Fees Collected by the MECO

Aside from the DOLE "verification fees," however, the MECO also collects "consular fees," or
fees it collects from the exercise of its delegated consular functions.

The authority behind "consular fees" is Section 2(6) of EO No. 15, s. 2001. The said section
authorizes the MECO to collect "reasonable fees" for its performance of the following consular
functions:

1. Issuance of temporary visitors’ visas and transit and crew list visas, and such other
visa services as may be authorized by the DFA;

2. Issuance, renewal, extension or amendment of passports of Filipino citizens in

accordance with existing regulations, and provision of such other passport services
as may be required under the circumstances;

3. Certification or affirmation of the authenticity of documents submitted for

authentication; and

4. Providing translation services.

Evidently, and just like the peculiarity that attends the DOLE "verification fees," there is no
consular office for the collection of the "consular fees." Thus, the authority for the MECO to
collect the "reasonable fees," vested unto it by the executive order.
The "consular fees," although held and expended by the MECO by virtue of EO No. 15, s.
2001, are, without question, derived from the exercise by the MECO of consular functions—
functions it performs by and only through special authority from the government. There was
never any doubt that the visas, passports and other documents that the MECO issues
pursuant to its authorized functions still emanate from the Philippine government itself.

Such fees, therefore, are received by the MECO to be used strictly for the purpose set out
under EO No. 15, s. 2001. They must be reasonable as the authorization requires. It is the
government that has ultimate control over the disposition of the "consular fees," which control
the government did exercise when it provided in Section 2(6) of EO No. 15, s. 2001 that such
funds may be kept by the MECO "to defray the cost of its operations."

The Accounts of the MECO Pertaining to the Verification Fees and Consular Fees May Be
Audited by the COA.

Section 14(1), Book V of the Administrative Code authorizes the COA to audit accounts of
non-governmental entities "required to pay xxx or have government share" but only with
respect to "funds xxx coming from or through the government." This provision of law perfectly
fits the MECO:

First. The MECO receives the "verification fees" by reason of being the collection agent of the
DOLE—a government agency. Out of its collections, the MECO is required, by agreement, to
remit a portion thereof to the DOLE. Hence, the MECO is accountable to the government for
its collections of such "verification fees" and, for that purpose, may be audited by the COA.

Second. Like the "verification fees," the "consular fees" are also received by the MECO
through the government, having been derived from the exercise of consular functions
entrusted to the MECO by the government. Hence, the MECO remains accountable to the
government for its collections of "consular fees" and, for that purpose, may be audited by the
COA.

Tersely put, the 27 February 2008 Memorandum of Agreement between the DOLE and the
MECO and Section 2(6) of EO No. 15, s. 2001, vis-à-vis, respectively, the "verification fees"
and the "consular fees," grant and at the same time limit the authority of the MECO to collect
such fees. That grant and limit require the audit by the COA of the collections thereby
generated.

Conclusion

The MECO is not a GOCC or government instrumentality. It is a sui generis private entity
especially entrusted by the government with the facilitation of unofficial relations with the
people in Taiwan without jeopardizing the country’s faithful commitment to the One China
policy of the PROC. However, despite its non-governmental character, the MECO handles
government funds in the form of the "verification fees" it collects on behalf of the DOLE and
the "consular fees" it collects under Section 2(6) of EO No. 15, s. 2001. Hence, under existing
laws, the accounts of the MECO pertaining to its collection of such "verification fees" and
"consular fees" should be audited by the COA.

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Manila

Economic and Cultural Office is hereby declared a non-governmental entity. However, the
accounts of the Manila Economic and Cultural Office pertaining to: the verification fees
contemplated by Section 7 of Executive Order No. 1022 issued 1 May 1985, that the former
collects on behalf of the Department of Labor and Employment, and the fees it was
authorized to collect under Section 2(6) of Executive Order No. 15 issued 16 May 2001, are
subject to the audit jurisdiction of the COA.

No costs.
SO ORDERED.
CLASSIFICATION OF CORPORATION

G.R. No. L-12719 May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.

PAREDES, J.:

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of
the Collector of Internal Revenue, assessing against and demanding from the "Club Filipino,
Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and
compromise penalty, allegedly due from it as a keeper of bar and restaurant.

As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a
civic corporation organized under the laws of the Philippines with an original authorized
capital stock of P22,000.00, which was subsequently increased to P200,000.00, among
others, to it "proporcionar, operar, y mantener un campo de golf, tenis, gimnesio
(gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos
no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de
toda clase y denominacion cualquiera para el recreo y entrenamiento saludable de sus
miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A).
Neither in the articles or by-laws is there a provision relative to dividends and their
distribution, although it is covenanted that upon its dissolution, the Club's remaining assets,
after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27,
Estatutos del Club, Exh. A-a.).

The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from
the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and
short orders to its members and their guests. The bar-restaurant was a necessary incident to
the operation of the club and its golf-course. The club is operated mainly with funds derived
from membership fees and dues. Whatever profits it had, were used to defray its overhead
expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from
the re-valuation of its real properties, the value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a
BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its
bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated
December 22, 1852, the Collector of Internal Revenue assessed against and demanded from
the Club, the following sums: —

As percentage tax on its gross receipts

during the tax years 1946 to 1951 P9,599.07

Surcharge therein 2,399.77

As fixed tax for the years 1946 to 1952 70.00

Compromise penalty 500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request
having been denied, the Club filed the instant petition for review.

The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed
and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax
Code, under which the assessment was made, in connection with the operation of its bar and
restaurant, during the periods mentioned above; and

2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a
business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten
pesos for each calendar year or fraction thereof in which such person shall engage in said
business." Section 183 provides in general that "the percentage taxes on business shall be
payable at the end of each calendar quarter in the amount lawfully due on the business
transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage
tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax
three per centum, and keepers of bar and cafes where wines or liquors are served five per
centum of their gross receipts . . .". It has been held that the liability for fixed and percentage
taxes, as provided by these sections, does not ipso facto attach by mere reason of the
operation of a bar and restaurant. For the liability to attach, the operator thereof must be
engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning
of business is restricted to activities or affairs where profit is the purpose or livelihood is the
motive, and the term business when used without qualification, should be construed in its
plain and ordinary meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev.
v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-
11176, June 29, 1959, giving full definitions of the word "business"; Coll. of Int. Rev. v.
Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts
of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan.
27, 1960).

Having found as a fact that the Club was organized to develop and cultivate sports of all class
and denomination, for the healthful recreation and entertainment of its stockholders and
members; that upon its dissolution, its remaining assets, after paying debts, shall be donated
to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from
membership fees and dues; that the Club's bar and restaurant catered only to its members
and their guests; that there was in fact no cash dividend distribution to its stockholders and
that whatever was derived on retail from its bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to
reason that the Club is not engaged in the business of an operator of bar and restaurant
(same authorities, cited above).

It is conceded that the Club derived profit from the operation of its bar and restaurant, but
such fact does not necessarily convert it into a profit-making enterprise. The bar and
restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived
therefrom are necessarily incidental to the primary object of developing and cultivating sports
for the healthful recreation and entertainment of the stockholders and members. That a Club
makes some profit, does not make it a profit-making Club. As has been remarked a club
should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v.
Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco
Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1äwphï1.ñët

It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee
Club is a stock corporation. This is unmeritorious. The facts that the capital stock of the
respondent Club is divided into shares, does not detract from the finding of the trial court that
it is not engaged in the business of operator of bar and restaurant. What is determinative of
whether or not the Club is engaged in such business is its object or purpose, as stated in its
articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the
corporate form or by the commercial aspect of the business prosecuted, but may be shown by
extrinsic evidence, including the by-laws and the method of operation. From the extrinsic
evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a
barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a
capital stock divided into shares and (2) an authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3,
Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be
found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock corporation, within the contemplation of the
corporation law.

A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-
profit, nonstock organizations, unless the intent to the contrary is manifest and patent"
(Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.

Having arrived at the conclusion that respondent Club is not engaged in the business as an
operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it
follows that it is not liable for any penalty, much less of a compromise penalty.

WHEREFORE, the decision appealed from is affirmed without costs.

CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,

vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto
Marabe; Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro
Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina
Basea, Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador
Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe
Basilan, and Ruben Robalos, respondents.

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be pierced when a corporation
is just but the alter ego of a person or of another corporation. Where badges of fraud exist;
where public convenience is defeated; where a wrong is sought to be justified thereby, the
corporate fiction or the notion of legal entity should come to naught. The law in these
instances will regard the corporation as a mere association of persons and, in case of two
corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary

liability for damages, the corporation may not be heard to say that it has a personality
separate and distinct from the other corporation. The piercing of the corporate veil comes into
play.

This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a "break-open order" to the
sheriff to be enforced against personal property found in the premises of petitioner's sister
company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan
Road, Valenzuela, Metro Manila, is engaged in the construction business. Private
respondents were employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination
of employment by petitioner, effective on November 30, 1981. It was stated in the individual
notices that their contracts of employment had expired and the project in which they were
hired had been completed.

Public respondent found it to be, the fact, however, that at the time of the termination of
private respondent's employment, the project in which they were hired had not yet been
finished and completed. Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and
non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against
petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate
private respondents and to pay them back wages equivalent to one year or three hundred
working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the
motion for reconsideration filed by petitioner on the ground that the said decision had already
become final and executory.2
On October 16, 1986, the NLRC Research and Information Department made the finding that
private respondents' back wages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to
execute the Decision, dated December 19, 1984. The writ was partially satisfied through
garnishment of sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned over to the cashier of the
NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the
sheriff to collect from herein petitioner the sum of P117,414.76, representing the balance of
the judgment award, and to reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of
execution on petitioner through the security guard on duty but the service was refused on the
ground that petitioner no longer occupied the premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a
second alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress
report, dated November 2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by
respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he
had levied upon.4

The said special sheriff recommended that a "break-open order" be issued to enable him to
enter petitioner's premises so that he could proceed with the public auction sale of the
aforesaid personal properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor
Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by
Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open
Order," alleging that HPPI and petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended its
business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which
petitioner and HPPI may suffer because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of
the General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities
Exchange Commission (SEC) and the General Information Sheet, dated May 25, 1987,
submitted by HPPI to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

 HPPI P 6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P 400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

 Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of
a break-open order, contending that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in
construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents'
motion for break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the
order of the Labor Arbiter, issued a break-open order and directed private respondents to file
a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties
already levied upon. It dismissed the third-party claim for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution,
dated December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the
execution of its decision despite a third-party claim on the levied property. Petitioner further
contends, that the doctrine of piercing the corporate veil should not have been applied, in this
case, in the absence of any showing that it created HPPI in order to evade its liability to
private respondents. It also contends that HPPI is engaged in the manufacture and sale of
steel, concrete and iron pipes, a business which is distinct and separate from petitioner's
construction business. Hence, it is of no consequence that petitioner and HPPI shared the
same premises, the same President and the same set of officers and subscribers. 7

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and

distinct from its stockholders and from other corporations to which it may be connected. 8 But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice.9 So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws,10 this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced.11 This is true likewise when the corporation
is merely an adjunct, a business conduit or an alter ego of another corporation. 12

The conditions under which the juridical entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid
down, but certainly, there are some probative factors of identity that will justify the application
of the doctrine of piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

The SEC en banc explained the "instrumentality rule" which the courts have applied in
disregarding the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the "instrumentality" may be disregarded.
The control necessary to invoke the rule is not majority or even complete
stock control but such domination of instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. It must be kept in mind that the
control must be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction
is as follows:

1. Control, not mere majority or complete stock control, but complete

domination, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty or
dishonest and unjust act in contravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.
 The absence of any one of these elements prevents "piercing the corporate
veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendant's relationship to that operation.14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper
corporation, a sham or a subterfuge is purely one of fact.15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the
same day, a similar information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casiño as the
corporate secretary of both corporations. It would also not be amiss to note
that both corporations had the same president, the same board of directors,
the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent
(herein petitioner) and the third-party claimant shared the same address
and/or premises. Under this circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of respondents. 16

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we
had the occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail Plant,
which ceased operation of June 30, 1957, was SUCCEEDED by the
Claparols Steel Corporation effective the next day, July 1, 1957, up to
December 7, 1962, when the latter finally ceased to operate, were not
disputed by petitioner. It is very clear that the latter corporation was a
continuation and successor of the first entity . . . . Both predecessors and
successor were owned and controlled by petitioner Eduardo Claparols and
there was no break in the succession and continuity of the same business.
This "avoiding-the-liability" scheme is very patent, considering that 90% of
the subscribed shares of stock of the Claparols Steel Corporation (the
second corporation) was owned by respondent . . . Claparols himself, and all
the assets of the dissolved Claparols Steel and Nail plant were turned over to
the emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced
as it was deliberately and maliciously designed to evade its financial
obligation to its employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject
of the execution, private respondents had no other recourse but to apply for a break-open
order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is
in consonance with Section 3, Rule VII of the NLRC Manual of Execution of Judgment which
provides that:

Should the losing party, his agent or representative, refuse or prohibit the
Sheriff or his representative entry to the place where the property subject of
execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and
hearing were complied with. Petitioner and the third-party claimant were given the opportunity
to submit evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-
open order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial
agencies supported by substantial evidence are binding on this Court and are entitled to great
respect, in the absence of showing of grave abuse of a discretion.18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated
April 23, 1992 and December 3, 1992, are AFFIRMED.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 182729 September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,

vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of
Manila, Branch 21, and ROMEO M. MORALES, doing business under the name and
style "RM Morales Trophies and Plaques,"Respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January
23, 2008 Decision1and the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA)
in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the
Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo
M. Morales, doing business under the name and style RM Morales Trophies and Plaques v.
Kukan, Inc. In the said orders, the RTC disregarded the separate corporate identities of
Kukan, Inc. and Kukan International Corporation and declared them to be one and the same
entity. Accordingly, the RTC held Kukan International Corporation, albeit not impleaded in the
underlying complaint of Romeo M. Morales, liable for the judgment award decreed in a
Decision dated November 28, 20025 in favor of Morales and against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of
signages in a building being constructed in Makati City. Morales tendered the winning bid and
was awarded the PhP 5 million contract. Some of the items in the project award were later
excluded resulting in the corresponding reduction of the contract price to PhP 3,388,502.
Despite his compliance with his contractual undertakings, Morales was only paid the amount
of PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to
pay despite demands. Shortchanged, Morales filed a Complaint 6 with the RTC against Kukan,
Inc. for a sum of money, the case docketed as Civil Case No. 99-93173 and eventually raffled
to Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial
ensued. However, starting November 2000, Kukan, Inc. no longer appeared and participated
in the proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in default
and paving the way for Morales to present his evidence ex parte.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan,
Inc., disposing as follows:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and
by preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per
annum from February 17, 1999 until full payment;
 2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable

attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a writ
of execution8 against Kukan, Inc. The sheriff then levied upon various personal properties
found at what was supposed to be Kukan, Inc.’s office at Unit 2205, 88 Corporate Center,
Salcedo Village, Makati City. Alleging that it owned the properties thus levied and that it was a
different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit
of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after Kukan,
Inc. had stopped participating in Civil Case No. 99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30,
2003. In it, Morales prayed, applying the principle of piercing the veil of corporate fiction, that
an order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the properties
under the name or in the possession of KIC, it being alleged that both corporations are but
one and the same entity. KIC opposed Morales’ motion. By Order of May 29, 20039as
reiterated in a subsequent order, the court denied the omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment Debtors
dated May 4, 2005. In this motion Morales sought that subponae be issued against the
primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too
was denied by the trial court in an Order dated May 24, 2005.10

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who
eventually granted the motion. The case was re-raffled to Branch 21, presided by public
respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate
Fiction to declare KIC as having no existence separate from Kukan, Inc. This time around, the
RTC, by Order dated March 12, 2007, granted the motion, the dispositive portion of which
reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby
declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the
same corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay
the amount awarded to plaintiff pursuant to the decision of November [28], 2002
which has long been final and executory.

SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another Order dated
June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7,
2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which
states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders
dated March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.

SO ORDERED.11

The CA later denied KIC’s motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the Court’s
consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioner’s
Constitutional Right to Due Process was not violated by the public respondent in
rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring
petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc." to
private respondent – as petitioner is a stranger to the case and was never made a
party in the case before the trial court nor was it ever served a summons and a copy
of the complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the
petitioner liable to the judgment obligations of the corporation "Kukan, Inc." to private
respondent are valid as said orders of the public respondent modify and/or amend the
trial court’s final and executory decision rendered on November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the
petitioner [KIC] and the corporation "Kukan, Inc." as one and the same, and,
therefore, the Veil of Corporate Fiction between them be pierced – as the procedure
undertaken by public respondent which the [CA] upheld is not sanctioned by the
Rules of Court and/or established jurisprudence enunciated by this Honorable
Supreme Court.12

In gist, the issues to be resolved boil down to the question of, first, whether the trial court can,
after the judgment against Kukan, Inc. has attained finality, execute it against the property of
KIC; second, whether the trial court acquired jurisdiction over KIC; and third, whether the trial
and appellate courts correctly applied, under the premises, the principle of piercing the veil of
corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after
adjudging Kukan, Inc. liable for a sum of money in a final and executory judgment, execute
such judgment debt against the property of KIC.
The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the
execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all
proceedings on the execution are proceedings in the suit. There is no question that the court
which rendered the judgment has a general supervisory control over its process of execution,
and this power carries with it the right to determine every question of fact and law which may
be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals 14 in this wise: "The said branch
has a general supervisory control over its processes in the execution of its judgment with a
right to determine every question of fact and law which may be involved in the execution."

The court’s supervisory control does not, however, extend as to authorize the alteration or
amendment of a final and executory decision, save for certain recognized exceptions, among
which is the correction of clerical errors. Else, the court violates the principle of finality of
judgment and its immutability, concepts which the Court, in Tan v. Timbal,15 defined:

As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement
of rights of the parties. Once a decision or order becomes final and executory, it is removed
from the power or jurisdiction of the court which rendered it to further alter or amend it. It
thereby becomes immutable and unalterable and any amendment or alteration which
substantially affects a final and executory judgment is null and void for lack of jurisdiction,
including the entire proceedings held for that purpose. An order of execution which varies the
tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis supplied.)

Republic v. Tango16 expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired
finality becomes immutable and unalterable. As such, it may no longer be modified in
any respect even if the modification is meant to correct erroneous conclusions of fact or law
and whether it will be made by the court that rendered it or by the highest court of the land. x
xx

The doctrine of finality of judgment is grounded on the fundamental principle of public policy
and sound practice that, at the risk of occasional error, the judgment of courts and the award
of quasi-judicial agencies must become final on some definite date fixed by law. The only
exceptions to the general rule are the correction of clerical errors, the so-called nunc pro tunc
entries which cause no prejudice to any party, void judgments, and whenever circumstances
transpire after the finality of the decision which render its execution unjust and inequitable.
None of the exceptions obtains here to merit the review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order
the execution of its final decision in a manner as would amount to its prohibited alteration or
modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it
provides:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and
by preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:
 1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per
annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable

attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.

x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of execution,
answerable for the above judgment liability is a clear case of altering a decision, an instance
of granting relief not contemplated in the decision sought to be executed. And the change
does not fall under any of the recognized exceptions to the doctrine of finality and immutability
of judgment. It is a settled rule that a writ of execution must conform to the fallo of the
judgment; as an inevitable corollary, a writ beyond the terms of the judgment is a nullity. 17

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an
examination of the other issues raised by KIC would be proper.

Second Issue: Propriety of the RTC

Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC and
its property, given that it was neither made a party nor impleaded in Civil Case No. 99-93173,
let alone served with summons. In other words, did the trial court acquire jurisdiction over
KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to
the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to earlier,
namely: (a) the Affidavit of Third-Party Claim;18(b) the Comment and Opposition to Plaintiff’s
Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order dated March 12,
2007;20 and (d) the Motion for Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of
the Rules of Court, stated that "the procedural rule on service of summons can be waived by
voluntary submission to the court’s jurisdiction through any form of appearance by the party or
its counsel."22

We cannot give imprimatur to the appellate court’s appreciation of the thrust of Sec. 20, Rule
14 of the Rules in concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire
jurisdiction over the parties in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other
hand, jurisdiction over the defendants in a civil case is acquired either through the service of
summons upon them or through their voluntary appearance in court and their submission to
its authority. (Emphasis supplied.)

In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of the
defendant either by the service of summons or by the latter’s voluntary appearance and
submission to the authority of the former."
The court’s jurisdiction over a party-defendant resulting from his voluntary submission to its
authority is provided under Sec. 20, Rule 14 of the Rules, which states:

Section 20. Voluntary appearance. – The defendant’s voluntary appearance in the actions
shall be equivalent to service of summons. The inclusion in a motion to dismiss of other
grounds aside from lack of jurisdiction over the person of the defendant shall not be deemed
a voluntary appearance.

To be sure, the CA’s ruling that any form of appearance by the party or its counsel is deemed
as voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd. 25 and De
Midgely v. Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether
superseded27 by La Naval Drug Corporation v. Court of Appeals, 28 wherein the Court
essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A] special
appearance before the court––challenging its jurisdiction over the person through a motion to
dismiss even if the movant invokes other grounds––is not tantamount to estoppel or a waiver
by the movant of his objection to jurisdiction over his person; and such is not constitutive of a
voluntary submission to the jurisdiction of the court."29

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it
is conceded that it raised affirmative defenses through its aforementioned pleadings, KIC
never abandoned its challenge, however implicit, to the RTC’s jurisdiction over its person. The
challenge was subsumed in KIC’s primary assertion that it was not the same entity as Kukan,
Inc. Pertinently, in its Comment and Opposition to Plaintiff’s Omnibus Motion dated May 20,
2003, KIC entered its "special but not voluntary appearance" alleging therein that it was a
different entity and has a separate legal personality from Kukan, Inc. And KIC would
consistently reiterate this assertion in all its pleadings, thus effectively resisting all along the
RTC’s jurisdiction of its person. It cannot be overemphasized that KIC could not file before the
RTC a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely because
KIC was neither impleaded nor served with summons. Consequently, KIC could only assert
and claim through its affidavits, comments, and motions filed by special appearance before
the RTC that it is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to
the court’s lack of jurisdiction over its person. It would defy logic to say that KIC unequivocally
submitted itself to the jurisdiction of the RTC when it strongly asserted that it and Kukan, Inc.
are different entities. In the scheme of things obtaining, KIC had no other option but to insist
on its separate identity and plead for relief consistent with that position.

Third Issue: Piercing the

Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts correctly
applied the principle of piercing the veil of corporate entity––called also as disregarding the
fiction of a separate juridical personality of a corporation––to support a conclusion that Kukan,
Inc. and KIC are but one and the same corporation with respect to the contract award referred
to at the outset. This principle finds its context on the postulate that a corporation is an
artificial being invested with a personality separate and distinct from those of the stockholders
and from other corporations to which it may be connected or related. 31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations

Commission,32 the Court revisited the subject principle of piercing the veil of corporate fiction
and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation
as a mere collection of individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the corporation unifying the group.
Another formulation of this doctrine is that when two business enterprises are owned,
conducted and controlled by the same parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal fiction that two corporations are distinct
entities and treat them as identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges on

obtaining facts appropriately pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice. x x x (Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an association
of persons or, in case of two corporations, merge them into one, when its corporate legal
entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of
corporate fiction. The doctrine applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a corporation is the mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be

established clearly and convincingly. It cannot be presumed.33 (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to
due process when, in the execution of its November 28, 2002 Decision, the court authorized
the issuance of the writ against KIC for Kukan, Inc.’s judgment debt, albeit KIC has never
been a party to the underlying suit. As a counterpoint, Morales argues that KIC’s specific
concern on due process and on the validity of the writ to execute the RTC’s November 28,
2002 Decision would be mooted if it were established that KIC and Kukan, Inc. are indeed
one and the same corporation.

Morales’ contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is
basically applied only to determine established liability; 34 it is not available to confer on the
court a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case.
Elsewise put, a corporation not impleaded in a suit cannot be subject to the court’s process of
piercing the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction
over the corporation and, hence, any proceedings taken against that corporation and its
property would infringe on its right to due process. Aguedo Agbayani, a recognized authority
on Commercial Law, stated as much:

23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x
xx

This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be applied, based on the evidence presented, it
is imperative that the court must first have jurisdiction over the corporation. 35 x x x (Emphasis
supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction
over the corporation or corporations involved before its or their separate personalities are
disregarded; and (2) the doctrine of piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly commenced involving parties duly brought
under the authority of the court by way of service of summons or what passes as such
service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the
matter of the time and manner of raising the principle in question, it is undisputed that no full-
blown trial involving KIC was had when the RTC disregarded the corporate veil of KIC. The
reason for this actuality is simple and undisputed: KIC was not impleaded in Civil Case No.
99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the case after
it reacted to the improper execution of its properties and veritably hauled to court, not thru the
usual process of service of summons, but by mere motion of a party with whom it has no
privity of contract and after the decision in the main case had already become final and
executory. As to the propriety of a plea for the application of the principle by mere motion, the
following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and
is not available to settle important questions of law, or to dispose of the merits of the case. A
motion is usually a proceeding incidental to an action, but it may be a wholly distinct or
independent proceeding. A motion in this sense is not within this discussion even though the
relief demanded is denominated an "order."

A motion generally relates to procedure and is often resorted to in order to correct errors
which have crept in along the line of the principal action’s progress. Generally, where there is
a procedural defect in a proceeding and no method under statute or rule of court by which it
may be called to the attention of the court, a motion is an appropriate remedy. In many
jurisdictions, the motion has replaced the common-law pleas testing the sufficiency of the
pleadings, and various common-law writs, such as writ of error coram nobis and audita
querela. In some cases, a motion may be one of several remedies available. For example, in
some jurisdictions, a motion to vacate an order is a remedy alternative to an appeal
therefrom.

Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of
Kukan, Inc.––assuming hypothetically that he can, applying the piercing the corporate veil
principle––resolves itself into the question of whether a mere motion is the appropriate vehicle
for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to hold
KIC liable on theory that Kukan, Inc. was out to defraud him through the use of the separate
and distinct personality of another corporation, KIC. In net effect, Morales’ adverted motion to
pierce the veil of corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for
the liability of judgment debtor Kukan, Inc. to be borne by KIC on the alleged identity of the
two corporations. This new cause of action should be properly ventilated in another complaint
and subsequent trial where the doctrine of piercing the corporate veil can, if appropriate, be
applied, based on the evidence adduced. Establishing the claim of Morales and the
corresponding liability of KIC for Kukan Inc.’s indebtedness could hardly be the subject, under
the premises, of a mere motion interposed after the principal action against Kukan, Inc. alone
had peremptorily been terminated. After all, a complaint is one where the plaintiff alleges
causes of action.

In any event, the principle of piercing the veil of corporate fiction finds no application to the
instant case.

As a general rule, courts should be wary of lifting the corporate veil between corporations,
however related. Philippine National Bank v. Andrada Electric Engineering
Company37 explains why:
A corporation is an artificial being created by operation of law. x x x It has a personality
separate and distinct from the persons composing it, as well as from any other legal entity to
which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation.
For reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a debt,
or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair
objectives or to cover up an otherwise blatant violation of the prohibition against forum-
shopping. Only in these and similar instances may the veil be pierced and disregarded.
(Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and
convincing proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings. To be sure, the Court has, on numerous occasions, 38applied the principle
where a corporation is dissolved and its assets are transferred to another to avoid a financial
liability of the first corporation with the result that the second corporation should be
considered a continuation and successor of the first entity.

In those instances when the Court pierced the veil of corporate fiction of two corporations,
there was a confluence of the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a

financial liability of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of the first
corporation.

In the instant case, however, the second and third factors are conspicuously absent. There is,
therefore, no compelling justification for disregarding the fiction of corporate entity separating
Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA miserably failed to
identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on
the following premises and arguments:

While it is true that a corporation has a separate and distinct personality from its stockholder,
director and officers, the law expressly provides for an exception. When Michael Chan, the
Managing Director of defendant Kukan, Inc. (majority stockholder of the newly formed
corporation [KIC]) confirmed the award to plaintiff to supply and install interior signages in the
Enterprise Center he (Michael Chan, Managing Director of defendant Kukan, Inc.) knew that
there was no sufficient corporate funds to pay its obligation/account, thus implying bad faith
on his part and fraud in contracting the obligation. Michael Chan neither returned the interior
signages nor tendered payment to the plaintiff. This circumstance may warrant the piercing of
the veil of corporation fiction. Having been guilty of bad faith in the management of corporate
matters the corporate trustee, director or officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred
from the circumstances of the case. x x x [A]nd the circumstances are: the signature of
Michael Chan, Managing Director of Kukan, Inc. appearing in the confirmation of the award
sent to the plaintiff; signature of Chan Kai Kit, a British National appearing in the Articles of
Incorporation and signature of Michael Chan also a British National appearing in the Articles
of Incorporation [of] Kukan International Corp. give the impression that they are one and the
same person, that Michael Chan and Chan Kai Kit are both majority stockholders of Kukan
International Corp. and Kukan, Inc. holding 40% of the stocks; that Kukan International Corp.
is practically doing the same kind of business as that of Kukan, Inc.39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence
of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of the common
shares of both corporations, obviously oblivious that overlapping stock ownership is a
common business phenomenon. It must be remembered, however, that KIC’s properties were
the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan for that
matter. Mere ownership by a single stockholder or by another corporation of a substantial
block of shares of a corporation does not, standing alone, provide sufficient justification for
disregarding the separate corporate personality. 40 For this ground to hold sway in this case,
there must be proof that Chan had control or complete dominion of Kukan and KIC’s finances,
policies, and business practices; he used such control to commit fraud; and the control was
the proximate cause of the financial loss complained of by Morales. The absence of any of
the elements prevents the piercing of the corporate veil.41 And indeed, the records do not
show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x
x x worth more than three million pesos although it had only Php5,000.00 paid-up capital;
[KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to appear and participate
in the trial; [KIC’s] purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC]
Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the outstanding stocks, while he
formerly held the same amount of stocks in Kukan Inc. These would lead to the inescapable
conclusion that Kukan, Inc. committed fraudulent representation by awarding to the private
respondent the contract with full knowledge that it was not in a position to comply with the
obligation it had assumed because of inadequate paid-up capital. It bears stressing that
shareholders should in good faith put at the risk of the business, unencumbered capital
reasonably adequate for its prospective liabilities. The capital should not be illusory or trifling
compared with the business to be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan,
a.k.a. Chan Kai Kit has the largest block of shares in both business enterprises. The
emergence of the former was cleverly timed with the hasty withdrawal of the latter during the
trial to avoid the financial liability that was eventually suffered by the latter. The two
companies have a related business purpose. Considering these circumstances, the obvious
conclusion is that the creation of Kukan International Corporation served as a device to evade
the obligation incurred by Kukan, Inc. and yet profit from the goodwill attained by the name
"Kukan" by continuing to engage in the same line of business with the same list of
clients.42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of
the business activities in which both corporations are engaged as a jumping board to its
conclusion that the creation of KIC "served as a device to evade the obligation incurred by
Kukan, Inc." The appellate court, however, left a gaping hole by failing to demonstrate that
Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was used to defeat Morales’
right to recover from Kukan, Inc. Judging from the records, no serious attempt was made to
levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc.
tried to avoid liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.’s closure is evidenced by its failure to file its 2001
General Information Sheet (GIS) with the Securities and Exchange Commission. However,
such fact does not necessarily mean that Kukan, Inc. had altogether ceased operations, as
Morales would have this Court believe, for it is stated on the face of the GIS that it is only
upon a failure to file the corporate GIS for five (5) consecutive years that non-operation shall
be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up
capital of PhP 5,000 is not an indication of the intent on the part of its management to defraud
creditors. Paid-up capital is merely seed money to start a corporation or a business entity. As
in this case, it merely represented the capitalization upon incorporation in 1997 of Kukan, Inc.
Paid-up capitalization of PhP 5,000 is not and should not be taken as a reflection of the firm’s
capacity to meet its recurrent and long-term obligations. It must be borne in mind that the
equity portion cannot be equated to the viability of a business concern, for the best test is the
working capital which consists of the liquid assets of a given business relating to the nature of
the business concern.lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a
badge of fraud, for it is in compliance with Sec. 13 of the Corporation Code, 43 which only
requires a minimum paid-up capital of PhP 5,000.1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is true that
Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both
corporations. But such circumstance, standing alone, is insufficient to establish identity. There
must be at least a substantial identity of stockholders for both corporations in order to
consider this factor to be constitutive of corporate identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development
and Investment Corporation.45 General Credit Corporation is factually not on all fours with the
instant case. There, the common stockholders of the corporations represented 90% of the
outstanding capital stock of the companies, unlike here where Michael Chan merely
represents 40% of the outstanding capital stock of both KIC and Kukan, Inc., not even a
majority of it. In that case, moreover, evidence was adduced to support the finding that the
funds of the second corporation came from the first. Finally, there was proof in General Credit
Corporation of complete control, such that one corporation was a mere dummy or alter ego of
the other, which is absent in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application of
the principle of piercing the veil of corporate fiction to the instant case. As shown by the
records, the name Michael Chan, the similarity of business activities engaged in, and
incidentally the word "Kukan" appearing in the corporate names provide the nexus between
Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the
identity of KIC as the alter ego or successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly,
those who seek to pierce the veil must clearly establish that the separate and distinct
personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate a
deception. In the concrete and on the assumption that the RTC has validly acquired
jurisdiction over the party concerned, Morales ought to have proved by convincing evidence
that Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to defraud
him. Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CA’s January 23, 2008 Decision and
April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET
ASIDE. The levy placed upon the personal properties of Kukan International Corporation is
hereby ordered lifted and the personal properties ordered returned to Kukan International
Corporation. The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision
dated November 28, 2002 against Kukan, Inc. with reasonable dispatch.

No costs.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 165442 August 25, 2010

NASECO GUARDS ASSOCIATION-PEMA (NAGA-PEMA), Petitioner,

vs.
NATIONAL SERVICE CORPORATION (NASECO), Respondent.

DECISION

VILLARAMA, JR., J.:

This petition for review on certiorari under Rule 45 assails the Decision1 dated May 27, 2004
of the Court of Appeals (CA) in CA-G.R. SP No. 76667. The appellate court set aside the
January 15, 20032 and March 11, 20033 Orders of the Department of Labor and Employment
(DOLE) and ordered the latter to allow the parties to adduce evidence in support of their
respective positions.

The facts follow.

Respondent National Service Corporation (NASECO) is a wholly-owned subsidiary of the

Philippine National Bank (PNB) organized under the Corporation Code in 1975. It supplies
security and manpower services to different clients such as the Securities and Exchange
Commission, the Philippine Deposit Insurance Corporation, Food Terminal Incorporated,
Forex Corporation and PNB. Petitioner NASECO Guards Association-PEMA (NAGA-PEMA)
is the collective bargaining representative of the regular rank and file security guards of
respondent. NASECO Employees Union-PEMA (NEMU-PEMA) is the collective bargaining
representative of the regular rank and file (non-security) employees of respondent such as
messengers, janitors, typists, clerks and radio-telephone operators.4

On December 2, 1993, respondent entered into a memorandum of agreement 5 with petitioner.

The terms of the agreement covered the monetary claims of the petitioner such as salary
adjustments, conversion of salary scheme under Republic Act (R.A.) No. 6758 6 to R.A. No.
6727,7 signing bonus, leaves and other benefits. A year after, petitioner demanded full
negotiation for a collective bargaining agreement (CBA) with the respondent and submitted its
proposals thereto.

On June 8, 1995, petitioner and respondent agreed to sign a CBA on non-economic terms.8

On September 24, 1996, petitioner filed a notice of strike because of respondent’s refusal to
bargain for economic benefits in the CBA. Following conciliation hearings, the parties again
commenced CBA negotiations and started to resolve the issues on wage increase,
productivity bonus, incentive bonus, allowances, and other benefits but failed to reach an
agreement.

Meanwhile, respondent and NEMU-PEMA entered into a CBA on non-economic

terms.9 Unfortunately, a dispute among the leaders of NEMU-PEMA arose and at a certain
point, leadership of the organization was unclear. Hence, the negotiations concerning the
economic terms of the CBA were put on hold until the internal dispute could be resolved.

On April 29, 1997, petitioner filed a notice of strike before the National Conciliation and
Mediation Board (NCMB) against respondent and PNB due to a bargaining deadlock. The
following day, NEMU-PEMA likewise filed a notice of strike against respondent and PNB on
the ground of unfair labor practices.10 Efforts by the NCMB to conciliate failed and pursuant to
Article 263(g) of the Labor Code,11 as amended, then DOLE Secretary Cresenciano B.
Trajano assumed jurisdiction over the strike notices on June 25, 1998. 12
On November 19, 1999, then DOLE Secretary Bienvenido E. Laguesma issued a
Resolution13 directing petitioner and respondent to execute a new CBA incorporating therein
his dispositions regarding benefits of the employees as to wage increase, productivity bonus,
vacation and sick leave, medical allowances and signing bonus. Respondent was further
ordered to negotiate, for purposes of collective bargaining agreement, with NEMU-PEMA led
by its president, Ligaya Valencia. The charge of unfair labor practice against respondent and
PNB was dismissed.14

Respondent promptly filed a petition for certiorari before the CA questioning the DOLE
Secretary’s order and arguing that the ruling of the DOLE Secretary in favor of the unions and
awarding them monetary benefits totaling five hundred thirty-one million four hundred forty-six
thousand six hundred sixty-six and 67/100 (₱531,446,666.67) was inimical and deleterious to
its financial standing and will result in closure and cessation of business for the company.

By Decision15 dated March 19, 2001 (first CA Decision), the CA partly granted the petition and
ruled that a recomputation and reevaluation of the benefits awarded was in order.

WHEREFORE, the instant petition is partly GRANTED in that the case is remanded to the
Secretary of Labor for purposes of recomputation and reevaluation of the CBA benefits.

SO ORDERED.16

In compliance with the CA directive, then DOLE Secretary Patricia A. Sto. Tomas conducted
several clarificatory hearings. On January 15, 2003, Secretary Sto. Tomas issued an Order
which provides:

From the above, it is indubitable that the total cost to NASECO of our questioned award
would amount to only ₱322,725,000, not ₱531,446,666.67 as claimed by the company. Thus,
our November 19, 1999 Order is hereby affirmed en toto.

WHEREFORE, judgment is hereby rendered:

1. [D]irecting NAGA-PEMA and NASECO to execute a new collective bargaining

agreement effective November 1, 1993, incorporating therein the dispositions
contained in our November 19, 1999 Order as well as all other items agreed upon by
the parties.

2. Ordering NASECO to negotiate with NEMA-PEMA for a new collective bargaining

agreement.

The charges of unfair labor practice against NASECO and PNB are dismissed for lack of
merit.

SO ORDERED.17

Respondent filed a motion for reconsideration with the DOLE Secretary which was denied on
March 11, 2003.

Respondent thus filed a petition for certiorari with the CA arguing that the DOLE Secretary, in
issuing the January 15, 2003 Order deprived respondent of due process of law for there was
no reevaluation that took place in the DOLE. It also argued that the order merely recomputed
the DOLE Secretary’s initial award of ₱531,446,666.67 and reduced it to ₱322,725,000.00,
contrary to the ruling of the CA to recompute and reevaluate. Respondent claimed that what
the DOLE Secretary should have done was to let the parties introduce evidence to show the
proper computation of the monetary awards under the approved CBA.

In its second Decision dated May 27, 2004, the CA granted the petition, thus:
WHEREFORE, the orders dated 15 January 2003 and 11 March 2003 are hereby SET ASIDE
and the case remanded to the public respondent to allow the parties to adduce evidence in
support of their respective positions.

SO ORDERED.18

A motion for reconsideration was filed by herein petitioner but the same was denied by the CA
on September 22, 200419 finding no reason to reverse and set aside its earlier decision.

Petitioner now comes to this Court for relief by way of a petition for review on certiorari
seeking to set aside and reverse the May 27, 2004 Decision and the September 22, 2004
Resolution of the CA.

The main issue in this case is whether or not the respondent’s right to due process was
violated. A side issue raised by the petitioner is whether or not PNB, being the undisputed
owner of and exercising control over respondent, should be made liable to pay the CBA
benefits awarded to the petitioner.

Petitioner argues first that there was no violation of due process because respondent was
never prohibited by the DOLE Secretary to submit supporting documents when the instant
case was pending on remand. Petitioner contends that due process is properly observed
when there is an opportunity to be heard, to present evidence and to file pleadings, which was
never denied to respondent.

Second, petitioner argues that the CA erred in stating that respondent was a company
operating at a loss and therefore cannot be expected to act generously and confer upon its
employees additional benefits exceeding what is mandated by law. It is the petitioner’s
position that based on the "no loss, no profit" policy of respondent with PNB, respondent in
truth has no "pocket" of its own and is, in effect, one (1) and the same with PNB with regard to
financial gains and/or liabilities. Thus, petitioners contend that the CBA benefits should be
shouldered by PNB considering the poor financial condition of respondent. To support such
claim, petitioner submitted evidence20 to show that PNB is in superb financial condition and is
very much capable of shouldering the CBA award. 21

Respondent on the other hand maintains that the DOLE Secretary violated its right to due
process when she merely recomputed the CBA award instead of reevaluating the entire case
and allowing it to present supporting documents in accordance with the first CA decision.22 It
claims that the order of the CA to reevaluate included and required a full assessment of the
case together with reception of evidence such as financial statements, and the omission of
such is a violation of its right to due process.

As to the petitioner’s argument that respondent and PNB are essentially the same when it
comes to financial condition, respondent contends that although a subsidiary, it has a
separate and distinct personality from PNB with its own charter. Hence, the issue of PNB’s
financial well-being is immaterial in this case.

The petition is partly meritorious.

In simple terms, the constitutional guarantee of due process requires that a litigant be given
"a day in court." It is the availability of the opportunity to be heard that determines whether or
not due process was violated. A litigant may or may not avail of the opportunity to be heard
but as long as such was made available to him/her, there is no violation of the due process
clause. In the case of Lumiqued v. Exevea,23 this Court declared that "[a]s long as a party
was given the opportunity to defend his interests in due course, he cannot be said to have
been denied due process of law, for this opportunity to be heard is the very essence of due
process. Moreover, this constitutional mandate is deemed satisfied if a person is granted an
opportunity to seek reconsideration of the action or ruling complained of."
The respondent’s right to due process in this case has not been denied. The order in the first
CA decision to recompute and reevaluate was satisfied when the DOLE Secretary
reexamined their initial findings and adjusted the awarded benefits. A reevaluation, contrary to
what the respondent claims, is a process by which a person or office (in this case the DOLE
secretary) revisits its own initial pronouncement and makes another assessment of its
findings. In simple terms, to reevaluate is to take another look at a previous matter in issue. A
reevaluation does not necessitate the introduction of new materials for review nor does it
require a full hearing for new arguments.

From a procedural standpoint, a reevaluation is a continuation of the original case and not a
new proceeding. Hence, the evidence, financial reports and other documents submitted by
the parties in the course of the original proceeding are to be visited and reviewed again. In
this light, the respondent has been given the opportunity to be heard by the DOLE Secretary.

Also, contrary to the claim of the respondent that it was barred by the DOLE Secretary to
introduce supporting documents during the recomputation and reevaluation, the records show
that an Order by then Secretary of Labor Patricia A. Sto. Tomas dated July 11, 2002
specifically allowed both parties to submit their respective computations as regards the
awarded benefits. To wit:

WHEREFORE, the Bureau of Working Conditions is hereby directed to submit to this Office a
detailed computation of the CBA benefits indicated in the resolution of November 19, 2001
within twenty (20) days from receipt of this Order. The parties may submit their own
computations to the Bureau for validation.

SO ORDERED.24 (Italics supplied.)

It is thus inaccurate for the respondent to claim that it was denied due process because it had
all the opportunity to introduce any supporting document in the course of the recomputation
and reevaluation of the DOLE Secretary. Respondent admits that it did attach the financial
statements and other documents in support of its alleged financial incapacity to pay the CBA
awarded benefits, the same evidence it had earlier submitted before the CA (Memorandum in
the first CA decision) in the motion for reconsideration of the DOLE Secretary’s January 15,
2003 Order.25 There is thus no showing that the DOLE Secretary denied respondent this
basic constitutional right.

On the issue of liability, petitioner contends that PNB should be held liable to shoulder the
CBA benefits awarded to them by virtue of it being a company having full financial,
managerial and functional control over respondent as its subsidiary, and by reason of the
unique "no loss, no profit" scheme implemented between respondent and PNB.

We are not persuaded.

Verily, what the petitioner is asking this Court to do is to pierce the veil of corporate fiction of
respondent and hold PNB (being the mother company) liable for the CBA benefits.

In Concept Builders, Inc. v. NLRC,26 we explained the doctrine of piercing the corporate veil,
as follows:

It is a fundamental principle of corporation law that a corporation is an entity separate and

distinct from its stockholders and from other corporations to which it may be connected. But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation
is merely an adjunct, a business conduit or an alter ego of another corporation.
Also in Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations
Commission,27 this Court ruled:

Whether the separate personality of the corporation should be pierced hinges on obtaining
facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be
done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. After all, the concept of corporate entity
was not meant to promote unfair objectives.

Applying the doctrine to the case at bar, we find no reason to pierce the corporate veil of
respondent and go beyond its legal personality. Control, by itself, does not mean that the
controlled corporation is a mere instrumentality or a business conduit of the mother company.
Even control over the financial and operational concerns of a subsidiary company does not by
itself call for disregarding its corporate fiction. There must be a perpetuation of fraud behind
the control or at least a fraudulent or illegal purpose behind the control in order to justify
piercing the veil of corporate fiction. Such fraudulent intent is lacking in this case.

Petitioner argues that the appreciation, analysis and inquiry of this case may go beyond the
presentation of respondent, and therefore must include the PNB, the bank being the
undisputed whole owner of respondent and the sole provider of funds for the company’s
operations and for the payment of wages and benefits of the employees, under the "no loss,
no profit" scheme.28

We disagree. There is no showing that such "no loss, no profit" scheme between respondent
and PNB was implemented to defeat public convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the labor laws, nor does the scheme show that
respondent is a mere business conduit or alter ego of PNB. Absent proof of these
circumstances, respondent’s corporate personality cannot be pierced.1âwphi1

It is apparent that petitioner wants the Court to disregard the corporate personality of
respondent and directly go after PNB in order for it to collect the CBA benefits. On the same
breath, however, petitioner argues that ultimately it is PNB, by virtue of the "no loss, no profit"
scheme, which shoulders and provides the funds for financial liabilities of respondent
including wages and benefits of employees. If such scheme was indeed true as the petitioner
presents it, then there was absolutely no need to pierce the veil of corporate fiction of
respondent. Moreover, the Court notes the pendency of a separate suit for absorption or
regularization of NASECO employees filed by petitioner and NEMU-PEMA against PNB and
respondent, docketed as NLRC NCR Case No. 06-03944-96), which is still on appeal with the
National Labor Relations Commission (NLRC), as per manifestation by respondent. In the
said case, petitioner submitted for resolution by the labor tribunal the issues of whether PNB
is the employer of NASECO’s work force and whether NASECO is a labor-only contractor.29

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated May 27, 2004 and
Resolution dated September 22, 2004 in CA-G.R. SP No. 76667 are hereby REVERSED and
SET ASIDE as to the order to remand the case to the Secretary of Labor for introduction of
supporting evidence. Accordingly, the Orders of the Secretary of Labor dated January 15,
2003 and March 11, 2003 are REINSTATED and UPHELD.

No costs.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 160236 October 16, 2009

"G" HOLDINGS, INC., Petitioner,

vs.
NATIONAL MINES AND ALLIED WORKERS UNION Local 103 (NAMAWU); SHERIFFS
RICHARD H. APROSTA and ALBERTO MUNOZ, all acting Sheriffs; DEPARTMENT OF
LABOR AND EMPLOYMENT, Region VI, Bacolod District Office, Bacolod
City, Respondents.

DECISION

NACHURA, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the October 14, 2003 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No.
75322.

The Facts

The petitioner, "G" Holdings, Inc. (GHI), is a domestic corporation primarily engaged in the
business of owning and holding shares of stock of different companies. 2 It was registered with
the Securities and Exchange Commission on August 3, 1992. Private respondent, National
Mines and Allied Workers Union Local 103 (NAMAWU), was the exclusive bargaining agent
of the rank and file employees of Maricalum Mining Corporation (MMC), 3 an entity operating a
copper mine and mill complex at Sipalay, Negros Occidental.4

MMC was incorporated by the Development Bank of the Philippines (DBP) and the Philippine
National Bank (PNB) on October 19, 1984, on account of their foreclosure of Marinduque
Mining and Industrial Corporation’s assets. MMC started its commercial operations in August
1985. Later, DBP and PNB transferred it to the National Government for disposition or
privatization because it had become a non-performing asset.5

On October 2, 1992, pursuant to a Purchase and Sale Agreement 6 executed between GHI
and Asset Privatization Trust (APT), the former bought ninety percent (90%) of MMC’s shares
and financial claims.7 These financial claims were converted into three Promissory
Notes8 issued by MMC in favor of GHI totaling ₱500M and secured by mortgages over
MMC’s properties. The notes, which were similarly worded except for their amounts, read as
follows:

PROMISSORY NOTE

AMOUNT - Php114,715,360.00 [Php186,550,560.00 in the second

note, and Php248,734,080.00 in the
third note.]

MAKATI, METRO MANILA, PHILIPPINES, October 2, 1992

For Value Received, MARICALUM MINING CORPORATION (MMC) with postal address at
4th Floor, Manila Memorial Park Bldg., 2283 Pasong Tamo Extension, Makati, Metro Manila,
Philippines, hereby promises to pay "G" HOLDINGS, INC., at its office at Phimco Compound,
F. Manalo Street, Punta, Sta. Ana, Manila, the amount of PESOS ONE HUNDRED
FOURTEEN MILLION, SEVEN HUNDRED FIFTEEN THOUSAND AND THREE HUNDRED
SIXTY (Php114,715,360.00) ["PESOS ONE HUNDRED EIGHTY SIX MILLION FIVE
HUNDRED FIFTY THOUSAND FIFE HUNDRED AND SIXTY (Php186,550,560.00)" in the
second note, and "PESOS TWO HUNDRED FORTY EIGHT MILLION, SEVEN HUNDRED
THIRTY FOUR THOUSAND AND EIGHTY (Php248,734,080.00)" in the third note],
PHILIPPINE CURRENCY, on or before October 2, 2002. Interest shall accrue on the amount
of this Note at a rate per annum equal to the interest of 90-day Treasury Bills prevailing on the
Friday preceding the maturity date of every calendar quarter.

As collateral security, MMC hereby establishes and constitutes in favor of "G" HOLDINGS,
INC., its successors and/or assigns:

1. A mortgage over certain parcels of land, more particularly listed and described in
the Sheriff’s Certificate of Sale dated September 7, 1984 issued by the Ex-Officio
Provincial Sheriff of Negros Occidental, Rolando V. Ramirez, with office at Bacolod
City following the auction sale conducted pursuant to the provisions of Act 3135, a
copy of which certificate of sale is hereto attached as Annex "A" and made an integral
part hereof;

2. A chattel mortgage over assets and personal properties more particularly listed and
described in the Sheriff’s Certificate of Sale dated September 7, 1984 issued by the
Ex-Officio Provincial Sheriff of Negros Occidental, Rolando V. Ramirez, with office at
Bacolod City following the auction conducted pursuant to the provisions of Act 1508,
a copy of which Certificate of Sale is hereto attached as Annex "B" and made an
integral part hereof.

3. Mortgages over assets listed in APT Specific Catalogue GC-031 for MMC, a copy
of which Catalogue is hereby made an integral part hereof by way of reference, as
well as assets presently in use by MMC but which are not listed or included in
paragraphs 1 and 2 above and shall include all assets that may hereinafter be
acquired by MMC.

MARICALUM MINING CORPORATION

(Maker)

x x x x9

Upon the signing of the Purchase and Sale Agreement and upon the full satisfaction of the
stipulated down payment, GHI immediately took physical possession of the mine site and its
facilities, and took full control of the management and operation of MMC.10

Almost four years thereafter, or on August 23, 1996, a labor dispute (refusal to bargain
collectively and unfair labor practice) arose between MMC and NAMAWU, with the latter
eventually filing with the National Conciliation and Mediation Board of Bacolod City a notice of
strike.11 Then Labor Secretary, now Associate Justice of this Court, Leonardo A. Quisumbing,
later assumed jurisdiction over the dispute and ruled in favor of NAMAWU. In his July 30,
1997 Order in OS-AJ-10-96-014 (Quisumbing Order), Secretary Quisumbing declared that the
lay-off (of workers) implemented on May 7, 1996 and October 7, 1996 was illegal and that
MMC committed unfair labor practice. He then ordered the reinstatement of the laid-off
workers, with payment of full backwages and benefits, and directed the execution of a new
collective bargaining agreement (CBA) incorporating the terms and conditions of the previous
CBA providing for an annual increase in the workers’ daily wage. 12 In two separate
cases─G.R. Nos. 133519 and 138996─filed with this Court, we sustained the validity of the
Quisumbing Order, which became final and executory on January 26, 2000. 13

On May 11, 2001, then Acting Department of Labor and Employment (DOLE) Secretary, now
also an Associate Justice of this Court, Arturo D. Brion, on motion of NAMAWU, directed the
issuance of a partial writ of execution (Brion Writ), and ordered the DOLE sheriffs to proceed
to the MMC premises for the execution of the same.14 Much later, in 2006, this Court, in G.R.
Nos. 157696-97, entitled Maricalum Mining Corporation v. Brion and NAMAWU,15affirmed the
propriety of the issuance of the Brion Writ.

The Brion Writ was not fully satisfied because MMC’s resident manager resisted its
enforcement.16 On motion of NAMAWU, then DOLE Secretary Patricia A. Sto. Tomas ordered
the issuance of the July 18, 2002 Alias Writ of Execution and Break-Open Order (Sto. Tomas
Writ).17 On October 11, 2002, the respondent acting sheriffs, the members of the union, and
several armed men implemented the Sto. Tomas Writ, and levied on the properties of MMC
located at its compound in Sipalay, Negros Occidental.18

On October 14, 2002, GHI filed with the Regional Trial Court (RTC) of Kabankalan City,
Negros Occidental, Special Civil Action (SCA) No. 1127 for Contempt with Prayer for the
Issuance of a Temporary Restraining Order (TRO) and Writ of Preliminary Injunction and to
Nullify the Sheriff’s Levy on Properties.19 GHI contended that the levied properties were the
subject of a Deed of Real Estate and Chattel Mortgage, dated September 5, 1996 20 executed
by MMC in favor of GHI to secure the aforesaid ₱550M promissory notes; that this deed was
registered on February 24, 2000;21 and that the mortgaged properties were already
extrajudicially foreclosed in July 2001 and sold to GHI as the highest bidder on December 3,
2001, as evidenced by the Certificate of Sale dated December 4, 2001.22

The trial court issued ex parte a TRO effective for 72 hours, and set the hearing on the
application for a writ of injunction.23 On October 17, 2002, the trial court ordered the issuance
of a Writ of Injunction (issued on October 18, 2002) 24 enjoining the DOLE sheriffs from further
enforcing the Sto. Tomas Writ and from conducting any public sale of the levied-on
properties, subject to GHI’s posting of a ₱5M bond.25

Resolving, among others, NAMAWU’s separate motions for the reconsideration of the
injunction order and for the dismissal of the case, the RTC issued its December 4, 2002
Omnibus Order,26 the dispositive portion of which reads:

WHEREFORE, premises considered, respondent NAMAWU Local 103’s Motion for

Reconsideration dated October 23, 2002 for the reconsideration of the Order of this Court
directing the issuance of Writ of Injunction prayed for by petitioner and the Order dated
October 18, 2002 approving petitioner’s Injunction Bond in the amount of ₱5,000,000.00 is
hereby DENIED.

Respondent’s Motion to Dismiss as embodied in its Opposition to Extension of Temporary

Restraining Order and Issuance of Writ of Preliminary Injunction with Motion to Dismiss and
Suspend Period to File Answer dated October 15, 2002 is likewise DENIED.

Petitioner’s Urgent Motion for the return of the levied firearms is GRANTED. Pursuant thereto,
respondent sheriffs are ordered to return the levied firearms and handguns to the petitioner
provided the latter puts [up] a bond in the amount of ₱332,200.00.

Respondent’s lawyer, Atty. Jose Lapak, is strictly warned not to resort again to disrespectful
and contemptuous language in his pleadings, otherwise, the same shall be dealt with
accordingly.

SO ORDERED.27

Aggrieved, NAMAWU filed with the CA a petition for certiorari under Rule 65, assailing the
October 17, 18 and December 4, 2002 orders of the RTC.28

After due proceedings, on October 14, 2003, the appellate court rendered a Decision setting
aside the RTC issuances and directing the immediate execution of the Sto. Tomas Writ. The
CA ruled, among others, that the circumstances surrounding the execution of the September
5, 1996 Deed of Real Estate and Chattel Mortgage yielded the conclusion that the deed was
sham, fictitious and fraudulent; that it was executed two weeks after the labor dispute arose in
1996, but surprisingly, it was registered only on February 24, 2000, immediately after the
Court affirmed with finality the Quisumbing Order. The CA also found that the certificates of
title to MMC’s real properties did not contain any annotation of a mortgage lien, and,
suspiciously, GHI did not intervene in the long drawn-out labor proceedings to protect its right
as a mortgagee of virtually all the properties of MMC.29

The CA further ruled that the subsequent foreclosure of the mortgage was irregular, effected
precisely to prevent the satisfaction of the judgment against MMC. It noted that the
foreclosure proceedings were initiated in July 2001, shortly after the issuance of the Brion
Writ; and, more importantly, the basis for the extrajudicial foreclosure was not the failure of
MMC to pay the mortgage debt, but its failure "to satisfy any money judgment against it
rendered by a court or tribunal of competent jurisdiction, in favor of any person, firm or entity,
without any legal ground or reason."30 Further, the CA pierced the veil of corporate fiction of
the two corporations.31 The dispositive portion of the appellate court’s decision reads:

WHEREFORE, in view of the foregoing considerations, the petition is GRANTED. The

October 17, 2002 and the December 4, 2002 Order of the RTC, Branch 61 of Kabankalan
City, Negros Occidental are hereby ANNULLED and SET ASIDE for having been issued in
excess or without authority. The Writ of Preliminary Injunction issued by the said court is
lifted, and the DOLE Sheriff is directed to immediately enforce the Writ of Execution issued by
the Department of Labor and Employment in the case "In re: Labor Dispute in Maricalum
Mining Corporation" docketed as OS-AJ-10-96-01 (NCMB-RB6-08-96).32

The Issues

Dissatisfied, GHI elevated the case to this Court via the instant petition for review on
certiorari, raising the following issues:

WHETHER OR NOT GHI IS A PARTY TO THE LABOR DISPUTE BETWEEN NAMAWU

AND MMC.

II

WHETHER OR NOT, ASSUMING ARGUENDO THAT THE PERTINENT DECISION OR

ORDER IN THE SAID LABOR DISPUTE BETWEEN MMC AND NAMAWU MAY BE
ENFORCED AGAINST GHI, THERE IS ALREADY A FINAL DEETERMINATION BY THE
SUPREME COURT OF THE RIGHTS OF THE PARTIES IN SAID LABOR DISPUTE
CONSIDERING THE PENDENCY OF G.R. NOS. 157696-97.

III

WHETHER OR NOT GHI IS THE ABSOLUTE OWNER OF THE PROPERTIES

UNLAWFULLY GARNISHED BY RESPONDENTS SHERIFFS.

IV

WHETHER OR NOT THE HONORABLE HENRY D. ARLES CORRECTLY ISSUED A WRIT

OF INJUNCTION AGAINST THE UNLAWFUL EXECUTIOIN ON GHI’S PROPERTIES.

WHETHER OR NOT THE VALIDITY OF THE DEED OF REAL AND CHATTEL MORTGAGE
OVER THE SUBJECT PROPERTIES BETWEEN MMC AND GHI MAY BE COLLATERALLY
ATTACKED.
 VI

WHETHER OR NOT, ASSUMING ARGUENDO THAT THE VALIDITY OF THE SAID REAL
AND CHATTEL MORTGAGE MAY BE COLLATERALLY ATTACKED, THE SAID
MORTGAGE IS SHAM, FICTITIOUS AND FRAUDULENT.

VII

WHETHER OR NOT GHI IS A DISTINCT AND SEPARATE CORPORATE ENTITY FROM

MMC.

VIII

WHETHER OR NOT GHI CAN BE PREVENTED THROUGH THE ISSUANCE OF A

RESTRAINING ORDER OR INJUNCTION FROM TAKING POSSESSION OR BE
DISPOSSESSED OF ASSETS PURCHASED BY IT FROM APT.33

Stripped of non-essentials, the core issue is whether, given the factual circumstances
obtaining, the RTC properly issued the writ of injunction to prevent the enforcement of the
Sto. Tomas Writ. The resolution of this principal issue, however, will necessitate a ruling on
the following key and interrelated questions:

1. Whether the mortgage of the MMC’s properties to GHI was a sham;

2. Whether there was an effective levy by the DOLE upon the MMC’s real and
personal properties; and

3. Whether it was proper for the CA to pierce the veil of corporate fiction between
MMC and GHI.

Our Ruling

Before we delve into an extended discussion of the foregoing issues, it is essential to take
judicial cognizance of cases intimately linked to the present controversy which had earlier
been elevated to and decided by this Court.

Judicial Notice.

Judicial notice must be taken by this Court of its Decision in Maricalum Mining Corporation v.
Hon. Arturo D. Brion and NAMAWU,34 in which we upheld the right of herein private
respondent, NAMAWU, to its labor claims. Upon the same principle of judicial notice, we
acknowledge our Decision in Republic of the Philippines, through its trustee, the Asset
Privatization Trust v. "G" Holdings, Inc.,35 in which GHI was recognized as the rightful
purchaser of the shares of stocks of MMC, and thus, entitled to the delivery of the company
notes accompanying the said purchase. These company notes, consisting of three (3)
Promissory Notes, were part of the documents executed in 1992 in the privatization sale of
MMC by the Asset Privatization Trust (APT) to GHI. Each of these notes uniformly contains
stipulations "establishing and constituting in favor of GHI" mortgages over MMC’s real and
personal properties. The stipulations were subsequently formalized in a separate document
denominated Deed of Real Estate and Chattel Mortgage on September 5, 1996. Thereafter,
the Deed was registered on February 4, 2000.36

We find both decisions critically relevant to the instant dispute. In fact, they should have
guided the courts below in the disposition of the controversy at their respective levels. To
repeat, these decisions respectively confirm the right of NAMAWU to its labor claims 37 and
affirm the right of GHI to its financial and mortgage claims over the real and personal
properties of MMC, as will be explained below. The assailed CA decision apparently failed to
consider the impact of these two decisions on the case at bar. Thus, we find it timely to
reiterate that: "courts have also taken judicial notice of previous cases to determine whether
or not the case pending is a moot one or whether or not a previous ruling is applicable to the
case under consideration."38

However, the CA correctly assessed that the authority of the lower court to issue the
challenged writ of injunction depends on the validity of the third party’s (GHI’s) claim of
ownership over the property subject of the writ of execution issued by the labor department.
Accordingly, the main inquiry addressed by the CA decision was whether GHI could be
treated as a third party or a stranger to the labor dispute, whose properties were beyond the
reach of the Writ of Execution dated December 18, 2001.39

In this light, all the more does it become imperative to take judicial notice of the two cases
aforesaid, as they provide the necessary perspective to determine whether GHI is such a
party with a valid ownership claim over the properties subject of the writ of execution. In
Juaban v. Espina,40 we held that "in some instances, courts have also taken judicial notice of
proceedings in other cases that are closely connected to the matter in controversy. These
cases may be so closely interwoven, or so clearly interdependent, as to invoke a rule of
judicial notice." The two cases that we have taken judicial notice of are of such character, and
our review of the instant case cannot stray from the findings and conclusions therein.

Having recognized these crucial Court rulings, situating the facts in proper perspective, we
now proceed to resolve the questions identified above.

The mortgage was not a sham.

Republic etc., v. "G" Holdings, Inc. acknowledged the existence of the Purchase and Sale
Agreement between the APT and the GHI, and recounts the facts attendant to that
transaction, as follows:

The series of negotiations between the petitioner Republic of the Philippines, through the APT
as its trustee, and "G" Holdings culminated in the execution of a purchase and sale
agreement on October 2, 1992. Under the agreement, the Republic undertook to sell and
deliver 90% of the entire issued and outstanding shares of MMC, as well as its company
notes, to "G" Holdings in consideration of the purchase price of ₱673,161,280. It also
provided for a down payment of ₱98,704,000 with the balance divided into four tranches
payable in installment over a period of ten years."41

The "company notes" mentioned therein were actually the very same three (3) Promissory
Notes amounting to ₱550M, issued by MMC in favor of GHI. As already adverted to above,
these notes uniformly contained stipulations "establishing and constituting" mortgages over
MMC’s real and personal properties.

It may be remembered that APT acquired the MMC from the PNB and the DBP. Then, in
compliance with its mandate to privatize government assets, APT sold the aforesaid MMC
shares and notes to GHI. To repeat, this Court has recognized this Purchase and Sale
Agreement in Republic, etc., v. "G" Holdings, Inc.

The participation of the Government, through APT, in this transaction is significant. Because
the Government had actively negotiated and, eventually, executed the agreement, then the
transaction is imbued with an aura of official authority, giving rise to the presumption of
regularity in its execution. This presumption would cover all related transactional acts and
documents needed to consummate the privatization sale, inclusive of the Promissory Notes. It
is obvious, then, that the Government, through APT, consented to the "establishment and
constitution" of the mortgages on the assets of MMC in favor of GHI, as provided in the notes.
Accordingly, the notes (and the stipulations therein) enjoy the benefit of the same
presumption of regularity accorded to government actions. Given the Government consent
thereto, and clothed with the presumption of regularity, the mortgages cannot be
characterized as sham, fictitious or fraudulent.

Indeed, as mentioned above, the three (3) Promissory Notes, executed on October 2, 1992,
"established and constituted" in favor of GHI the following mortgages:

1. A mortgage over certain parcels of land, more particularly listed and described in
the Sheriff’s Certificate of Sale dated September 7, 1984 issued by the Ex-Officio
Provincial Sheriff of Negros Occidental, Rolando V. Ramirez, with office at Bacolod
City following the auction sale conducted pursuant to the provisions of Act 3135, a
copy of which certificate of sale is hereto attached as Annex "A" and made an integral
part hereof;

2. A chattel mortgage over assets and personal properties more particularly listed and
described in the Sheriff’s Certificate of Sale dated September 7, 1984 issued by the
Ex-Officio Provincial Sheriff of Negros Occidental, Rolando V. Ramirez, with office at
Bacolod City following the auction conducted pursuant to the provision of Act 1508, a
copy of which Certificate of Sale is hereto attached as Annex "B" and made an
integral part hereof.

3. Mortgages over assets listed in APT Specific catalogue GC-031 for MMC, a copy
of which Catalogue is hereby made an integral part hereof by way of reference, as
well as assets presently in use by MMC but which are not listed or included in
paragraphs 1 and 2 above and shall include all assets that may hereinafter be
acquired by MMC.42

It is difficult to conceive that these mortgages, already existing in 1992, almost four (4) years
before NAMAWU filed its notice of strike, were a "fictitious" arrangement intended to defraud
NAMAWU. After all, they were agreed upon long before the seeds of the labor dispute
germinated.

While it is true that the Deed of Real Estate and Chattel Mortgage was executed only on
September 5, 1996, it is beyond cavil that this formal document of mortgage was merely a
derivative of the original mortgage stipulations contained in the Promissory Notes of October
2, 1992. The execution of this Deed in 1996 does not detract from, but instead reinforces, the
manifest intention of the parties to "establish and constitute" the mortgages on MMC’s real
and personal properties.

Apparently, the move to execute a formal document denominated as the Deed of Real Estate
and Chattel Mortgage came about after the decision of the RTC of Manila in Civil Case No.
95-76132 became final in mid-1996. This conclusion surfaces when we consider the genesis
of Civil Case No. 95-76132 and subsequent incidents thereto, as narrated in Republic, etc. v.
"G" Holdings, Inc., viz:

Subsequently, a disagreement on the matter of when installment payments should commence

arose between the parties. The Republic claimed that it should be on the seventh month from
the signing of the agreement while "G" Holdings insisted that it should begin seven months
after the fulfillment of the closing conditions.

Unable to settle the issue, "G" Holdings filed a complaint for specific performance and
damages with the Regional Trial Court of Manila, Branch 49, against the Republic to compel it
to close the sale in accordance with the purchase and sale agreement. The complaint was
docketed as Civil Case No. 95-76132.

During the pre-trial, the respective counsels of the parties manifested that the issue involved
in the case was one of law and submitted the case for decision. On June 11, 1996, the trial
court rendered its decision. It ruled in favor of "G" Holdings and held:
"In line with the foregoing, this Court having been convinced that the Purchase and Sale
Agreement is indeed subject to the final closing conditions prescribed by Stipulation No. 5.02
and conformably to Rule 39, Section 10 of the Rules of Court, accordingly orders that the
Asset Privatization Trust execute the corresponding Document of Transfer of the
subject shares and financial notes and cause the actual delivery of subject shares and
notes to "G" Holdings, Inc., within a period of thirty (30) days from receipt of this
Decision, and after "G" Holdings Inc., shall have paid in full the entire balance, at its present
value of ₱241,702,122.86, computed pursuant to the prepayment provisions of the
Agreement. Plaintiff shall pay the balance simultaneously with the delivery of the Deed of
Transfer and actual delivery of the shares and notes.

SO ORDERED."

The Solicitor General filed a notice of appeal on behalf of the Republic on June 28, 1996.
Contrary to the rules of procedure, however, the notice of appeal was filed with the Court of
Appeals (CA), not with the trial court which rendered the judgment appealed from.

No other judicial remedy was resorted to until July 2, 1999 when the Republic, through the
APT, filed a petition for annulment of judgment with the CA. It claimed that the decision
should be annulled on the ground of abuse of discretion amounting to lack of jurisdiction on
the part of the trial court. x x x

Finding that the grounds necessary for the annulment of judgment were inexistent, the
appellate court dismissed the petition. x x x x43

With the RTC decision having become final owing to the failure of the Republic to perfect an
appeal, it may have become necessary to execute the Deed of Real Estate and Chattel
Mortgage on September 5, 1996, in order to enforce the trial court’s decision of June 11,
1996. This appears to be the most plausible explanation for the execution of the Deed of Real
Estate and Chattel Mortgage only in September 1996. Even as the parties had already validly
constituted the mortgages in 1992, as explicitly provided in the Promissory Notes, a specific
deed of mortgage in a separate document may have been deemed necessary for registration
purposes. Obviously, this explanation is more logical and more sensible than the strained
conjecture that the mortgage was executed on September 5, 1996 only for the purpose of
defrauding NAMAWU.

It is undeniable that the Deed of Real Estate and Chattel Mortgage was formally documented
two weeks after NAMAWU filed its notice of strike against MMC on August 23, 1996.
However, this fact alone cannot give rise to an adverse inference for two reasons. First, as
discussed above, the mortgages had already been "established and constituted" as early as
October 2, 1992 in the Promissory Notes, showing the clear intent of the parties to impose a
lien upon MMC’s properties. Second, the mere filing of a notice of strike by NAMAWU did not,
as yet, vest in NAMAWU any definitive right that could be prejudiced by the execution of the
mortgage deed.

The fact that MMC’s obligation to GHI is not reflected in the former’s financial statements─a
circumstance made capital of by NAMAWU in order to cast doubt on the validity of the
mortgage deed─is of no moment. By itself, it does not provide a sufficient basis to invalidate
this public document. To say otherwise, and to invalidate the mortgage deed on this pretext,
would furnish MMC a convenient excuse to absolve itself of its mortgage obligations by
adopting the simple strategy of not including the obligations in its financial statements. It
would ignore our ruling in Republic, etc. v. "G" Holdings, Inc., which obliged APT to deliver the
MMC shares and financial notes to GHI. Besides, the failure of the mortgagor to record in its
financial statements its loan obligations is surely not an essential element for the validity of
mortgage agreements, nor will it independently affect the right of the mortgagee to foreclose.

Contrary to the CA decision, Tanongon v. Samson44 is not "on all fours" with the instant case.
There are material differences between the two cases. At issue in Tanongon was a third-party
claim arising from a Deed of Absolute Sale executed between Olizon and Tanongon on July
29, 1997, after the NLRC decision became final and executory on April 29, 1997. In the case
at bar, what is involved is a loan with mortgage agreement executed on October 2, 1992, well
ahead of the union’s notice of strike on August 23, 1996. No presumption of regularity inheres
in the deed of sale in Tanongon, while the participation of APT in this case clothes the
transaction in 1992 with such a presumption that has not been successfully rebutted.
In Tanongon, the conduct of a full-blown trial led to the finding─duly supported by
evidence─that the voluntary sale of the assets of the judgment debtor was made in bad faith.
Here, no trial was held, owing to the motion to dismiss filed by NAMAWU, and the CA failed to
consider the factual findings made by this Court in Republic, etc. v. "G" Holdings,
Inc. Furthermore, in Tanongon, the claimant did not exercise his option to file a separate
action in court, thus allowing the NLRC Sheriff to levy on execution and to determine the
rights of third-party claimants.45 In this case, a separate action was filed in the regular courts
by GHI, the third-party claimant. Finally, the questioned transaction in Tanongon was a plain,
voluntary transfer in the form of a sale executed by the judgment debtor in favor of a dubious
third-party, resulting in the inability of the judgment creditor to satisfy the judgment. On the
other hand, this case involves an involuntary transfer (foreclosure of mortgage) arising from a
loan obligation that well-existed long before the commencement of the labor claims of the
private respondent.

Three other circumstances have been put forward by the CA to support its conclusion that the
mortgage contract is a sham. First, the CA considered it highly suspect that the Deed of Real
Estate and Chattel Mortgage was registered only on February 4, 2000, "three years after its
execution, and almost one month after the Supreme Court rendered its decision in the labor
dispute."46 Equally suspicious, as far as the CA is concerned, is the fact that the mortgages
were foreclosed on July 31, 2001, after the DOLE had already issued a Partial Writ of
Execution on May 9, 2001.47 To the appellate court, the timing of the registration of the
mortgage deed was too coincidental, while the date of the foreclosure signified that it was
"effected precisely to prevent the satisfaction of the judgment awards." 48Furthermore, the CA
found that the mortgage deed itself was executed without any consideration, because at the
time of its execution, all the assets of MMC had already been transferred to GHI. 49

These circumstances provided the CA with sufficient justification to apply Article 1387 of the
Civil Code on presumed fraudulent transactions, and to declare that the mortgage deed was
void for being simulated and fictitious.50

We do not agree. We find this Court’s ruling in MR Holdings, Ltd. v. Sheriff Bajar51 pertinent
and instructive:

Article 1387 of the Civil Code of the Philippines provides:

"Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not reserve
sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against
whom some judgment has been rendered in any instance or some writ of attachment has
been issued. The decision or attachment need not refer to the property alienated, and need
not have been obtained by the party seeking rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by law and of evidence."

This article presumes the existence of fraud made by a debtor. Thus, in the absence of
satisfactory evidence to the contrary, an alienation of a property will be held fraudulent if it is
made after a judgment has been rendered against the debtor making the alienation. This
presumption of fraud is not conclusive and may be rebutted by satisfactory and convincing
evidence. All that is necessary is to establish affirmatively that the conveyance is made in
good faith and for a sufficient and valuable consideration.

The "Assignment Agreement" and the "Deed of Assignment" were executed for valuable
considerations. Patent from the "Assignment Agreement" is the fact that petitioner assumed
the payment of US$18,453,450.12 to ADB in satisfaction of Marcopper’s remaining debt as of
March 20, 1997. Solidbank cannot deny this fact considering that a substantial portion of the
said payment, in the sum of US$13,886,791.06, was remitted in favor of the Bank of Nova
Scotia, its major stockholder.

The facts of the case so far show that the assignment contracts were executed in good faith.
The execution of the "Assignment Agreement" on March 20, 1997 and the "Deed of
Assignment" on December 8,1997 is not the alpha of this case. While the execution of these
assignment contracts almost coincided with the rendition on May 7, 1997 of the Partial
Judgment in Civil Case No. 96-80083 by the Manila RTC, however, there was no intention on
the part of petitioner to defeat Solidbank’s claim. It bears reiterating that as early as
November 4, 1992, Placer Dome had already bound itself under a "Support and Standby
Credit Agreement" to provide Marcopper with cash flow support for the payment to ADB of its
obligations. When Marcopper ceased operations on account of disastrous mine tailings spill
into the Boac River and ADB pressed for payment of the loan, Placer Dome agreed to have
its subsidiary, herein petitioner, pay ADB the amount of US$18,453,450.12.

Thereupon, ADB and Marcopper executed, respectively, in favor of petitioner an "Assignment

Agreement" and a "Deed of Assignment." Obviously, the assignment contracts were
connected with transactions that happened long before the rendition in 1997 of the
Partial Judgment in Civil Case No. 96-80083 by the Manila RTC.Those contracts cannot
be viewed in isolation. If we may add, it is highly inconceivable that ADB, a reputable
international financial organization, will connive with Marcopper to feign or simulate a contract
in 1992 just to defraud Solidbank for its claim four years thereafter. And it is equally incredible
for petitioner to be paying the huge sum of US$18,453,450.12 to ADB only for the purpose of
defrauding Solidbank of the sum of ₱52,970,756.89.

It is said that the test as to whether or not a conveyance is fraudulent is ― does it prejudice
the rights of creditors? We cannot see how Solidbank’s right was prejudiced by the
assignment contracts considering that substantially all of Marcopper’s properties were already
covered by the registered "Deed of Real Estate and Chattel Mortgage" executed by
Marcopper in favor of ADB as early as November 11, 1992. As such, Solidbank cannot assert
a better right than ADB, the latter being a preferred creditor. It is basic that mortgaged
properties answer primarily for the mortgaged credit, not for the judgment credit of the
mortgagor’s unsecured creditor. Considering that petitioner assumed Marcopper’s debt to
ADB, it follows that Solidbank’s right as judgment creditor over the subject properties must
give way to that of the former.52

From this ruling in MR Holdings, we can draw parallel conclusions. The execution of the
subsequent Deed of Real Estate and Chattel Mortgage on September 5, 1996 was simply the
formal documentation of what had already been agreed in the seminal transaction (the
Purchase and Sale Agreement) between APT and GHI. It should not be viewed in isolation,
apart from the original agreement of October 2, 1992. And it cannot be denied that this
original agreement was supported by an adequate consideration. The APT was even ordered
by the court to deliver the shares and financial notes of MMC in exchange for the payments
that GHI had made.

It was also about this time, in 1996, that NAMAWU filed a notice of strike to protest non-
payment of its rightful labor claims.53 But, as already mentioned, the outcome of that labor
dispute was yet unascertainable at that time, and NAMAWU could only have hoped for, or
speculated about, a favorable ruling. To paraphrase MR Holdings, we cannot see how
NAMAWU’s right was prejudiced by the Deed of Real Estate and Chattel Mortgage, or by its
delayed registration, when substantially all of the properties of MMC were already mortgaged
to GHI as early as October 2, 1992. Given this reality, the Court of Appeals had no basis to
conclude that this Deed of Real Estate and Chattel Mortgage, by reason of its late
registration, was a simulated or fictitious contract.

The importance of registration and its binding effect is stated in Section 51 of the Property
Registration Decree or Presidential Decree (P.D.) No. 1529, 54 which reads:

SECTION 51. Conveyance and other dealings by registered owner.—An owner of registered
land may convey, mortgage, lease, charge or otherwise deal with the same in accordance
with existing laws. He may use such forms, deeds, mortgages, leases or other voluntary
instrument as are sufficient in law. But no deed, mortgage, lease or other voluntary
instrument, except a will purporting to convey or effect registered land, shall take effect as a
conveyance or bind the land, but shall operate only as a contract between the parties and as
evidence of authority to the Registry of Deeds to make registration.

The act of registration shall be the operative act to convey or affect the land insofar as third
persons are concerned, and in all cases under this Decree, the registration shall be made in
the Office of the Register of Deeds for the province or the city where the land lies.55

Under the Torrens system, registration is the operative act which gives validity to the transfer
or creates a lien upon the land. Further, entrenched in our jurisdiction is the doctrine that
registration in a public registry creates constructive notice to the whole world. 56 Thus, Section
51 of Act No. 496, as amended by Section 52 of P.D. No. 1529, provides:

SECTION 52. Constructive notice upon registration.—Every conveyance, mortgage, lease,

lien, attachment, order, judgment, instrument or entry affecting registered land shall, if
registered, filed or entered in the Office of the Register of Deeds for the province or city where
the land to which it relates lies, be constructive notice to all persons from the time of such
registering, filing or entering.

But, there is nothing in Act No. 496, as amended by P.D. No. 1529, that imposes a period
within which to register annotations of "conveyance, mortgage, lease, lien, attachment, order,
judgment, instrument or entry affecting registered land." If liens were not so registered, then it
"shall operate only as a contract between the parties and as evidence of authority to the
Registry of Deeds to make registration." If registered, it "shall be the operative act to convey
or affect the land insofar as third persons are concerned." The mere lapse of time from the
execution of the mortgage document to the moment of its registration does not affect the
rights of a mortgagee.

Neither will the circumstance of GHI’s foreclosure of MMC’s properties on July 31, 2001, or
after the DOLE had already issued a Partial Writ of Execution on May 9, 2001 against MMC,
support the conclusion of the CA that GHI’s act of foreclosing on MMC’s properties was
"effected to prevent satisfaction of the judgment award." GHI’s mortgage rights, constituted in
1992, antedated the Partial Writ of Execution by nearly ten (10) years. GHI’s resort to
foreclosure was a legitimate enforcement of a right to liquidate a bona fide debt. It was a
reasonable option open to a mortgagee which, not being a party to the labor dispute between
NAMAWU and MMC, stood to suffer a loss if it did not avail itself of the remedy of foreclosure.

The well-settled rule is that a mortgage lien is inseparable from the property
mortgaged.57 While it is true that GHI’s foreclosure of MMC’s mortgaged properties may have
had the "effect to prevent satisfaction of the judgment award against the specific mortgaged
property that first answers for a mortgage obligation ahead of any subsequent creditors," that
same foreclosure does not necessarily translate to having been "effected to prevent
satisfaction of the judgment award" against MMC.

Likewise, we note the narration of subsequent facts contained in the Comment of the Office of
the Solicitor General. Therein, it is alleged that after the Partial Writ of Execution was issued
on May 9, 2001, a motion for reconsideration was filed by MMC; that the denial of the motion
was appealed to the CA; that when the appeal was dismissed by the CA on January 24,
2002, it eventually became the subject of a review petition before this Court, docketed as
G.R. No. 157696; and that G.R. No. 157696 was decided by this Court only on February 9,
2006.

This chronology of subsequent events shows that February 9, 2006 would have been the
earliest date for the unimpeded enforcement of the Partial Writ of Execution, as it was only
then that this Court resolved the issue. This happened four and a half years after July 31,
2001, the date when GHI foreclosed on the mortgaged properties. Thus, it is not accurate to
say that the foreclosure made on July 31, 2001 was "effected [only] to prevent satisfaction of
the judgment award."

We also observe the error in the CA’s finding that the 1996 Deed of Real Estate and Chattel
Mortgage was not supported by any consideration since at the time the deed was executed,
"all the real and personal property of MMC had already been transferred in the hands of G
Holdings."58 It should be remembered that the Purchase and Sale Agreement between GHI
and APT involved large amounts (₱550M) and even spawned a subsequent court action (Civil
Case No. 95-76132, RTC of Manila). Yet, nowhere in the Agreement or in the RTC decision is
there any mention of real and personal properties of MMC being included in the sale to GHI in
1992. These properties simply served as mortgaged collateral for the 1992 Promissory
Notes.59 The Purchase and Sale Agreement and the Promissory Notes themselves are the
best evidence that there was ample consideration for the mortgage.

Thus, we must reject the conclusion of the CA that the Deed of Real Estate and Chattel
Mortgage executed in 1996 was a simulated transaction.

On the issue of whether there had been an effective levy upon the properties of GHI.

The well-settled principle is that the rights of a mortgage creditor over the mortgaged
properties are superior to those of a subsequent attaching creditor. In Cabral v.
Evangelista,60 this Court declared that:

Defendants-appellants purchase of the mortgaged chattels at the public sheriff's sale and the
delivery of the chattels to them with a certificate of sale did not give them a superior right to
the chattels as against plaintiffs-mortgagees. Rule 39, Section 22 of the old Rules of Court
(now Rule 39, Section 25 of the Revised Rules), cited by appellants precisely provides that
"the sale conveys to the purchaser all the right which the debtor had in such property on the
day the execution or attachment was levied." It has long been settled by this Court that "The
right of those who so acquire said properties should not and can not be superior to that of the
creditor who has in his favor an instrument of mortgage executed with the formalities of the
law, in good faith, and without the least indication of fraud. This is all the more true in the
present case, because, when the plaintiff purchased the automobile in question on August 22,
1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument
of mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said
automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such
circumstances existed, it should be presumed that he did so, very much willing to respect the
lien existing thereon, since he should not have expected that with the purchase, he would
acquire a better right than that which the vendor then had." In another case between two
mortgagees, we held that "As between the first and second mortgagees, therefore, the
second mortgagee has at most only the right to redeem, and even when the second
mortgagee goes through the formality of an extrajudicial foreclosure, the purchaser acquires
no more than the right of redemption from the first mortgagee." The superiority of the
mortgagee's lien over that of a subsequent judgment creditor is now expressly provided in
Rule 39, Section 16 of the Revised Rules of Court, which states with regard to the effect of
levy on execution as to third persons that "The levy on execution shall create a lien in favor of
the judgment creditor over the right, title and interest of the judgment debtor in such property
at the time of the levy, subject to liens or encumbrances then existing."

Even in the matter of possession, mortgagees over chattel have superior, preferential and
paramount rights thereto, and the mortgagor has mere rights of redemption. 61
Similar rules apply to cases of mortgaged real properties that are registered. Since the
properties were already mortgaged to GHI, the only interest remaining in the mortgagor was
its right to redeem said properties from the mortgage. The right of redemption was the only
leviable or attachable property right of the mortgagor in the mortgaged real properties. We
have held that —

The main issue in this case is the nature of the lien of a judgment creditor, like the petitioner,
who has levied an attachment on the judgment debtor's (CMI) real properties which had been
mortgaged to a consortium of banks and were subsequently sold to a third party, Top Rate.

xxxx

The sheriff's levy on CMI's properties, under the writ of attachment obtained by the petitioner,
was actually a levy on the interest only of the judgment debtor CMI on those properties. Since
the properties were already mortgaged to the consortium of banks, the only interest remaining
in the mortgagor CMI was its right to redeem said properties from the mortgage. The right of
redemption was the only leviable or attachable property right of CMI in the mortgaged real
properties. The sheriff could not have attached the properties themselves, for they had
already been conveyed to the consortium of banks by mortgage (defined as a "conditional
sale"), so his levy must be understood to have attached only the mortgagor's remaining
interest in the mortgaged property — the right to redeem it from the mortgage.62

xxxx

There appears in the record a factual contradiction relating to whether the foreclosure by GHI
on July 13, 200163over some of the contested properties came ahead of the levy thereon, or
the reverse. NAMAWU claims that the levy on two trucks was effected on June 22,
2001,64 which GHI disputes as a misstatement because the levy was attempted on July 18,
2002, and not 200165 What is undisputed though is that the mortgage of GHI was registered
on February 4, 2000,66 well ahead of any levy by NAMAWU. Prior registration of a lien creates
a preference, as the act of registration is the operative act that conveys and affects the
land,67 even against subsequent judgment creditors, such as respondent herein. Its
registration of the mortgage was not intended to defraud NAMAWU of its judgment claims,
since even the courts were already judicially aware of its existence since 1992. Thus, at that
moment in time, with the registration of the mortgage, either NAMAWU had no properties of
MMC to attach because the same had been previously foreclosed by GHI as mortgagee
thereof; or by virtue of the DOLE’s levy to enforce NAMAWU’s claims, the latter’s rights are
subject to the notice of the foreclosure on the subject properties by a prior mortgagee’s right.
GHI’s mortgage right had already been registered by then, and "it is basic that mortgaged
properties answer primarily for the mortgaged credit, not for the judgment credit of the
mortgagor’s unsecured creditor."68

On the issue of piercing the veil of corporate fiction.

The CA found that:

"Ordinarily, the interlocking of directors and officers in two different corporations is not a
conclusive indication that the corporations are one and the same for purposes of applying the
doctrine of piercing the veil of corporate fiction. However, when the legal fiction of the
separate corporate personality is abused, such as when the same is used for fraudulent or
wrongful ends, the courts have not hesitated to pierce the corporate veil (Francisco vs. Mejia,
362 SCRA 738). In the case at bar, the Deed of Real Estate and Chattel Mortgage was
entered into between MMC and G Holdings for the purpose of evading the satisfaction of the
legitimate claims of the petitioner against MMC. The notion of separate personality is clearly
being utilized by the two corporations to perpetuate the violation of a positive legal duty
arising from a final judgment to the prejudice of the petitioner’s right."69

Settled jurisprudence70 has it that –

"(A) corporation, upon coming into existence, is invested by law with a personality separate
and distinct from those persons composing it as well as from any other legal entity to which it
may be related. By this attribute, a stockholder may not, generally, be made to answer for
acts or liabilities of the said corporation, and vice versa. This separate and distinct personality
is, however, merely a fiction created by law for convenience and to promote the ends of
justice. For this reason, it may not be used or invoked for ends subversive to the policy and
purpose behind its creation or which could not have been intended by law to which it owes its
being. This is particularly true when the fiction is used to defeat public convenience, justify
wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate
deception or otherwise circumvent the law. This is likewise true where the corporate entity is
being used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In all these cases, the notion of corporate entity
will be pierced or disregarded with reference to the particular transaction involved.

Given this jurisprudential principle and the factual circumstances obtaining in this case, we
now ask: Was the CA correct in piercing the veil of corporate identity of GHI and MMC?

In our disquisition above, we have shown that the CA’s finding that there was a "simulated
mortgage" between GHI and MMC to justify a wrong or protect a fraud has struggled vainly to
find a foothold when confronted with the ruling of this Court in Republic v. "G" Holdings, Inc.

The negotiations between the GHI and the Government--through APT, dating back to 1992--
culminating in the Purchase and Sale Agreement, cannot be depicted as a contrived
transaction. In fact, in the said Republic, etc., v. "G" Holdings, Inc., this Court adjudged that
GHI was entitled to its rightful claims─ not just to the shares of MMC itself, or just to the
financial notes that already contained the mortgage clauses over MMCs disputed assets, but
also to the delivery of those instruments. Certainly, we cannot impute to this Court’s findings
on the case any badge of fraud. Thus, we reject the CA’s conclusion that it was right to pierce
the veil of corporate fiction, because the foregoing circumstances belie such an inference.
Furthermore, we cannot ascribe to the Government, or the APT in particular, any undue
motive to participate in a transaction designed to perpetrate fraud. Accordingly, we consider
the CA interpretation unwarranted.

We also cannot agree that the presumption of fraud in Article 1387 of the Civil Code relative
to property conveyances, when there was already a judgment rendered or a writ of
attachment issued, authorizes piercing the veil of corporate identity in this case. We find that
Article 1387 finds less application to an involuntary alienation such as the foreclosure of
mortgage made before any final judgment of a court. We thus hold that when the alienation is
involuntary, and the foreclosure is not fraudulent because the mortgage deed has been
previously executed in accordance with formalities of law, and the foreclosure is resorted to in
order to liquidate a bona fide debt, it is not the alienation by onerous title contemplated in
Article 1387 of the Civil Code wherein fraud is presumed.

Since the factual antecedents of this case do not warrant a finding that the mortgage and loan
agreements between MMC and GHI were simulated, then their separate personalities must
be recognized. To pierce the veil of corporate fiction would require that their personalities as
creditor and debtor be conjoined, resulting in a merger of the personalities of the creditor
(GHI) and the debtor (MMC) in one person, such that the debt of one to the other is thereby
extinguished. But the debt embodied in the 1992 Financial Notes has been established, and
even made subject of court litigation (Civil Case No. 95-76132, RTC Manila). This can only
mean that GHI and MMC have separate corporate personalities.

Neither was MMC used merely as an alter ego, adjunct, or business conduit for the sole
benefit of GHI, to justify piercing the former’s veil of corporate fiction so that the latter could be
held liable to claims of third-party judgment creditors, like NAMAWU. In this regard, we find
American jurisprudence persuasive. In a decision by the Supreme Court of New
York71 bearing upon similar facts, the Court denied piercing the veil of corporate fiction to
favor a judgment creditor who sued the parent corporation of the debtor, alleging fraudulent
corporate asset-shifting effected after a prior final judgment. Under a factual background
largely resembling this case at bar, viz:

In this action, plaintiffs seek to recover the balance due under judgments they obtained
against Lake George Ventures Inc. (hereinafter LGV), a subsidiary of defendant that was
formed to develop the Top O’ the World resort community overlooking Lake George, by
piercing the corporate veil or upon the theory that LGV's transfer of certain assets constituted
fraudulent transfers under the Debtor and Creditor Law. We previously upheld Supreme
Court's denial of defendant's motion for summary judgment dismissing the complaint (252
A.D.2d 609, 675 N.Y.S.2d 234)and the matter proceeded to a nonjury trial. Supreme Court
thereafter rendered judgment in favor of defendant upon its findings that, although defendant
dominated LGV, it did not use that domination to commit a fraud or wrong on plaintiffs.
Plaintiffs appealed.1avvphi1

The trial evidence showed that LGV was incorporated in November 1985. Defendant's
principal, Francesco Galesi, initially held 90% of the stock and all of the stock was ultimately
transferred to defendant. Initial project funding was provided through a $2.5 million loan from
Chemical Bank, secured by defendant's guarantee of repayment of the loan and completion
of the project. The loan proceeds were utilized to purchase the real property upon which the
project was to be established. Chemical Bank thereafter loaned an additional $3.5 million to
LGV, again guaranteed by defendant, and the two loans were consolidated into a first
mortgage loan of $6 million. In 1989, the loan was modified by splitting the loan into a $1.9
term note on which defendant was primary obligor and a $4.1 million project note on which
LGV was the obligor and defendant was a guarantor.

Due to LGV's lack of success in marketing the project's townhouses and in order to protect
itself from the exercise of Chemical Bank's enforcement remedies, defendant was forced
to make monthly installments of principal and interest on LGV's behalf. Ultimately, defendant
purchased the project note from Chemical Bank for $3.1 million, paid the $1.5 million balance
on the term note and took an assignment of the first mortgage on the project's realty. After
LGV failed to make payments on the indebtedness over the course of the succeeding two
years, defendant brought an action to foreclose its mortgage. Ultimately, defendant obtained
a judgment of foreclosure and sale in the amount of $6,070,246.50. Defendant bid in the
property at the foreclosure sale and thereafter obtained a deficiency judgment in the amount
of $3,070,246.50.

Following the foreclosure sale, LGV transferred to defendant all of the shares of Top of the
World Water Company, a separate entity that had been organized to construct and operate
the water supply and delivery system for the project, in exchange for a $950,000 reduction in
the deficiency judgment.

the U.S. Supreme Court of New York held—

Based on the foregoing, and accepting that defendant exercised complete domination and
control over LGV, we are at a loss as to how plaintiffs perceive themselves to have been
inequitably affected by defendant's foreclosure action against LGV, by LGV's divestiture of the
water company stock or the sports complex property, or by defendant's transfer to LGV of a
third party's uncollectible note, accomplished solely for tax purposes. It is undisputed that
LGV was, and for some period of time had been, unable to meet its obligations and, at the
time of the foreclosure sale, liens against its property exceeded the value of its assets by
several million dollars, even including the water company and sports complex at the values
plaintiffs would assign to them. In fact, even if plaintiffs' analysis were utilized to eliminate the
entire $3 million deficiency judgment, the fact remains that subordinate mortgages totaling
nearly an additional $2 million have priority over plaintiffs' judgments.

As properly concluded by Supreme Court, absent a finding of any inequitable consequence to

plaintiffs, both causes of action pleaded in the amended complaint must fail. Fundamentally, a
party seeking to pierce the corporate veil must show complete domination and control of the
subsidiary by the parent and also that such domination was used to commit a fraud or wrong
against the plaintiff that resulted in the plaintiff's injury ( 252 A.D.2d 609, 610, 675 N.Y.S.2d
234, supra; see, Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135,
141, 603 N.Y.S.2d 807, 623 N.E.2d 1157). Notably, "[e]vidence of domination alone does not
suffice without an additional showing that it led to inequity, fraud or malfeasance" (TNS
Holdings v. MKI Sec. Corp., 92 N.Y.2d 335, 339, 680 N.Y.S.2d 891, 703 N.E.2d 749).

xxxx

In reaching that conclusion, we specifically reject a number of plaintiffs' assertions, including

the entirely erroneous claims that our determination on the prior appeal (252 A.D.2d 609, 675
N.Y.S.2d 234, supra) set forth a "roadmap" for the proof required at trial and mandated a
verdict in favor of plaintiffs upon their production of evidence that supported the decision's
"listed facts". To the contrary, our decision was predicated upon the existence of such
evidence, absent which we would have granted summary judgment in favor of defendant. We
are equally unpersuaded by plaintiffs' continued reliance upon defendant's December 1991
unilateral conversion of its intercompany loans with LGV from debt to equity, which
constituted nothing more than a "bookkeeping transaction" and had no apparent effect on
LGV's obligations to defendant or defendant's right to foreclose on its mortgage.72

This doctrine is good law under Philippine jurisdiction.

In Concept Builders, Inc. v. National Labor Relations Commission,73 we laid down the test in
determining the applicability of the doctrine of piercing the veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked
so that the corporate entity as to this transaction had at the time no separate mind,
will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.

xxxx

Time and again, we have reiterated that mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not, by itself, a
sufficient ground for disregarding a separate corporate personality. 74 It is basic that a
corporation has a personality separate and distinct from that composing it as well as from that
of any other legal entity to which it may be related. Clear and convincing evidence is needed
to pierce the veil of corporate fiction.75

In this case, the mere interlocking of directors and officers does not warrant piercing the
separate corporate personalities of MMC and GHI. Not only must there be a showing that
there was majority or complete control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked, so that the corporate entity
as to this transaction had at the time no separate mind, will or existence of its own. The
mortgage deed transaction attacked as a basis for piercing the corporate veil was a
transaction that was an offshoot, a derivative, of the mortgages earlier constituted in the
Promissory Notes dated October 2, 1992. But these Promissory Notes with mortgage were
executed by GHI with APT in the name of MMC, in a full privatization process. It appears that
if there was any control or domination exercised over MMC, it was APT, not GHI, that wielded
it. Neither can we conclude that the constitution of the loan nearly four (4) years prior to
NAMAWU’s notice of strike could have been the proximate cause of the injury of NAMAWU
for having been deprived of MMC’s corporate assets.
 On the propriety of injunction to prevent execution by the NLRC on the properties of
third-party claimants

It is settled that a Regional Trial Court can validly issue a Temporary Restraining Order (TRO)
and, later, a writ of preliminary injunction to prevent enforcement of a writ of execution issued
by a labor tribunal on the basis of a third-party’s claim of ownership over the properties levied
upon.76 While, as a rule, no temporary or permanent injunction or restraining order in any
case involving or growing out of a labor dispute shall be issued by any court--where the writ of
execution issued by a labor tribunal is sought to be enforced upon the property of a stranger
to the labor dispute, even upon a mere prima facie showing of ownership of such claimant--a
separate action for injunctive relief against such levy may be maintained in court, since said
action neither involves nor grows out of a labor dispute insofar as the third party is
concerned.77 Instructively, National Mines and Allied Workers’ Union v. Vera78

Petitioners' reliance on the provision of Art. 254 of the New Labor Code (herein earlier
quoted) which prohibits injunctions or restraining orders in any case involving or growing out
of a 'labor dispute' is not well-taken. This has no application to the case at bar. Civil Case No.
2749 is one which neither "involves" nor "grows out" of a labor dispute. What 'involves' or
'grows out' of a labor dispute is the NLRC case between petitioners and the judgment debtor,
Philippine Iron Mines. The private respondents are not parties to the said NLRC case. Civil
Case No. 2749 does not put in issue either the fact or validity of the proceeding in theNLRC
case nor the decision therein rendered, much less the writ of execution issued thereunder. It
does not seek to enjoin the execution of the decision against the properties of the judgment
debtor. What is sought to be tried in Civil Case No. 2749 is whether the NLRC's decision and
writ of execution, above mentioned, shall be permitted to be satisfied against properties of
private respondents, and not of the judgment debtor named in the NLRC decision and writ of
execution. Such a recourse is allowed under the provisions of Section 17, Rule 39 of the
Rules of Court.

To sustain petitioners' theory will inevitably lead to disastrous consequences and lend judicial
imprimatur to deprivation of property without due process of law. Simply because a writ of
execution was issued by the NLRC does not authorize the sheriff implementing the same to
levy on anybody's property. To deny the victim of the wrongful levy, the recourse such as that
availed of by the herein private respondents, under the pretext that no court of general
jurisdiction can interfere with the writ of execution issued in a labor dispute, will be sanctioning
a greater evil than that sought to be avoided by the Labor Code provision in question.
Certainly, that could not have been the intendment of the law creating the NLRC. For well-
settled is the rule that the power of a court to execute its judgment extends only over
properties unquestionably belonging to the judgment debtor."

Likewise, since the third-party claimant is not one of the parties to the action, he cannot,
strictly speaking, appeal from the order denying his claim, but he should file a separate
reivindicatory action against the execution creditor or the purchaser of the property after the
sale at public auction, or a complaint for damages against the bond filed by the judgment
creditor in favor of the sheriff.79

A separate civil action for recovery of ownership of the property would not constitute
interference with the powers or processes of the labor tribunal which rendered the judgment
to execute upon the levied properties. The property levied upon being that of a stranger is not
subject to levy. Thus, a separate action for recovery, upon a claim and prima facie showing of
ownership by the petitioner, cannot be considered as interference.80

Upon the findings and conclusions we have reached above, petitioner is situated squarely as
such third-party claimant. The questioned restraining order of the lower court, as well as the
order granting preliminary injunction, does not constitute interference with the powers or
processes of the labor department. The registration of the mortgage document operated as
notice to all on the matter of the mortgagee’s prior claims. Official proceedings relative to the
foreclosure of the subject properties constituted a prima facie showing of ownership of such
claimant to support the issuance of injunctive reliefs.
As correctly held by the lower court:

The subject incidents for TRO and/or Writ of Injunction were summarily heard and in resolving
the same, the Court believes, that the petitioner has a clear and unmistakable right over the
levied properties. The existence of the subject Deed of Real Estate and Chattel Mortgage, the
fact that petitioner initiated a foreclosure of said properties before the Clerk of Court and Ex-
Officio Sheriff, RTC Branch 61, Kabankalan City on July 13, 2001, the fact that said Ex-Officio
Sheriff and the Clerk of Court issue a Notice of Foreclosure, Possession and Control over
said mortgaged properties on July 19, 2001 and the fact that a Sheriff’s Certificate of Sale
was issued on December 3, 2001 are the basis of its conclusion. Unless said mortgage
contract is annulled or declared null and void, the presumption of regularity of transaction
must be considered and said document must be looked [upon] as valid.

Notably, the Office of the Solicitor General also aptly observed that when the respondent
maintained that the Deed of Real Estate and Chattel mortgage was entered into in fraud of
creditors, it thereby admitted that the mortgage was not void, but merely rescissible under
Article 1381(3) of the Civil Code; and, therefore, an independent action is needed to rescind
the contract of mortgage.81 We, however, hold that such an independent action cannot now
be maintained, because the mortgage has been previously recognized to exist, with a valid
consideration, in Republic, etc., v. "G" Holdings, Inc.

A final word

The Court notes that the case filed with the lower court involves a principal action for
injunction to prohibit execution over properties belonging to a third party not impleaded in the
legal dispute between NAMAWU and MMC. We have observed, however, that the lower court
and the CA failed to take judicial notice of, or to consider, our Decisions in Republic, etc., v.
"G" Holdings, Inc., and Maricalum Mining Corporation v. Brion and NAMAWU, in which we
respectively recognized the entitlement of GHI to the shares and the company notes of MMC
(under the Purchase and Sale Agreement), and the rights of NAMAWU to its labor claims. At
this stage, therefore, neither the lower court nor the CA, nor even this Court, can depart from
our findings in those two cases because of the doctrine of stare decisis.

From our discussion above, we now rule that the trial court, in issuing the questioned orders,
did not commit grave abuse of discretion, because its issuance was amply supported by
factual and legal bases.

We are not unmindful, however, of the fact that the labor claims of NAMAWU, acknowledged
by this Court in Maricalum, still awaits final execution. As success fades from NAMAWU’s
efforts to execute on the properties of MMC, which were validly foreclosed by GHI, we see
that NAMAWU always had, and may still have, ample supplemental remedies found in Rule
39 of the Rules of Court in order to protect its rights against MMC. These include the
examination of the judgment obligor when judgment is unsatisfied, 82 the examination of the
obligors of judgment obligors,83 or even the resort to receivership.841avvphi1

While, theoretically, this case is not ended by this decision, since the lower court is still to try
the case filed with it and decide it on the merits, the matter of whether the mortgage and
foreclosure of the assets that are the subject of said foreclosure is ended herein, for the third
and final time. So also is the consequential issue of the separate and distinct personalities of
GHI and MMC. Having resolved these principal issues with certainty, we find no more need to
remand the case to the lower court, only for the

purpose of resolving again the matter of whether GHI owns the properties that were the
subject of the latter’s foreclosure.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated
October 14, 2003 is SET ASIDE. The Omnibus Order dated December 4, 2002 of the
Regional Trial Court, Branch 61 of Kabankalan City, Negros Occidental is AFFIRMED. No
costs.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 170689 March 17, 2009

PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO

RETRENCHED EMPLOYEES ASSOCIATION (PANREA), Petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (NLRC), PANTRANCO NORTH
EXPRESS, INC. (PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE NATIONAL
BANK-MANAGEMENT AND DEVELOPMENT CORPORATION (PNB-MADECOR), and
MEGA PRIME REALTY AND HOLDINGS CORPORATION (MEGA PRIME), Respondents.

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

G.R. No. 170705 March 17, 2009

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
PANTRANCO EMPLOYEES ASSOCIATION, INC. (PEA-PTGWO), PANTRANCO
RETRENCHED EMPLOYEES ASSOCIATION (PANREA) AND PANTRANCO
ASSOCIATION OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE NATIONAL
BANK-MANAGEMENT DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA
PRIME REALTY HOLDINGS, INC., Respondents.

DECISION

NACHURA, J.:

Before us are two consolidated petitions assailing the Court of Appeals (CA) Decision 1 dated
June 3, 2005 and its Resolution2 dated December 7, 2005 in CA-G.R. SP No. 80599.

In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco Retrenched
Employees Association (PANREA) pray that the CA decision be set aside and a new one be
entered, declaring the Philippine National Bank (PNB) and PNB Management and
Development Corporation (PNB-Madecor) jointly and solidarily liable for the ₱722,727,150.22
National Labor Relations Commission (NLRC) judgment in favor of the Pantranco North
Express, Inc. (PNEI) employees;3 while in G.R. No. 170705, PNB prays that the auction sale
of the Pantranco properties be declared null and void.4

The facts of the case, as found by the CA,5 and established in Republic of the Phils. v.
NLRC,6 Pantranco North Express, Inc. v. NLRC,7 and PNB MADECOR v. Uy,8 follow:

The Gonzales family owned two corporations, namely, the PNEI and Macris Realty
Corporation (Macris). PNEI provided transportation services to the public, and had its bus
terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood
on four valuable pieces of real estate (known as Pantranco properties) registered under the
name of Macris.9 The Gonzales family later incurred huge financial losses despite attempts of
rehabilitation and loan infusion. In March 1975, their creditors took over the management of
PNEI and Macris. By 1978, full ownership was transferred to one of their creditors, the
National Investment Development Corporation (NIDC), a subsidiary of the PNB.

Macris was later renamed as the National Realty Development Corporation (Naredeco) and
eventually merged with the National Warehousing Corporation (Nawaco) to form the new
PNB subsidiary, the PNB-Madecor.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by
Gregorio Araneta III. In 1986, PNEI was among the several companies placed under
sequestration by the Presidential Commission on Good Government (PCGG) shortly after the
historic events in EDSA. In January 1988, PCGG lifted the sequestration order to pave the
way for the sale of PNEI back to the private sector through the Asset Privatization Trust
(APT). APT thus took over the management of PNEI.

In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of
payments. A management committee was thereafter created which recommended to the SEC
the sale of the company through privatization. As a cost-saving measure, the committee
likewise suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its
operation. Along with the cessation of business came the various labor claims commenced by
the former employees of PNEI where the latter obtained favorable decisions.

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution 10 commanding the
NLRC Sheriffs to levy on the assets of PNEI in order to satisfy the ₱722,727,150.22 due its
former employees, as full and final satisfaction of the judgment awards in the labor cases.
The sheriffs were likewise instructed to proceed against PNB, PNB-Madecor and Mega
Prime.11 In implementing the writ, the sheriffs levied upon the four valuable pieces of real
estate located at the corner of Quezon and Roosevelt Avenues, on which the former
Pantranco Bus Terminal stood. These properties were covered by Transfer Certificate of Title
(TCT) Nos. 87881-87884, registered under the name of PNB-Madecor.12 Subsequently,
Notice of Sale of the foregoing real properties was published in the newspaper and the sale
was set on July 31, 2002. Having been notified of the auction sale, motions to quash the writ
were separately filed by PNB-Madecor and Mega Prime, and PNB. They likewise filed their
Third-Party Claims.13 PNB-Madecor anchored its motion on its right as the registered owner
of the Pantranco properties, and Mega Prime as the successor-in-interest. For its part, PNB
sought the nullification of the writ on the ground that it was not a party to the labor case. 14 In
its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to the former and that the
Pantranco properties

would answer for such debt. As such, the scheduled auction sale of the aforesaid properties
was not legally in order.15

On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties
were owned by PNB-Madecor. It being a corporation with a distinct and separate personality,
its assets could not answer for the liabilities of PNEI. Considering, however, that PNB-
Madecor executed a promissory note in favor of PNEI for ₱7,884,000.00, the writ of execution
to the extent of the said amount was concerned was considered valid.16

PNB’s third-party claim – to nullify the writ on the ground that it has an interest in the
Pantranco properties being a creditor of PNB-Madecor, – on the other hand, was denied
because it only had an inchoate interest in the properties. 17

The dispositive portion of the Labor Arbiter’s September 10, 2002 Resolution is quoted
hereunder:

WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings, Inc. is
hereby GRANTED and concomitantly the levies made by the sheriffs of the NLRC on the
properties of PNB Madecor should be as it (sic) is hereby LIFTED subject to the payment by
PNB Madecor to the complainants the amount of ₱7,884,000.00.

The Motion to Quash and Third Party Claim of PNB is hereby DENIED.

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby PARTIALLY
GRANTED insofar as the amount of the writ exceeds ₱7,884,000.00.
The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED for
want of merit.

The Motion to Expunge from the Records claimants/complainants Opposition dated August 3,
2002 is hereby DENIED for lack of merit.

SO ORDERED.18

On appeal to the NLRC, the same was denied and the Labor Arbiter’s disposition was
affirmed.19 Specifically, the NLRC concluded as follows:

(1) PNB-Madecor and Mega Prime contended that it would be impossible for them to
comply with the requirement of the labor arbiter to pay to the PNEI employees the
amount of ₱7.8 million as a condition to the lifting of the levy on the properties, since
the credit was already garnished by Gerardo Uy and other creditors of PNEI. The
NLRC found no evidence that Uy had satisfied his judgment from the promissory
note, and opined that even if the credit was in custodia legis, the claim of the PNEI
employees should enjoy preference under the Labor Code.

(2) The PNEI employees contested the finding that PNB-Madecor was indebted to the
PNEI for only ₱7.8 million without considering the accrual of interest. But the NLRC
said that there was no evidence that demand was made as a basis for reckoning
interest.

(3) The PNEI employees further argued that the labor arbiter may not properly
conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon
City that PNB-Madecor was the owner of the properties as his decision was
reconsidered by the next presiding judge, nor from a decision of the Supreme Court
that PNEI was a mere lessee of the properties, the fact being that the transfer of the
properties to PNB-Madecor was done to avoid satisfaction of the claims of the
employees with the NLRC and that as a result of a civil case filed by Mega Prime, the
subsequent sale of the properties by PNB to Mega Prime was rescinded. The NLRC
pointed out that while the Macapagal decision was set aside by Judge Bruselas and
hence, his findings could not be invoked by the labor arbiter, the titles of PNB-
Madecor are conclusive and there is no evidence that PNEI had ever been an owner.
The Supreme Court had observed in its decision that PNEI owed back rentals of ₱8.7
million to PNB-Madecor.

(4) The PNEI employees faulted the labor arbiter for not finding that PNEI, PNB,
PNB-Madecor and Mega Prime were all jointly and severally liable for their claims.
The NLRC underscored the fact that PNEI and Macris were subsidiaries of NIDC and
had passed through and were under the Asset Privatization Trust (APT) when the
labor claims accrued. The labor arbiter was correct in not granting PNB’s third-party
claim because at the time the causes of action accrued, the PNEI was managed by a
management committee appointed by the PNB as the new owner of PNRI (sic) and
Macris through a deed of assignment or transfer of ownership. The NLRC says at
length that the same is not true with PNB-Madecor which is now the registered owner
of the properties.20

The parties’ separate motions for reconsideration were likewise denied.21 Thereafter, the
matter was elevated to the CA by PANREA, PEA-PTGWO and the Pantranco Association of
Concerned Employees. The latter group, however, later withdrew its petition. The former
employees’ petition was docketed as CA-G.R. SP No. 80599.

PNB-Madecor and Mega Prime likewise filed their separate petition before the CA which was
docketed as CA-G.R. SP No. 80737, but the same was dismissed.22
In view of the ₱7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an auction
sale was conducted over the Pantranco properties to satisfy the claim of the PNEI employees,
wherein CPAR Realty was adjudged as the highest bidder.23

On June 3, 2005, the CA rendered the assailed decision affirming the NLRC resolutions.

The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are corporations
with personalities separate and distinct from PNEI. As such, there being no cogent reason to
pierce the veil of corporate fiction, the separate personalities of the above corporations should
be maintained. The CA added that the Pantranco properties were never owned by PNEI;
rather, their titles were registered under the name of PNB-Madecor. If PNB and PNB-Madecor
could not answer for the liabilities of PNEI, with more reason should Mega Prime not be held
liable being a mere successor-in-interest of PNB-Madecor.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration; 24 while PNB
filed its Partial Motion for Reconsideration.25 PNB pointed out that PNB-Madecor was made to
answer for ₱7,884,000.00 to the PNEI employees by virtue of the promissory note it (PNB-
Madecor) earlier executed in favor of PNEI. PNB, however, questioned the June 23, 2004
auction sale as the ₱7.8 million debt had already been satisfied pursuant to this Court’s
decision in PNB MADECOR v. Uy.26

Both motions were denied by the appellate court.27

In two separate petitions, PNB and the former PNEI employees come up to this Court
assailing the CA decision and resolution. The former PNEI employees raise the lone error,
thus:

The Honorable Court of Appeals palpably departed from the established rules and
jurisprudence in ruling that private respondents Pantranco North Express, Inc. (PNEI),
Philippine National Bank (PNB), Philippine National Bank Management and Development
Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc. (Mega Prime) are not
jointly and severally answerable to the ₱722,727,150.22 Million NLRC money judgment
awards in favor of the 4,000 individual members of the Petitioners.28

They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI
and had complete control over the funds of PNEI. Hence, they are solidarily answerable with
PNEI for the unpaid money claims of the employees.29 Citing A.C. Ransom Labor Union-
CCLU v. NLRC,30 the employees insist that where the employer corporation ceases to exist
and is no longer able to satisfy the judgment awards in favor of its employees, the owner of
the employer corporation should be made jointly and severally liable. 31 They added that
malice or bad faith need not be proven to make the owners liable.

On the other hand, PNB anchors its petition on this sole assignment of error, viz.:

THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO
PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE AMOUNT
OF ₱7,884,000.00 (THE AMOUNT OF PNB-MADECOR’S PROMISSORY NOTE IN FAVOR
OF PNEI) IS NOT IN ORDER AS THE SAID PROPERTY IS NOT OWNED BY PNEI.
FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY BEEN GARNISHED IN
FAVOR OF GERARDO C. UY WHICH LED TO THREE (3) PROPERTIES UNDER THE
NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881, 87882 AND 87883, BEING LEVIED
AND SOLD ON EXECUTION IN THE "PNB-MADECOR VS. UY" CASE (363 SCRA 128
[2001]) AND "GERARDO C. UY VS. PNEI" (CIVIL CASE NO. 95-72685, RTC MANILA,
BRANCH 38).32

PNB insists that the Pantranco properties could no longer be levied upon because the
promissory note for which the Labor Arbiter held PNB-Madecor liable to PNEI, and in turn to
the latter’s former employees, had already been satisfied in favor of Gerardo C. Uy. It added
that the properties were in fact awarded to the highest bidder. Besides, says PNB, the subject
properties were not owned by PNEI, hence, the execution sale thereof was not validly
effected.33

Both petitions must fail.

G.R. No. 170689

Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI
employees is whether they can attach the properties (specifically the Pantranco properties) of
PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI.

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in the
records was it shown that PNEI owned the Pantranco properties. Petitioners, in fact, never
alleged in any of their pleadings the fact of such ownership. What was established, instead, in
PNB MADECOR v. Uy34 and PNB v. Mega Prime Realty and Holdings Corporation/Mega
Prime Realty and Holdings Corporation v. PNB35 was that the properties were owned by
Macris, the predecessor of PNB-Madecor. Hence, they cannot be pursued against by the
creditors of PNEI.

We would like to stress the settled rule that the power of the court in executing judgments
extends only to properties unquestionably belonging to the judgment debtor alone. 36 To be
sure, one man’s goods shall not be sold for another man’s debts. 37 A sheriff is not authorized
to attach or levy on property not belonging to the judgment debtor, and even incurs liability if
he wrongfully levies upon the property of a third person.38

Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate
and distinct from that of PNEI. PNB is sought to be held liable because it acquired PNEI
through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is being
made to answer for petitioners’ labor claims as the owner of the subject Pantranco properties
and as a subsidiary of PNB. Mega Prime is also included for having acquired PNB’s shares
over PNB-Madecor.

The general rule is that a corporation has a personality separate and distinct from those of its
stockholders and other corporations to which it may be connected. 39 This is a fiction created
by law for convenience and to prevent injustice. 40 Obviously, PNB, PNB-Madecor, Mega
Prime, and PNEI are corporations with their own personalities. The "separate personalities" of
the first three corporations had been recognized by this Court in PNB v. Mega Prime Realty
and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB 41 where we
stated that PNB was only a stockholder of PNB-Madecor which later sold its shares to Mega
Prime; and that PNB-Madecor was the owner of the Pantranco properties. Moreover, these
corporations are registered as separate entities and, absent any valid reason, we maintain
their separate identities and we cannot treat them as one.

Neither can we merge the personality of PNEI with PNB simply because the latter acquired
the former. Settled is the rule that where one corporation sells or otherwise transfers all its
assets to another corporation for value, the latter is not, by that fact alone, liable for the debts
and liabilities of the transferor.42

Lastly, while we recognize that there are peculiar circumstances or valid grounds that may
exist to warrant the piercing of the corporate veil, 43 none applies in the present case whether
between PNB and PNEI; or PNB and PNB-Madecor.

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation
as a mere collection of individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the corporation unifying the
group.44 Another formulation of this doctrine is that when two business enterprises are owned,
conducted and controlled by the same parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal fiction that two corporations are distinct
entities and treat them as identical or as one and the same.45

Whether the separate personality of the corporation should be pierced hinges on obtaining
facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be
done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. After all, the concept of corporate entity
was not meant to promote unfair objectives.46

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and
insist that because the company, PNEI, has already ceased operations and there is no other
way by which the judgment in favor of the employees can be satisfied, corporate officers can
be held jointly and severally liable with the company. Petitioners rely on the pronouncement of
this Court in A.C. Ransom Labor Union-CCLU v. NLRC47 and subsequent cases.48

This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant
case.

For one, in the said cases, the persons made liable after the company’s cessation of
operations were the officers and agents of the corporation. The rationale is that, since the
corporation is an artificial person, it must have an officer who can be presumed to be the
employer, being the person acting in the interest of the employer. The corporation, only in the
technical sense, is the employer.49 In the instant case, what is being made liable is another
corporation (PNB) which acquired the debtor corporation (PNEI).

Moreover, in the recent cases Carag v. National Labor Relations Commission 50 and McLeod
v. National Labor Relations Commission,51 the Court explained the doctrine laid down in AC
Ransom relative to the personal liability of the officers and agents of the employer for the
debts of the latter. In AC Ransom, the Court imputed liability to the officers of the corporation
on the strength of the definition of an employer in Article 212(c) (now Article 212[e]) of the
Labor Code. Under the said provision, employer includes any person acting in the interest of
an employer, directly or indirectly, but does not include any labor organization or any of its
officers or agents except when acting as employer. It was clarified in Carag and McLeod that
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable
for the debts of the corporation. It added that the governing law on personal liability of
directors or officers for debts of the corporation is still Section 3152 of the Corporation Code.

More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom,
foreseeing the possibility or probability of payment of backwages to its employees, organized
Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their
case. The execution could not be implemented against Ransom because of the disposition
posthaste of its leviable assets evidently in order to evade its just and due
obligations.53Hence, the Court sustained the piercing of the corporate veil and made the
officers of Ransom personally liable for the debts of the latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the
corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience
as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2)
fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego
or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation.54 In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be made personally liable for
corporate liabilities.55
Applying the foregoing doctrine to the instant case, we quote with approval the CA disposition
in this wise:

It would not be enough, then, for the petitioners in this case, the PNEI employees, to rest on
their laurels with evidence that PNB was the owner of PNEI. Apart from proving ownership, it
is necessary to show facts that will justify us to pierce the veil of corporate fiction and hold
PNB liable for the debts of PNEI. The burden undoubtedly falls on the petitioners to prove
their affirmative allegations. In line with the basic jurisprudential principles we have explored,
they must show that PNB was using PNEI as a mere adjunct or instrumentality or has
exploited or misused the corporate privilege of PNEI.

We do not see how the burden has been met. Lacking proof of a nexus apart from mere
ownership, the petitioners have not provided us with the legal basis to reach the assets of
corporations separate and distinct from PNEI.56

Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI,
petitioners still cannot proceed against the Pantranco properties, the same being owned by
PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The
general rule remains that PNB-Madecor has a personality separate and distinct from PNB.
The mere fact that a corporation owns all of the stocks of another corporation, taken alone, is
not sufficient to justify their being treated as one entity. If used to perform legitimate functions,
a subsidiary’s separate existence shall be respected, and the liability of the parent corporation
as well as the subsidiary will be confined to those arising in their respective businesses. 57

In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances which are useful in the
determination of whether a subsidiary is but a mere instrumentality of the parent-corporation,
to wit:

1. The parent corporation owns all or most of the capital stock of the subsidiary;

2. The parent and subsidiary corporations have common directors or officers;

3. The parent corporation finances the subsidiary;

4. The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;

5. The subsidiary has grossly inadequate capital;

6. The parent corporation pays the salaries and other expenses or losses of the
subsidiary;

7. The subsidiary has substantially no business except with the parent corporation or
no assets except those conveyed to or by the parent corporation;

8. In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporation’s own;

9. The parent corporation uses the property of the subsidiary as its own;

10. The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary, but take their orders from the parent corporation;

11. The formal legal requirements of the subsidiary are not observed.
None of the foregoing circumstances is present in the instant case. Thus, piercing of PNB-
Madecor’s corporate veil is not warranted. Being a mere successor-in-interest of PNB-
Madecor, with more reason should no liability attach to Mega Prime.

G.R. No. 170705

In its petition before this Court, PNB seeks the annulment of the June 23, 2004 execution sale
of the Pantranco properties on the ground that the judgment debtor (PNEI) never owned said
lots. It likewise contends that the levy and the eventual sale on execution of the subject
properties was null and void as the promissory note on which PNB-Madecor was made liable
had already been satisfied.

It has been repeatedly stated that the Pantranco properties which were the subject of
execution sale were owned by Macris and later, the PNB-Madecor. They were never owned
by PNEI or PNB. Following our earlier discussion on the separate personalities of the different
corporations involved in the instant case, the only entity which has the right and interest to
question the execution sale and the eventual right to annul the same, if any, is PNB-Madecor
or its successor-in-interest. Settled is the rule that proceedings in court must be instituted by
the real party 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. 59 "Interest" within the meaning of the rule
means material interest, an interest in issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or a mere incidental interest. 60 The
interest of the party must also be personal and not one based on a desire to vindicate the
constitutional right of some third and unrelated party. 61 Real interest, on the other hand,
means a present substantial interest, as distinguished from a mere expectancy or a future,
contingent, subordinate, or consequential interest.62

Specifically, in proceedings to set aside an execution sale, the real party in interest is the
person who has an interest either in the property sold or the proceeds thereof. Conversely,
one who is not interested or is not injured by the execution sale cannot question its validity.63

In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the
buyer of its entire stockholdings in PNB-Madecor was indebted to it (PNB). Considering that
said indebtedness remains unpaid, PNB insists that it has an interest over PNB-Madecor and
Mega Prime’s assets.

Again, the contention is bereft of merit. While PNB has an apparent interest in Mega Prime’s
assets being the creditor of the latter for a substantial amount, its interest remains inchoate
and has not yet ripened into a present substantial interest, which would give it the standing to
maintain an action involving the subject properties. As aptly observed by the Labor Arbiter,
PNB only has an inchoate right to the properties of Mega Prime in case the latter would not
be able to pay its indebtedness. This is especially true in the instant case, as the debt being
claimed by PNB is secured by the accessory contract of pledge of the entire stockholdings of
Mega Prime to PNB-Madecor.64

The Court further notes that the Pantranco properties (or a portion thereof ) were sold on
execution to satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor was thus
made liable to the former PNEI employees as the judgment debtor of PNEI. It has long been
established in PNB-Madecor v. Uy and other similar cases that PNB-Madecor had an unpaid
obligation to PNEI amounting to more or less ₱7 million which could be validly pursued by the
creditors of the latter. Again, this strengthens the proper parties’ right to question the validity
of the execution sale, definitely not PNB.

Besides, the issue of whether PNB has a substantial interest over the Pantranco properties
has already been laid to rest by the Labor Arbiter. 65 It is noteworthy that in its Resolution
dated September 10, 2002, the Labor Arbiter denied PNB’s Third-Party Claim primarily
because PNB only has an inchoate right over the Pantranco properties. 66Such conclusion
was later affirmed by the NLRC in its Resolution dated June 30, 2003. 67 Notwithstanding said
conclusion, PNB did not elevate the matter to the CA via a petition for review. Hence it is
presumed to be satisfied with the adjudication therein.68 That decision of the NLRC has
become final as against PNB and can no longer be reviewed, much less reversed, by this
Court.69 This is in accord with the doctrine that a party who has not appealed cannot obtain
from the appellate court any affirmative relief other than the ones granted in the appealed
decision.70

WHEREFORE, premises considered, the petitions are hereby DENIED for lack of merit.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 166282 February 13, 2013

HEIRS OF FE TAN UY (Represented by her heir, Mauling Uy Lim), Petitioners,

vs.
INTERNATIONAL EXCHANGE BANK, Respondent.

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

G.R. No. 166283

GOLDKEYDEVELOPMENT CORPORATION, Petitioner,

vs.
INTERNATIONAL EXCHANGE BANK, Respondent.

DECISION

MENDOZA, J.:

Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the
1997 Revised Rules of Civil Procedure, assailing the August 16, 2004 Decision 1 and the
December 2, 2004 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 69817
entitled "International Exchange Bank v. Hammer Garments Corp., et al."

The Facts

On several occasions, from June 23, 1997 to September 3, 1997, respondent International
Exchange Bank (iBank), granted loans to Hammer Garments Corporation (Hammer), covered
by promissory notes and deeds of assignment, in the following amounts: 3

Date of Promissory Note Amount

June 23, 1997 P 5,599,471.33
July 24, 1997 2,700,000.00
July 25, 1997 2,300,000.00
August 1, 1997 2,938,505.04
August 1, 1997 3,361,494.96
August 14, 1997 980,000.00
August 21, 1997 2,527,200.00
August 21, 1997 3,146,715.00
September 3, 1997 1,385,511.75
Total ₱24,938,898.08

These were made pursuant to the Letter-Agreement,4 dated March 23, 1996, between iBank
and Hammer, represented by its President and General Manager, Manuel Chua (Chua) a.k.a.
Manuel Chua Uy Po Tiong, granting Hammer a P 25 Million-Peso Omnibus Line.5 The loans
were secured by a P 9 Million-Peso Real Estate Mortgage6executed on July 1, 1997 by
Goldkey Development Corporation (Goldkey) over several of its properties and a P 25 Million-
Peso Surety Agreement7 signed by Chua and his wife, Fe Tan Uy (Uy), on April 15, 1996.

As of October 28, 1997, Hammer had an outstanding obligation of ₱25,420,177.62 to

iBank.8 Hammer defaulted in the payment of its loans, prompting iBank to foreclose on
Goldkey’s third-party Real Estate Mortgage. The mortgaged properties were sold for P 12
million during the foreclosure sale, leaving an unpaid balance of P 13,420,177.62. 9 For failure
of Hammer to pay the deficiency, iBank filed a Complaint 10 for sum of money on December
16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati
City (RTC).11

Despite service of summons, Chua and Hammer did not file their respective answers and
were declared in default. In her separate answer, Uy claimed that she was not liable to iBank
because she never executed a surety agreement in favor of iBank. Goldkey, on the other
hand, also denies liability, averring that it acted only as a third-party mortgagor and that it was
a corporation separate and distinct from Hammer.12

Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which was
granted by the RTC in its December 17, 1997 Order.13 The Notice of Levy on Attachment of
Real Properties, dated July 15, 1998, covering the properties under the name of Goldkey,
was sent by the sheriff to the Registry of Deeds of Quezon City.14

The RTC, in its Decision,15 dated December 27, 2000, ruled in favor of iBank. While it made
the pronouncement that the signature of Uy on the Surety Agreement was a forgery, it
nevertheless held her liable for the outstanding obligation of Hammer because she was an
officer and stockholder of the said corporation. The RTC agreed with Goldkey that as a third-
party mortgagor, its liability was limited to the properties mortgaged. It came to the
conclusion, however, that Goldkey and Hammer were one and the same entity for the
following reasons: (1) both were family corporations of Chua and Uy, with Chua as the
President and Chief Operating Officer; (2) both corporations shared the same office and
transacted business from the same place, (3) the assets of Hammer and Goldkey were co-
mingled; and (4) when Chua absconded, both Hammer and Goldkey ceased to operate. As
such, the piercing of the veil of corporate fiction was warranted. Uy, as an officer and
stockholder of Hammer and Goldkey, was found liable to iBank together with Chua, Hammer
and Goldkey for the deficiency of ₱13,420,177.62.

Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA. On August
16, 2004, it promulgated its decision affirming the findings of the RTC. The CA found that
iBank was not negligent in evaluating the financial stability of Hammer. According to the
appellate court, iBank was induced to grant the loan because petitioners, with intent to
defraud the bank, submitted a falsified Financial Report for 1996 which incorrectly declared
the assets and cashflow of Hammer.16 Because petitioners acted maliciously and in bad faith
and used the corporate fiction to defraud iBank, they should be treated as one and the same
as Hammer.17

Hence, these petitions filed separately by the heirs of Uy and Goldkey. On February 9, 2005,
this Court ordered the consolidation of the two cases.18

The Issues

Petitioners raise the following issues:

Whether or not a trial court, under the facts of this case, can go out of the issues
raised by the pleadings;19

Whether or not there is guilt by association in those cases where the veil of corporate
fiction may be pierced;20 and

Whether or not the "alter ego" theory in disregarding the corporate personality of a
corporation is applicable to Goldkey.21

Simplifying the issues in this case, the Court must resolve the following: (1) whether Uy can
be held liable to iBank for the loan obligation of Hammer as an officer and stockholder of the
said corporation; and (2) whether Goldkey can be held liable for the obligation of Hammer for
being a mere alter ego of the latter.

The Court’s Ruling

The petitions are partly meritorious.

Uy is not liable; The piercing of the

veil of corporate fiction is not justified

The heirs of Uy argue that the latter could not be held liable for being merely an officer of
Hammer and Goldkey because it was not shown that she had committed any actionable
wrong22 or that she had participated in the transaction between Hammer and iBank. They
further claim that she had cut all ties with Hammer and her husband long before the execution
of the loan.23

The Court finds in favor of Uy.

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a
legal personality separate and distinct from those acting for and in its behalf and, in general,
from the people comprising it. Following this principle, obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held personally liable for obligations incurred by
the corporation.24 Nevertheless, this legal fiction may be disregarded if it is used as a means
to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues. 25 This is consistent with the
provisions of the Corporation Code of the Philippines, which states:

Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who wilfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

Solidary liability will then attach to the directors, officers or employees of the corporation in
certain circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith
or with gross negligence in directing the corporate affairs; and (c) are guilty of conflict
of interest to the prejudice of the corporation, its stockholders or members, and other
persons;

2. When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto;

3. When a director, trustee or officer has contractually agreed or stipulated to hold

himself personally and solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law, personally

liable for his corporate action.26

Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must allege in
the complaint that the director or officer assented to patently unlawful acts of the corporation,
or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must
clearly and convincingly prove such unlawful acts, negligence or bad faith. 27

While it is true that the determination of the existence of any of the circumstances that would
warrant the piercing of the veil of corporate fiction is a question of fact which cannot be the
subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of
factual issues if the findings of the lower court are not supported by the evidence on record or
are based on a misapprehension of facts.28

In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy
committed an act as an officer of Hammer that would permit the piercing of the corporate veil.
A reading of the complaint reveals that with regard to Uy, iBank did not demand that she be
held liable for the obligations of Hammer because she was a corporate officer who committed
bad faith or gross negligence in the performance of her duties such that the lifting of the
corporate mask would be merited. What the complaint simply stated is that she, together with
her errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the
Surety Agreement which was later found by the RTC to have been forged. 29

Considering that the only basis for holding Uy liable for the payment of the loan was proven to
be a falsified document, there was no sufficient justification for the RTC to have ruled that Uy
should be held jointly and severally liable to iBank for the unpaid loan of Hammer. Neither did
the CA explain its affirmation of the RTC’s ruling against Uy. The Court cannot give credence
to the simplistic declaration of the RTC that liability would attach directly to Uy for the sole
reason that she was an officer and stockholder of Hammer.

At most, Uy could have been charged with negligence in the performance of her duties as
treasurer of Hammer by allowing the company to contract a loan despite its precarious
financial position. Furthermore, if it was true, as petitioners claim, that she no longer
performed the functions of a treasurer, then she should have formally resigned as treasurer to
isolate herself from any liability that could result from her being an officer of the corporation.
Nonetheless, these shortcomings of Uy are not sufficient to justify the piercing of the
corporate veil which requires that the negligence of the officer must be so gross that it could
amount to bad faith and must be established by clear and convincing evidence. Gross
negligence is one that is characterized by the lack of the slightest care, acting or failing to act
in a situation where there is a duty to act, wilfully and intentionally with a conscious
indifference to the consequences insofar as other persons may be affected. 30

It behooves this Court to emphasize that the piercing of the veil of corporate fiction is frowned
upon and can only be done if it has been clearly established that the separate and distinct
personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a
deception.31 As aptly explained in Philippine National Bank v. Andrada Electric & Engineering
Company:32

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.33

Indeed, there is no showing that Uy committed gross negligence. And in the absence of any
of the aforementioned requisites for making a corporate officer, director or stockholder
personally liable for the obligations of a corporation, Uy, as a treasurer and stockholder of
Hammer, cannot be made to answer for the unpaid debts of the corporation.

Goldkey is a mere alter ego of Hammer

Goldkey contends that it cannot be held responsible for the obligations of its stockholder,
Chua.34 Moreover, it theorizes that iBank is estopped from expanding Goldkey’s liability
beyond the real estate mortgage.35 It adds that it did not authorize the execution of the said
mortgage.36 Finally, it passes the blame on to iBank for failing to exercise the requisite due
diligence in properly evaluating Hammer’s creditworthiness before it was extended an
omnibus line.37

The Court disagrees with Goldkey.

There is no reason to discount the findings of the CA that iBank duly inspected the viability of
Hammer and satisfied itself that the latter was a good credit risk based on the Financial
Statement submitted. In addition, iBank required that the loan be secured by Goldkey’s Real
Estate Mortgage and the Surety Agreement with Chua and Uy. The records support the
factual conclusions made by the RTC and the CA.

To the Court’s mind, Goldkey’s argument, that iBank is barred from pursuing Goldkey for the
satisfaction of the unpaid obligation of Hammer because it had already limited its liability to
the real estate mortgage, is completely absurd. Goldkey needs to be reminded that it is being
sued not as a consequence of the real estate mortgage, but rather, because it acted as an
alter ego of Hammer. Accordingly, they must be treated as one and the same entity, making
Goldkey accountable for the debts of Hammer.

In fact, it is Goldkey who is now precluded from denying the validity of the Real Estate
Mortgage. In its Answer with Affirmative Defenses and Compulsory Counterclaim, dated
January 5, 1998, it already admitted that it acted as a third-party mortgagor to secure the
obligation of Hammer to iBank.38 Thus, it cannot, at this late stage, question the due
execution of the third-party mortgage.

Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to enforce an

obligation of Chua. The records clearly show that it was Hammer, of which Chua was the
president and a stockholder, which contracted a loan from iBank. What iBank sought was
redress from Goldkey by demanding that the veil of corporate fiction be lifted so that it could
not raise the defense of having a separate juridical personality to evade liability for the
obligations of Hammer.

Under a variation of the doctrine of piercing the veil of corporate fiction, when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or one and the same. 39

While the conditions for the disregard of the juridical entity may vary, the following are some
probative factors of identity that will justify the application of the doctrine of piercing the
corporate veil, as laid down in Concept Builders, Inc. v NLRC:40

(1) Stock ownership by one or common ownership of both corporations;

(2) Identity of directors and officers;

(3) The manner of keeping corporate books and records, and

(4) Methods of conducting the business.41

These factors are unquestionably present in the case of Goldkey and Hammer, as observed
by the RTC, as follows:

1. Both corporations are family corporations of defendants Manuel Chua and his wife Fe Tan
Uy. The other incorporators and shareholders of the two corporations are the brother and
sister of Manuel Chua (Benito Ng Po Hing and Nenita Chua Tan) and the sister of Fe Tan Uy,
Milagros Revilla. The other incorporator/share holder is Manling Uy, the daughter of Manuel
Chua Uy Po Tiong and Fe Tan Uy.

The stockholders of Hammer Garments as of March 23, 1987, aside from spouses Manuel
and Fe Tan Uy are: Benito Chua, brother Manuel Chua, Nenita Chua Tan, sister of Manuel
Chua and Tessie See Chua Tan. On March 8, 1988, the shares of Tessie See Chua Uy were
assigned to Milagros T. Revilla, thereby consolidating the shares in the family of Manuel Chua
and Fe Tan Uy.

2. Hammer Garments and Goldkey share the same office and practically transact their
business from the same place.

3. Defendant Manuel Chua is the President and Chief Operating Officer of both corporations.
All business transactions of Goldkey and Hammer are done at the instance of defendant
Manuel Chua who is authorized to do so by the corporations.

The promissory notes subject of this complaint are signed by him as Hammer’s President and
General Manager. The third-party real estate mortgage of defendant Goldkey is signed by him
for Goldkey to secure the loan obligation of Hammer Garments with plaintiff "iBank". The
other third-party real estate mortgages which Goldkey executed in favor of the other creditor
banks of Hammer are also assigned by Manuel Chua.

4. The assets of Goldkey and Hammer are co-mingled. The real properties of Goldkey are
mortgaged to secure Hammer’s obligation with creditor banks.

The proceed of at least two loans which Hammer obtained from plaintiff "iBank", purportedly
to finance its export to Wal-Mart are instead used to finance the purchase of a manager’s
check payable to Goldkey. The defendants’ claim that Goldkey is a creditor of Hammer to
justify its receipt of the Manager’s check is not substantiated by evidence. Despite subpoenas
issued by this Court, Goldkey thru its treasurer, defendant Fe Tan Uy and or its corporate
secretary Manling Uy failed to produce the Financial Statement of Goldkey.

5. When defendant Manuel Chua "disappeared", the defendant Goldkey ceased to operate
despite the claim that the other "officers" and stockholders like Benito Chua, Nenita Chua
Tan, Fe Tan Uy, Manling Uy and Milagros T. Revilla are still around and may be able to
continue the business of Goldkey, if it were different or distinct from Hammer which suffered
financial set back.42

Based on the foregoing findings of the RTC, it was apparent that Goldkey was merely an
adjunct of Hammer and, as such, the legal fiction that it has a separate personality from that
of Hammer should be brushed aside as they are, undeniably, one and the same.

WHEREFORE, the petition are PARTLY GRANTED. The August 16, 2004 Decision and the
December 2, 2004 Resolution of the Court of Appeals in CA-G.R. CV No. 69817, are hereby
MODIFIED. Fe Tan Uy is released from any liability arising from the debts incurred by
Hammer from iBank. Hammer Garments Corporation, Manuel Chua Uy Po Tiong and
Goldkey Development Corporation are jointly and severally liable to pay International
Exchange Bank the sum of ₱13,420,177.62 representing the unpaid loan obligation of
Hammer as of December 12, 1997 plus interest. No costs.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 174938 October 1, 2014

GERARDO LANUZA, JR. AND ANTONIO O. OLBES, Petitioners,

vs.
BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B.
COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS, Respondents.

DECISION

LEONEN, J.:

Corporate representatives may be compelled to submit to arbitration proceedings pursuant to

a contract entered into by the corporation they represent if there are allegations of bad faith or
malice in their acts representing the corporation.

This is a Rule 45 petition, assailing the Court of Appeals' May 11, 2006 decision and October
5, 2006 resolution. The Court of Appeals affirmed the trial court's decision holding that
petitioners, as director, should submit themselves as parties tothe arbitration proceedings
between BF Corporation and Shangri-La Properties, Inc. (Shangri-La).

In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos. 1

BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it
entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a
mall and a multilevel parking structure along EDSA.2

Shangri-La had been consistent in paying BF Corporation in accordance with its progress
billing statements.3However, by October 1991, Shangri-La started defaulting in payment.4

BF Corporation alleged that Shangri-La induced BF Corporation to continue with the

construction of the buildings using its own funds and credit despite Shangri-La’s
default.5 According to BF Corporation, ShangriLa misrepresented that it had funds to pay for
its obligations with BF Corporation, and the delay in payment was simply a matter of delayed
processing of BF Corporation’s progress billing statements.6

BF Corporation eventually completed the construction of the buildings. 7 Shangri-La allegedly

took possession of the buildings while still owing BF Corporation an outstanding balance. 8

BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the
balance owed to it.9 It also alleged that the Shangri-La’s directors were in bad faith in directing
Shangri-La’s affairs. Therefore, they should be held jointly and severally liable with Shangri-
La for its obligations as well as for the damages that BF Corporation incurred as a result of
Shangri-La’s default.10

On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III,
and Benjamin C. Ramos filed a motion to suspend the proceedings in view of BF
Corporation’s failure to submit its dispute to arbitration, in accordance with the arbitration
clauseprovided in its contract, quoted in the motion as follows: 11

35. Arbitration
(1) Provided always that in case any dispute or difference shall arise between the Owner or
the Project Manager on his behalf and the Contractor, either during the progress or after the
completion or abandonment of the Works as to the construction of this Contract or as to any
matter or thing of whatsoever nature arising there under or inconnection therewith (including
any matter or thing left by this Contract to the discretion of the Project Manager or the
withholding by the Project Manager of any certificate to which the Contractor may claim to be
entitled or the measurement and valuation mentioned in clause 30(5)(a) of these Conditions
or the rights and liabilities of the parties under clauses 25, 26, 32 or 33 of these Conditions),
the owner and the Contractor hereby agree to exert all efforts to settle their differences or
dispute amicably. Failing these efforts then such dispute or difference shall be referred to
arbitration in accordance with the rules and procedures of the Philippine Arbitration Law.

xxx xxx xxx

(6) The award of such Arbitrators shall be final and binding on the parties. The decision of the
Arbitrators shall be a condition precedent to any right of legal action that either party may
have against the other. . . .12 (Underscoring in the original)

On August 19, 1993, BF Corporation opposed the motion to suspend proceedings.13

In the November 18, 1993 order, the Regional Trial Court denied the motion to suspend
proceedings.14

On December 8, 1993, petitioners filed an answer to BF Corporation’s complaint, with

compulsory counter claim against BF Corporation and crossclaim against Shangri-La.15 They
alleged that they had resigned as members of Shangri-La’s board of directors as of July 15,
1991.16

After the Regional Trial Court denied on February 11, 1994 the motion for reconsideration of
its November 18, 1993 order, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco,Maximo G.
Licauco III, and Benjamin Ramos filed a petition for certiorari with the Court of Appeals.17

On April 28, 1995, the Court of Appeals granted the petition for certiorari and ordered the
submission of the dispute to arbitration.18

Aggrieved by the Court of Appeals’ decision, BF Corporation filed a petition for review on
certiorari with this court.19On March 27, 1998, this court affirmed the Court of Appeals’
decision, directing that the dispute be submitted for arbitration. 20

Another issue arose after BF Corporation had initiated arbitration proceedings. BF

Corporation and Shangri-La failed to agree as to the law that should govern the arbitration
proceedings.21 On October 27, 1998, the trial court issued the order directing the parties to
conduct the proceedings in accordance with Republic Act No. 876. 22

Shangri-La filed an omnibus motion and BF Corporation an urgent motion for clarification,
both seeking to clarify the term, "parties," and whether Shangri-La’s directors should be
included in the arbitration proceedings and served with separate demands for arbitration. 23

Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that
they be excluded from the arbitration proceedings for being non-parties to Shangri-La’s and
BF Corporation’s agreement.24

On July 28, 2003, the trial court issued the order directing service of demands for arbitration
upon all defendants in BF Corporation’s complaint.25 According to the trial court, Shangri-La’s
directors were interested parties who "must also be served with a demand for arbitration to
give them the opportunity to ventilate their side of the controversy, safeguard their interest
and fend off their respective positions."26 Petitioners’ motion for reconsideration ofthis order
was denied by the trial court on January 19, 2005.27
Petitioners filed a petition for certiorari with the Court of Appeals, alleging grave abuse of
discretion in the issuance of orders compelling them to submit to arbitration proceedings
despite being third parties to the contract between Shangri-La and BF Corporation.28

In its May 11, 2006 decision,29 the Court of Appeals dismissed petitioners’ petition for
certiorari. The Court of Appeals ruled that ShangriLa’s directors were necessary parties in the
arbitration proceedings.30 According to the Court of Appeals:

[They were] deemed not third-parties tothe contract as they [were] sued for their acts in
representation of the party to the contract pursuant to Art. 31 of the Corporation Code, and
that as directors of the defendant corporation, [they], in accordance with Art. 1217 of the Civil
Code, stand to be benefited or injured by the result of the arbitration proceedings, hence,
being necessary parties, they must be joined in order to have complete adjudication of the
controversy. Consequently, if [they were] excluded as parties in the arbitration proceedings
and an arbitral award is rendered, holding [Shangri-La] and its board of directors jointly and
solidarily liable to private respondent BF Corporation, a problem will arise, i.e., whether
petitioners will be bound bysuch arbitral award, and this will prevent complete determination
of the issues and resolution of the controversy.31

The Court of Appeals further ruled that "excluding petitioners in the arbitration proceedings . .
. would be contrary to the policy against multiplicity of suits."32

The dispositive portion of the Court of Appeals’ decision reads:

WHEREFORE, the petition is DISMISSED. The assailed orders dated July 28, 2003 and
January 19, 2005 of public respondent RTC, Branch 157, Pasig City, in Civil Case No. 63400,
are AFFIRMED.33

The Court of Appeals denied petitioners’ motion for reconsideration in the October 5, 2006
resolution.34

On November 24, 2006, petitioners filed a petition for review of the May 11, 2006 Court of
Appeals decision and the October 5, 2006 Court of Appeals resolution.35

The issue in this case is whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.

Petitioners argue that they cannot be held personally liable for corporate acts or
obligations.36 The corporation is a separate being, and nothing justifies BF Corporation’s
allegation that they are solidarily liable with Shangri-La.37Neither did they bind themselves
personally nor did they undertake to shoulder Shangri-La’s obligations should it fail in its
obligations.38 BF Corporation also failed to establish fraud or bad faith on their part. 39

Petitioners also argue that they are third parties to the contract between BF Corporation and
Shangri-La.40Provisions including arbitration stipulations should bind only the parties. 41 Based
on our arbitration laws, parties who are strangers to an agreement cannot be compelled to
arbitrate.42

Petitioners point out thatour arbitration laws were enacted to promote the autonomy of parties
in resolving their disputes.43 Compelling them to submit to arbitration is against this purpose
and may be tantamount to stipulating for the parties.44

Separate comments on the petition werefiled by BF Corporation, and Maximo G. Licauco III,
Alfredo C.Ramos and Benjamin C. Ramos.45
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C. Ramos agreed with petitioners that
Shangri-La’sdirectors, being non-parties to the contract, should not be made personally liable
for Shangri-La’s acts.46 Since the contract was executed only by BF Corporation and Shangri-
La, only they should be affected by the contract’s stipulation. 47 BF Corporation also failed to
specifically allege the unlawful acts of the directors that should make them solidarily liable
with Shangri-La for its obligations.48

Meanwhile, in its comment, BF Corporation argued that the courts’ ruling that the parties
should undergo arbitration "clearly contemplated the inclusion of the directors of the
corporation[.]"49 BF Corporation also argued that while petitioners were not parties to the
agreement, they were still impleaded under Section 31 of the Corporation Code. 50Section 31
makes directors solidarily liable for fraud, gross negligence, and bad faith.51 Petitioners are
not really third parties to the agreement because they are being sued as Shangri-La’s
representatives, under Section 31 of the Corporation Code.52

BF Corporation further argued that because petitioners were impleaded for their solidary
liability, they are necessary parties to the arbitration proceedings.53 The full resolution of all
disputes in the arbitration proceedings should also be done in the interest of justice. 54

In the manifestation dated September 6, 2007, petitioners informed the court that the Arbitral
Tribunal had already promulgated its decision on July 31, 2007. 55 The Arbitral Tribunal denied
BF Corporation’s claims against them.56Petitioners stated that "[they] were included by the
Arbitral Tribunal in the proceedings conducted . . . notwithstanding [their] continuing objection
thereto. . . ."57 They also stated that "[their] unwilling participation in the arbitration case was
done ex abundante ad cautela, as manifested therein on several occasions." 58 Petitioners
informed the court that they already manifested with the trial court that "any action taken on
[the Arbitral Tribunal’s decision] should be without prejudice to the resolution of [this] case." 59

Upon the court’s order, petitioners and Shangri-La filed their respective memoranda.
Petitioners and Maximo G. Licauco III, Alfredo C. Ramos, and Benjamin C. Ramos reiterated
their arguments that they should not be held liable for Shangri-La’s default and made parties
to the arbitration proceedings because only BF Corporation and Shangri-La were parties to
the contract.

In its memorandum, Shangri-La argued that petitioners were impleaded for their solidary
liability under Section 31 of the Corporation Code. Shangri-La added that their exclusion from
the arbitration proceedings will result in multiplicity of suits, which "is not favored in this
jurisdiction."60 It pointed out that the case had already been mooted by the termination of the
arbitration proceedings, which petitioners actively participated in. 61 Moreover, BF Corporation
assailed only the correctness of the Arbitral Tribunal’s award and not the part absolving
Shangri-La’s directors from liability.62

BF Corporation filed a counter-manifestation with motion to dismiss63 in lieu of the required

memorandum.

In its counter-manifestation, BF Corporation pointed out that since "petitioners’ counterclaims

were already dismissed with finality, and the claims against them were likewise dismissed
with finality, they no longer have any interest orpersonality in the arbitration case. Thus, there
is no longer any need to resolve the present Petition, which mainly questions the inclusion of
petitioners in the arbitration proceedings."64 The court’s decision in this case will no longer
have any effect on the issue of petitioners’ inclusion in the arbitration proceedings. 65

The petition must fail.

The Arbitral Tribunal’s decision, absolving petitioners from liability, and its binding effect on
BF Corporation, have rendered this case moot and academic.
The mootness of the case, however, had not precluded us from resolving issues so that
principles may be established for the guidance of the bench, bar, and the public. In De la
Camara v. Hon. Enage,66 this court disregarded the fact that petitioner in that case already
escaped from prison and ruled on the issue of excessive bails:

While under the circumstances a ruling on the merits of the petition for certiorari is
notwarranted, still, as set forth at the opening of this opinion, the fact that this case is moot
and academic should not preclude this Tribunal from setting forth in language clear and
unmistakable, the obligation of fidelity on the part of lower court judges to the unequivocal
command of the Constitution that excessive bail shall not be required. 67

This principle was repeated in subsequent cases when this court deemed it proper to clarify
important matters for guidance.68

Thus, we rule that petitioners may be compelled to submit to the arbitration proceedings in
accordance with Shangri-Laand BF Corporation’s agreement, in order to determine if the
distinction between Shangri-La’s personality and their personalities should be disregarded.

This jurisdiction adopts a policy in favor of arbitration. Arbitration allows the parties to avoid
litigation and settle disputes amicably and more expeditiously by themselves and through
their choice of arbitrators.

The policy in favor of arbitration has been affirmed in our Civil Code,69 which was approved as
early as 1949. It was later institutionalized by the approval of Republic Act No. 876, 70 which
expressly authorized, made valid, enforceable, and irrevocable parties’ decision to submit
their controversies, including incidental issues, to arbitration. This court recognized this policy
in Eastboard Navigation, Ltd. v. Ysmael and Company, Inc.:71

As a corollary to the question regarding the existence of an arbitration agreement, defendant

raises the issue that, even if it be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it amounts to removing said dispute
from the jurisdiction of the courts in which the parties are domiciled or where the dispute
occurred. It is true that there are authorities which hold that "a clause in a contract providing
that all matters in dispute between the parties shall be referred to arbitrators and to them
alone, is contrary to public policy and cannot oust the courts of jurisdiction" (Manila Electric
Co. vs. Pasay Transportation Co., 57 Phil., 600, 603), however, there are authorities which
favor "the more intelligent view that arbitration, as an inexpensive, speedy and amicable
method of settling disputes, and as a means of avoiding litigation, should receive every
encouragement from the courts which may be extended without contravening sound public
policy or settled law" (3 Am. Jur., p. 835). Congress has officially adopted the modern view
when it reproduced in the new Civil Code the provisions of the old Code on Arbitration. And
only recently it approved Republic Act No. 876 expressly authorizing arbitration of future
disputes.72 (Emphasis supplied)

In view of our policy to adopt arbitration as a manner of settling disputes, arbitration clauses
are liberally construed to favor arbitration. Thus, in LM Power Engineering Corporation v.
Capitol Industrial Construction Groups, Inc.,73 this court said:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along
with mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside
from unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially
of the commercial kind. It is thus regarded as the "wave of the future" in international civil and
commercial disputes. Brushing aside a contractual agreement calling for arbitration between
the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging alternative dispute resolution

methods, courts should liberally construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should
be granted. Any doubt should be resolved in favor of arbitration.74(Emphasis supplied)

A more clear-cut statement of the state policy to encourage arbitration and to favor
interpretations that would render effective an arbitration clause was later expressed in
Republic Act No. 9285:75

SEC. 2. Declaration of Policy.- It is hereby declared the policy of the State to actively promote
party autonomy in the resolution of disputes or the freedom of the party to make their own
arrangements to resolve their disputes. Towards this end, the State shall encourage and
actively promote the use of Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court dockets. As such, the State shall
provide means for the use of ADR as an efficient tool and an alternative procedure for the
resolution of appropriate cases. Likewise, the State shall enlist active private sector
participation in the settlement of disputes through ADR. This Act shall be without prejudice to
the adoption by the Supreme Court of any ADR system, such as mediation, conciliation,
arbitration, or any combination thereof as a means of achieving speedy and efficient means of
resolving cases pending before all courts in the Philippines which shall be governed by such
rules as the Supreme Court may approve from time to time.

....

SEC. 25. Interpretation of the Act.- In interpreting the Act, the court shall have due regard to
the policy of the law in favor of arbitration.Where action is commenced by or against multiple
parties, one or more of whomare parties who are bound by the arbitration agreement although
the civil action may continue as to those who are not bound by such arbitration agreement.
(Emphasis supplied)

Thus, if there is an interpretation that would render effective an arbitration clause for purposes
ofavoiding litigation and expediting resolution of the dispute, that interpretation shall be
adopted. Petitioners’ main argument arises from the separate personality given to juridical
persons vis-à-vis their directors, officers, stockholders, and agents. Since they did not sign
the arbitration agreement in any capacity, they cannot be forced to submit to the jurisdiction of
the Arbitration Tribunal in accordance with the arbitration agreement. Moreover, they had
already resigned as directors of Shangri-Laat the time of the alleged default.

Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate
and distinct from Shangri-La.

A corporation is an artificial entity created by fiction of law. 76 This means that while it is not a
person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in
the legal sense, is an individual with a personality that is distinct and separate from other
persons including its stockholders, officers, directors, representatives, 77 and other juridical
entities. The law vests in corporations rights,powers, and attributes as if they were natural
persons with physical existence and capabilities to act on their own. 78 For instance, they have
the power to sue and enter into transactions or contracts. Section 36 of the Corporation Code
enumerates some of a corporation’s powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code
has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate ofincorporation;

3. To adopt and use a corporate seal;

 4. To amend its articles of incorporation in accordance with the provisions of this
Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell

treasury stocks in accordance with the provisions of this Code; and to admit members
to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in this

Code;

9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and

11. To exercise such other powers asmay be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (13a)

Because a corporation’s existence is only by fiction of law, it can only exercise its rights and
powers through itsdirectors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation

through its representatives is not consent of the representative, personally. Its obligations,
incurred through official acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities
incurred on or in behalf of the corporation.

Petitioners are also correct that arbitration promotes the parties’ autonomy in resolving their
disputes. This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation79 that an arbitration clause shall not apply to persons who were neither parties to
the contract nor assignees of previous parties, thus:

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation

on arbitration, binds the parties thereto, as well as their assigns and heirs. But only
they.80 (Citations omitted)

Similarly, in Del Monte Corporation-USA v. Court of Appeals,81 this court ruled:

The provision to submit to arbitration any dispute arising therefrom and the relationship of the
parties is part of that contract and is itself a contract. As a rule, contracts are respected as the
law between the contracting parties and produce effect as between them, their assigns and
heirs. Clearly, only parties to the Agreement . . . are bound by the Agreement and its
arbitration clause as they are the only signatories thereto.82 (Citation omitted)

This court incorporated these rulings in Agan, Jr. v. Philippine International Air Terminals Co.,
Inc.83 and Stanfilco Employees v. DOLE Philippines, Inc., et al.84

As a general rule, therefore, a corporation’s representative who did not personally bind
himself or herself to an arbitration agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into by the corporation. He or she is
generally not considered a party to that agreement.

However, there are instances when the distinction between personalities of directors,
officers,and representatives, and of the corporation, are disregarded. We call this piercing the
veil of corporate fiction.

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues." 85 It is also
warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation."86

When corporate veil is pierced, the corporation and persons who are normally treated as
distinct from the corporation are treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they were the corporation.

Among the persons who may be treatedas the corporation itself under certain circumstances
are its directors and officers. Section 31 of the Corporation Code provides the instances when
directors, trustees, or officers may become liable for corporate acts:

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed inhim in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation. (n)

Based on the above provision, a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:

a) The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;

b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his or
her duties as director or trustee.
Solidary liability with the corporation will also attach in the following instances:

a) "When a director or officer has consented to the issuance of watered stocks or

who, having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto";87

b) "When a director, trustee or officer has contractually agreed or stipulated to hold

himself personally and solidarily liable with the corporation";88 and

c) "When a director, trustee or officer is made, by specific provision of law, personally

liable for his corporate action."89

When there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these persons and
the corporation should be treated as one. Without a trial, courts and tribunals have no basis
for determining whether the veil of corporate fiction should be pierced. Courts or tribunals do
not have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the distinction between the
corporation and the persons representing it. The determination of these circumstances must
be made by one tribunal or court in a proceeding participated in by all parties involved,
including current representatives of the corporation, and those persons whose personalities
are impliedly the sameas the corporation. This is because when the court or tribunal finds that
circumstances exist warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be held liable for corporate
acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a
mere aggregation of persons undertaking a business under the collective name of the
corporation.

Hence, when the directors, as in this case, are impleaded in a case against a corporation,
alleging malice orbad faith on their part in directing the affairs of the corporation, complainants
are effectively alleging that the directors and the corporation are not acting as separate
entities. They are alleging that the acts or omissions by the corporation that violated their
rights are also the directors’ acts or omissions. 90 They are alleging that contracts executed by
the corporation are contracts executed by the directors. Complainants effectively pray that the
corporate veilbe pierced because the cause of action between the corporation and the
directors is the same.

In that case, complainants have no choice but to institute only one proceeding against the
parties.1âwphi1 Under the Rules of Court, filing of multiple suits for a single cause of action is
prohibited. Institution of more than one suit for the same cause of action constitutes splitting
the cause of action, which is a ground for the dismissal ofthe others. Thus, in Rule 2:

Section 3. One suit for a single cause of action. — A party may not institute more than one
suit for a single cause of action. (3a)

Section 4. Splitting a single cause of action;effect of. — If two or more suits are instituted on
the basis of the same cause of action, the filing of one or a judgment upon the merits in any
one is available as a ground for the dismissal of the others. (4a)

It is because the personalities of petitioners and the corporation may later be found to be
indistinct that we rule that petitioners may be compelled to submit to arbitration.

However, in ruling that petitioners may be compelled to submit to the arbitration proceedings,
we are not overturning Heirs of Augusto Salas wherein this court affirmed the basic arbitration
principle that only parties to an arbitration agreement may be compelled to submit to
arbitration. In that case, this court recognizedthat persons other than the main party may be
compelled to submit to arbitration, e.g., assignees and heirs. Assignees and heirs may be
considered parties to an arbitration agreement entered into by their assignor because the
assignor’s rights and obligations are transferred to them upon assignment. In other words, the
assignor’s rights and obligations become their own rights and obligations. In the same way,
the corporation’s obligations are treated as the representative’s obligations when the
corporate veil is pierced. Moreover, in Heirs of Augusto Salas, this court affirmed its policy
against multiplicity of suits and unnecessary delay. This court said that "to split the
proceeding into arbitration for some parties and trial for other parties would "result in
multiplicity of suits, duplicitous procedure and unnecessary delay." 91 This court also intimated
that the interest of justice would be best observed if it adjudicated rights in a single
proceeding.92 While the facts of that case prompted this court to direct the trial court to
proceed to determine the issues of thatcase, it did not prohibit courts from allowing the case
to proceed to arbitration, when circumstances warrant.

Hence, the issue of whether the corporation’s acts in violation of complainant’s rights, and the
incidental issue of whether piercing of the corporate veil is warranted, should be determined
in a single proceeding. Such finding would determine if the corporation is merely an
aggregation of persons whose liabilities must be treated as one with the corporation.

However, when the courts disregard the corporation’s distinct and separate personality from
its directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in
an absolute confusion of personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat them as one, in relation to a
specific act, in order to extend the terms of the contract and the liabilities for all damages to
erring corporate officials who participated in the corporation’s illegal acts. This is done so that
the legal fiction cannot be used to perpetrate illegalities and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine ifsuch distinction should indeed
be disregarded and, if so, to determine the extent of their liabilities.

In this case, the Arbitral Tribunal rendered a decision, finding that BF Corporation failed to
prove the existence of circumstances that render petitioners and the other directors solidarily
liable. It ruled that petitioners and Shangri-La’s other directors were not liable for the
contractual obligations of Shangri-La to BF Corporation. The Arbitral Tribunal’s decision was
made with the participation of petitioners, albeit with their continuing objection. In view of our
discussion above, we rule that petitioners are bound by such decision.

WHEREFORE, the petition is DENIED. The Court of Appeals' decision of May 11, 2006 and
resolution of October 5, 2006 are AFFIRMED.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

G.R. No. 182770 September 17, 2014

WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,

vs.
FE CORAZON LABAYEN, Respondent.

DECISION

BRION, J.:

We review in this petition for review on certiorari1 the decision2 dated September 28, 2007
and the resolution3 dated April 28, 2008 of the Court of Appeals (CA) in CA-G.R. CV No.
68289 that affirmed with modification the decision4 of the Regional Trial Court (RTC), Branch
77, Quezon City.

The Factual Background

The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a

management and consultant firm. The petitioner, WPM International Trading, Inc. (WPM), is a
domestic corporation engaged in the restaurant business, while Warlito P. Manlapaz
(Manlapaz) is its president.

Sometime in 1990, WPM entered into a management agreement with the respondent, by
virtue of which the respondent was authorized to operate, manage and rehabilitate Quickbite,
a restaurant owned and operated by WPM. As part of her tasks, the respondent looked for a
contractor who would renovate the two existing Quickbite outlets in Divisoria, Manila and
Lepanto St., University Belt, Manila. Pursuant to the agreement, the respondent engaged the
services of CLN Engineering Services (CLN) to renovate Quickbite-Divisoria at the cost of
₱432,876.02.

On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its possession
was delivered to the respondent. However, out of the ₱432,876.02 renovation cost, only the
amount of ₱320,000.00 was paid to CLN, leaving a balance of ₱112,876.02.

Complaint for Sum of Money (Civil Case No. Q-90-7013)

On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC
against the respondent and Manlapaz, which was docketed as Civil Case No. Q-90-7013.
CLN later amended the complaint to exclude Manlapaz as defendant. The respondent was
declared in default for her failure to file a responsive pleading.

The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual
damages inthe amount of ₱112,876.02 with 12% interest per annum from June 18,1990 (the
date of first demand) and 20% of the amount recoverable as attorney’s fees.

Complaint for Damages (Civil Case No. Q-92-13446)

Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM
and Manlapaz. The respondent alleged that in Civil Case No. Q-90-7013, she was adjudged
liable for a contract that she entered into for and in behalf of the petitioners, to which she
should be entitled to reimbursement; that her participation in the management agreement was
limited only to introducing Manlapaz to Engineer Carmelo Neri (Neri), CLN’s general
manager; that it was actually Manlapaz and Neri who agreed on the terms and conditions of
the agreement; that when the complaint for damages was filed against her, she was abroad;
and that she did not know of the case until she returned to the Philippines and received a
copy of the decision of the RTC.

In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus
interest at 12%per annum from June 18, 1990 until fully paid; and 20% of the award as
attorney’s fees. She likewise prayed that an award of ₱100,000.00 as moral damages and
₱20,000.00 as attorney’s fees be paid to her.

In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar
Alcansajewho was in-charge with the daily operations of the Quickbite outlets; that when
Alcansaje left WPM, the remaining directors were compelled to hire the respondent as
manager; that the respondent had entered intothe renovation agreement with CLN in her own
personal capacity; that when he found the amount quoted by CLN too high, he instructed the
respondent to either renegotiate for a lower price or to look for another contractor; that since
the respondent had exceeded her authority as agent of WPM, the renovation agreement
should only bind her; and that since WPM has a separate and distinct personality, Manlapaz
cannot be made liable for the respondent’s claim.

Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of
counterclaim, for the award of ₱350,000.00 as moral and exemplary damages and
₱50,000.00 attorney’s fees.

The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file
a responsive pleading.

The Decision of the RTC

In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The
RTC found that based on the records, there is a clear indication that WPM is a mere
instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz are
considered one and the same. The RTC also found that Manlapaz had complete control over
WPM considering that he is its chairman, president and treasurer at the same time. The RTC
thus concluded that Manlapaz is liable in his personal capacity to reimburse the respondent
the amount she paid to CLN inconnection with the renovation agreement.

The petitioners appealed the RTC decision with the CA. There, they argued that in view of the
respondent’s act of entering into a renovation agreement with CLN in excess of her authority
as WPM’s agent, she is not entitled to indemnity for the amount she paid. Manlapaz also
contended that by virtue ofWPM’s separate and distinct personality, he cannot be
madesolidarily liable with WPM.

The Ruling of the Court of Appeals

On September 28, 2007, the CA affirmed, with modification on the award of attorney’s fees,
the decision of the RTC.The CA held that the petitioners are barred from raising as a defense
the respondent’s alleged lack of authority to enter into the renovation agreement in view of
their tacit ratification of the contract.

The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same
based on the following: (1) Manlapaz is the principal stockholder of WPM; (2) Manlapaz had
complete control over WPM because he concurrently held the positions of president,
chairman of the board and treasurer, in violation of the Corporation Code; (3) two of the four
other stockholders of WPM are employed by Manlapaz either directly or indirectly; (4)
Manlapaz’s residence is the registered principal office of WPM; and (5) the acronym "WPM"
was derived from Manlapaz’s initials. The CA applied the principle of piercing the veil of
corporate fiction and agreed with the RTC that Manlapaz cannot evade his liability by simply
invoking WPM’s separate and distinct personality.
After the CA's denial of their motion for reconsideration, the petitioners filed the present
petition for review on certiorari under Rule 45 of the Rules of Court.

The Petition

The petitioners submit that the CA gravely erred in sustaining the RTC’s application of the
principle of piercing the veil of corporate fiction. They argue that the legal fiction of corporate
personality could only be discarded upon clear and convincing proof that the corporation is
being used as a shield to avoid liability or to commit a fraud. Since the respondent failed to
establish that any of the circumstances that would warrant the piercing is present, Manlapaz
claims that he cannot be made solidarily liable with WPM to answerfor damages allegedly
incurred by the respondent.

The petitioners further argue that, assuming they may be held liable to reimburse to the
respondentthe amount she paid in Civil Case No. Q-90-7013, such liability is only limited to
the amount of ₱112,876.02, representing the balance of the obligation to CLN, and should not
include the twelve 12% percent interest, damages and attorney’s fees.

The Issues

The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business
conduit of Manlapaz; and (2) whether Manlapaz is jointly and severally liable with WPM to the
respondent for reimbursement, damages and interest.

Our Ruling

We find merit in the petition.

We note, at the outset, that the question of whether a corporation is a mere instrumentality or
alter-ego of another is purely one of fact.5 This is also true with respect to the question of
whether the totality of the evidence adduced by the respondentwarrants the application of the
piercing the veil of corporate fiction doctrine.6

Generally, factual findings of the lower courts are accorded the highest degree of respect, if
not finality. When adopted and confirmed by the CA, these findings are final and conclusive
and may not be reviewed on appeal,7save in some recognized exceptions 8 among others,
when the judgment is based on misapprehension of facts.

We have reviewed the records and found that the application of the principle of piercing the
veil of corporate fiction is unwarranted in the present case.

On the Application ofthe Principle of Piercing the Veil of Corporate Fiction

The rule is settled that a corporation has a personality separate and distinct from the persons
acting for and in its behalf and, in general, from the people comprising it. 9 Following this
principle, the obligations incurred by the corporate officers, orother persons acting as
corporate agents, are the direct accountabilities ofthe corporation they represent, and not
theirs. Thus, a director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation;10 it is only in exceptional circumstances that
solidary liability will attach to them.

Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely: a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a
fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is
essentially a farce, since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs so conducted as to make it merely
aninstrumentality, agency, conduit or adjunct of another corporation. 11

Piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

(2) Such control must have beenused by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury
or unjust loss complained of.

The absence of any ofthese elements prevents piercing the corporate veil. 12

In the present case, the attendantcircumstances do not establish that WPM is a mere alter
ego of Manlapaz.

Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show
that WPM was organized and controlled, and its affairs conducted in a manner that made it
merely an instrumentality, agency, conduit or adjunct ofManlapaz. As held in Martinez v.
Court of Appeals,13 the mere ownership by a singlestockholder of even all or nearly all of the
capital stocks ofa corporation is not by itself a sufficient ground to disregard the separate
corporate personality. To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established.14

Likewise, the records of the case do not support the lower courts’ finding that Manlapaz had
control or domination over WPM or its finances. That Manlapaz concurrentlyheld the positions
of president, chairman and treasurer, or that the Manlapaz’s residence is the registered
principal office of WPM, are insufficient considerations to prove that he had exercised
absolutecontrol over WPM.

In this connection, we stress thatthe control necessary to invoke the instrumentality or alter
ego rule is not majority or even complete stock control but such domination of finances,
policies and practices that the controlled corporation has, so tospeak, no separate mind, will
or existence of its own, and is but a conduit for its principal. The control must be shown to
have been exercised at the time the acts complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or unjust loss for which the complaint is
made.

Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control
over WPM.1âwphi1 Even granting that he exercised a certain degree of control over the
finances, policies and practices of WPM, in view of his position as president, chairman and
treasurer of the corporation, such control does not necessarily warrant piercing the veil of
corporate fiction since there was not a single proof that WPM was formed to defraud CLN or
the respondent, or that Manlapaz was guilty of bad faith or fraud.

On the contrary, the evidence establishes that CLN and the respondent knew and acted on
the knowledgethat they were dealing with WPM for the renovation of the latter’s restaurant,
and not with Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting
to the filing of a civil case for sum of money against the respondent, does not automatically
indicate fraud, in the absence of any proof to support it.
This Court also observed that the CA failed to demonstrate how the separate and distinct
personalityof WPM was used by Manlapaz to defeat the respondent’s right for
reimbursement. Neither was there any showing that WPM attempted to avoid liability or had
no property against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which the
latter could be held solidarily liable with WPM, and considering that there was no proof that
WPM had insufficient funds, there was no sufficient justification for the RTC and the CA to
have ruled that Manlapaz should be held jointly and severally liable to the respondent for the
amount she paid to CLN. Hence, only WPM is liable to indemnify the respondent.

Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and
thus, must be done with caution.15 It can only be done if it has been clearly established that
the separate and distinct personality of the corporation is used to justify a wrong, protect
fraud, or perpetrate a deception. The court must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed against another, in
disregard of its rights; it cannot be presumed.

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified
refusal to pay a just debt. Under Article 2220 of the New Civil Code, 16 moral damages may be
awarded in cases of a breach of contract where the defendant acted fraudulently or in bad
faith or was guilty of gross negligence amounting to bad faith.

In the present case, when payment for the balance of the renovation cost was demanded,
WPM, instead of complying with its obligation, denied having authorized the respondent to
contract in its behalf and accordingly refused to pay. Such cold refusal to pay a just debt
amounts to a breach of contract in bad faith, as contemplated by Article 2220. Hence, the
CA's order to pay moral damages was in order.

WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court
of Appeals in CA-G.R. CV No. 68289 is MODIFIED and.that petitioner Warlito P. Manlapaz is
ABSOLVED from any liability under the renovation agreement.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

July 8, 2015

G.R. No. 198436

PIONEER INSURANCE SURETY CORPORATION, Petitioner,

vs.
MORNING STAR TRAVEL & TOURS, INC., ESTELITA CO WONG, BENNY H. WONG,
ARSENIO CHUA, SONNY CHUA, AND WONG YAN TAK, Respondents.

DECISION

LEONEN, J.:

As a general rule, a corporation has a separate and distinct personality from those who
represent it.1 Its officers are solidarily liable only when exceptional circumstances exist, such
as cases enumerated in Section 31 of the Corporation Code. 2The liability of the officers must
be proven by evidence sufficient to overcome the burden of proof borne by the plaintiff.

This case originated from a Complaint3 for Collection of Sum of Money and Damages filed by
Pioneer Insurance & Surety Corporation (Pioneer) against Morning Star Travel & Tours, Inc.
(Morning Star) for the amounts Pioneer paid the International Air Transport Association under
its credit insurance policy. The amounts of P100,479,171.59 and US$457,834.14 represent
Morning Star’s overdue remittances to the International Air Transport Association. 4

Pioneer filed this Petition for Review5 assailing the Court of Appeals’ February 28, 2011
Decision6 "only insofar as it absolved the individual respondents of their joint and solidary
liability to petitioner[,]"7 and August 31, 2011 Resolution8 denying reconsideration.

Morning Star is a travel and tours agency with Benny Wong, Estelita Wong, Arsenio Chua,
Sonny Chua, and Wong Yan Tak as shareholders and members of the board of directors. 9

International Air Transport Association is a Canadian corporation licensed to do business in

the Philippines "to promote safe, regular and economical air transport for all people, among
others."10

International Air Transport Association appointed Morning Star as an accredited travel

agent.11 Morning Star "avail[ed] of the privilege of getting on credit . . . air transport tickets
from various airline companies [to be sold] to passengers at prices fixed by the airline
companies[.]"12

Morning Star and International Air Transport Association entered a Passenger Sales Agency
Agreement such that Morning Star must report all air transport ticket sales to International Air
Transport Association and account all payments received through the centralized system
called Billing and Settlement Plan.13 Morning Star only holds in trust all monies collected as
these belong to the airline companies.14

International Air Transport Association obtained a Credit Insurance Policy from Pioneer to
assure itself of payments by accredited travel agents for ticket sales and monies due to the
airline companies under the Billing and Settlement Plan.15 The policy was for the period from
November 1, 2001 to December 31, 2002, renewed for the period from January 1, 2003 to
December 31, 2003.16

The policy was made known to the accredited travel agents. Morning Star, through its
President, Benny Wong, was among those that declared itself liable to indemnify Pioneer for
any and all claims under the policy. He executed a registration form under the Credit
Insurance Program for BSP-Philippines Agents.17

Morning Star had an accrued billing of P49,051,641.80 and US$325,865.35 for the period
from December 16, 2002 to December 31, 2002. It failed to remit these amounts through the
Billing and Settlement Plan, prompting the International Air Transport Association to send a
letter dated January 17, 2003 advising on the overdue remittance.18

International Air Transport Association again declared Morning Star in default by a letter
dated January 20, 2003 for its overdue account covering the period from January 1, 2003 to
January 20, 2003.19

Pursuant to the credit insurance policies, International Air Transport Association demanded
from Pioneer the sums of P109,728,051.00 and US$457,834.14 representing Morning Star’s
overdue account as of April 30, 2003. Pioneer investigated, ascertained, and validated the
claims, then paid International Air Transport Association the amounts of P100,479,171.59 and
US$457,834.14.20

Consequently, Pioneer demanded these amounts from Morning Star through a letter dated
September 23, 2003.21International Air Transport Association executed in Pioneer’s favor a
Release of Claim and Subrogation Receipt on December 23, 2003.22

On November 10, 2005, Pioneer filed a Complaint for Collection of Sum of Money and
Damages against Morning Star and its shareholders and directors.23

Morning Star, Benny Wong, and Estelita Wong were served with summons and a copy of the
Complaint on November 22, 2005, while Arsenio Chua, Sonny Chua, and Wong Yan Tak
were unserved.24

The trial court granted Pioneer’s Motion to Declare Respondents in Default for failure to file an
Answer within the period.25 Pioneer presented its evidence ex-parte.26

Meanwhile, Pioneer filed an Ex-Parte Motion for Issuance of Alias Summons since Morning
Star was previously served through substituted service. The trial court granted the Motion,
and alias summons was served on February 5, 2007. Upon motion, Morning Star was
declared in default for failure to file an Answer within the period.27

On June 28, 2007, Morning Star filed a Motion for Leave of Court to File Attached Answer
explaining that it only received a copy of the Complaint on February 5, 2007. 28 Its counsel
also alleged that he was retained only on June 22, 2007.29 The trial court denied the Motion
on July 23, 2007, and also denied reconsideration. 30

The Regional Trial Court in its Decision31 dated November 9, 2007 ruled in favor of Pioneer
and ordered respondents to jointly and severally pay Pioneer:

WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of the

plaintiff as against the defendants ordering the latter to jointly and severally pay the following
amount:

1. One Hundred Million Four Hundred Seventy Nine Thousand One Hundred Seventy
One Pesos and Fifty Nine (Php100,479,171.59) and Four Hundred Fifty Seven
Thousand Eight Hundred Thirty Four Dollars and 14/100 (US$457,834.14), with
interest at 12% per annum from September 23, 2003 until the sum is fully paid;

2. Php100,000.00 as attorney’s fees;

3. Php100,000.00 as exemplary damages;

 4. Php200,000.00 as litigation expenses[;]

5. costs of suit.

SO ORDERED.32

The Court of Appeals, in its Decision dated February 28, 2011, affirmed the trial court with
modification in that only Morning Star was liable to pay petitioner:

WHEREFORE, premises considered, the instant Appeal is DENIED. Accordingly, the assailed
9 November 2007 Decision of the Regional Trial Court of Makati City, Branch 143 in Civil
Case No. 05-993 is AFFIRMED with MODIFICATION. Insofar as the trial court ordered
Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and
Wong Yan Tak to jointly and severally pay the amounts awarded to Plaintiff-Appellee, the
same is deleted. Only Morning Star is held personally liable for the payment thereof. Further,
exemplary damages and attorney’s fees are likewise deleted for lack of basis.

SO ORDERED.33

The Court of Appeals denied Pioneer’s Motion for Partial Reconsideration. 34 Thus, Pioneer
filed this Petition.

Pioneer submits that its Petition falls under the exceptions to the general rule that petitions for
review may raise only questions of law.35 Pioneer raises conflicting findings and conclusions
by the lower courts regarding solidary liability, and misapprehension of facts by the Court of
Appeals.36

Pioneer argues that "the individual respondents were, at the very least, grossly negligent in
running the affairs of respondent Morning Star by knowingly allowing it to amass huge debts
to [International Air Transport Association] despite its financial distress, thus, giving sufficient
ground for the court to pierce the corporate veil and hold said individual respondents
personally liable."37 It cites Section 31 of the Corporation Code on the liability of directors
"guilty of gross negligence or bad faith in directing the affairs of the corporation[.]" 38

Pioneer also cites jurisprudence39 on the requisites for the doctrine of piercing the corporate
veil to apply.40 It submits that all requisites are present, thus, the individual respondents
should be held solidarily liable with Morning Star.41 It cites at length the testimony of its
witness Atty. Vincenzo Nonato M. Taggueg (Atty. Taggueg)42 that based on Morning Star’s
General Information Sheet and financial statements, Morning Star "has been accumulating
losses as early as 1998 continuing to 1999 and 2000 resulting to a deficit of
Php26,168,1768.00 [sic] as of December 31, 2000[.]"43

Pioneer contends that the abnormally large indebtedness to International Air Transport
Association was incurred in fraud and bad faith, with Morning Star having no intention to pay
its debt.44 It cites Oria v. McMicking45 on the badges of fraud.46 Pioneer then enumerates "the
unmistakable badges of fraud and deceit committed by individual respondents"47 such as the
fact that Morning Star had no assets,48 but the two corporations also "controlled and managed
by the individual respondents were doing relatively well [at] the time . . . Morning Star was
incurring huge losses[.]"49 Moreover, a new travel agency called Morning Star Tour Planners,
Inc. now operates at the Morning Star’s former principal place of business in Pedro Gil,
Manila, with the children of individual respondents as its stockholders, directors, and
officers.50

Respondents counter with the general rule clothing corporations with personality separate
and distinct from their officers and stockholders.51 They submit that "[m]ere sweeping
allegations that officers acted in bad faith because it incurred obligations it cannot pay will not
hold any water."52 Respondents argue that Pioneer failed to prove bad faith, relying only on
Atty. Taggueg’s testimony, but "Mr. Taggueg admitted that his knowledge about the
defendant Morning Star was merely based on his assumptions and his examination of the
[Securities and Exchange Commission] documents."53

The issues for resolution are:

First, whether this case involves an exception to the general rule that petitions for review are
limited to questions of law; and

Second, whether the doctrine of piercing the corporate veil applies to hold the individual
respondents solidarily liable with respondent Morning Star Travel and Tours, Inc. to pay the
award in favor of petitioner Pioneer Insurance & Surety Corporation.

Only questions of law may be raised in a petition for review.54 Factual findings of the Court of
Appeals are generally "final and conclusive, and cannot be reviewed on appeal by [this court],
provided they are borne out by the record or based on substantial evidence." 55

Issues such as whether the separate and distinct personality of a corporation was used for
fraudulent ends, or whether the evidence warrants a piercing of the corporate veil, involve
questions of fact.56

Jurisprudence established exceptions from the general rule against a factual review by this
court. These exceptions include cases when the judgment appears to be based on a "patent
misappreciation of facts."57

Petitioner invokes this exception in alleging that "the conflicting findings and conclusions
between the Court of Appeals and the trial court insofar as the solidary liability of respondents
to pay petitioner and the misapprehensions of facts by the Court of Appeals constrains
petitioner to raise both questions of fact and law in the Petition."58

In ruling against the solidary liability of the individual respondents with respondent Morning
Star, the Court of Appeals discussed that "the trial court merely stated in the dispositive
portion thereof that Defendants- Appellants are ordered to pay Plaintiff-Appellee jointly and
severally the judgment award without discussing in the body of the decision the reason for
such conclusion."59

The Court of Appeals then enumerated the exceptional circumstances warranting solidary
liabilities by corporate agents based on jurisprudence, and found none to be present in this
case.60

We affirm the Court of Appeals.

II

The law vests corporations with a separate and distinct personality from those that represent
these corporations.61

The corporate legal structure draws its "economic superiority"62 from key features such as a
separate corporate personality. Unlike other business associations such as partnerships, the
corporate framework encourages investment by allowing even small capital contributors to be
part of a big business endeavor made possible by the aggregation of their capital funds. 63 The
consequent limited liability feature, since corporate assets will answer for corporate debts,
also proves attractive for investors. However, this legal structure should not be abused.
A separate corporate personality shields corporate officers acting in good faith and within their
scope of authority from personal liability except for situations enumerated by law and
jurisprudence,64 thus:

Personal liability of a corporate director, trustee or officer along (although not necessarily)
with the corporation may so validly attach, as a rule, only when —

‘1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;

‘2. He consents to the issuance of watered stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;

‘3. He agrees to hold himself personally and solidarily liable with the corporation; or

‘4. He is made, by a specific provision of law, to personally answer for his corporate
action.’65

The first exception comes from Section 31 of the Corporation Code:

SECTION 31. Liability of Directors, Trustees or Officers. —

Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in directing the affairs
of the corporation or acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other
persons. (Emphasis supplied)

Petitioner imputes gross negligence and bad faith on the part of the individual respondents for
incurring the huge indebtedness to International Air Transport Association. 66

Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, not simply bad judgment or negligence."67 "[I]t means breach of a known duty through
some motive or interest or ill will; it partakes of the nature of fraud."68

The trial court gave weight to its finding that respondent Morning Star still availed itself of
loans and/or obligations with International Air Transport Association despite its financial
standing of operating at a loss:

Based on the plaintiff’s examination of the financial statements submitted by the defendant
Morning Star with the Securities and Exchange Commission (SEC) for the years 2000 and
2001 with comparative figures for the years ending 1998, 1999 and 2000, herein defendant
corporation has been accumulating losses as early as 1998 continuing to 1999 and 2000
resulting to a deficit of Php26, 168,176.80 as of December 31, 2000. It was also shown that
for the prior years of 1998 and 1999, defendant Morning Star incurred a deficit of
Php3,910,763.00 as of December 31, 1998 and Php2,841,626.00 as of December 31, 1999
and in the Balance Sheet, it indicated therein the defendants’ total assets of
Php150,579,421.00 while the total liabilities amounted to Php160,222,966.00, thereby making
the defendant Morning Star insolvent. Despite the fact that defendant Morning Star was
already incurring losses as early as 1998 up to the year 2000, the latter still
contracted loans and/or obligations with IATA sometime in 2002 and which
indebtedness ballooned to the huge amount of Php109,728,051.00 andUS$496,403.21
as of April 30, 2003, which obviously it could not pay considering its financial standing.
Further investigation by the plaintiff shows that it could not find any assets or properties in the
name of defendant Morning Star because even the land and the building where it held office
was registered in the name of "Morning Star Management Ventures Corporation", as
evidenced by the certified true copies of the transfer certificates of title (TCT) nos. 192243
and 192244 in the name of Morning Star Management Ventures Corporation and unlike the
defendant Morning Star, which has practically the same officers and members of the Board,
has only an asset of Php125,392,960.00 and liabilities of Php4,306,702[.]00 and an income
deficit of Php26,922,598.00 as of December 31, 2001. Similarly, the Pic [‘]N Pac Mart, Inc.,
which has the same set of officers, said corporation has shown a total assets of
Php5,423,201.30 and liabilities/stockholders equity of Php5,423,201.30 but with a retained
earnings of Php194,412[.]74 as of December 31, 1999. Plaintiff contends that in such a
case, defendant Morning Star has used the separate and distinct corporate personality
accorded to it under the Corporation Code to commit said fraudulent transaction of
incurring corporate debts and allow the herein individual defendants to escape
personal liability and placing the assets beyond the reach of the
creditors.69 (Emphasis supplied, citations omitted)

On the other hand, the Court of Appeals ruled that the general rule on separate corporate
personality and against personal liability by corporate officers applies since petitioner failed to
prove bad faith amounting to fraud by the corporate officers:

The mere fact that Morning Star has been incurring huge losses and that it has no assets at
the time it contracted large financial obligations to IATA, cannot be considered that its officers,
Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and
Wong Yan Tak, acted in bad faith or such circumstance would amount to fraud, warranting
personal and solidary liability of its corporate officers. The same is also true with the fact that
Morning Star Management Ventures Corporation and Pic ‘N Pac Mart, Inc., corporations
having the same set of officers as Morning Star, were doing relatively well during the time that
the former incurred huge losses. Thus, only Morning Star should be held personally liable to
Plaintiff- Appellee, and not its corporate officers.70

Piercing the corporate veil in order to hold corporate officers personally liable for the
corporation’s debts requires that "the bad faith or wrongdoing of the director must be
established clearly and convincingly [as] [b]ad faith is never presumed."71

III

Oria v. McMicking72 enumerates several badges of fraud. Petitioner argues the existence of
the fourth to sixth badges:73

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending
against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when
he is insolvent or greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are
present other of the above circumstances.

7. The failure of the vendee to take exclusive possession of all the

property.74 (Emphasis supplied)
Petitioner listed the following circumstances as constituting badges of fraud by the individual
respondents:

Attention is drawn to the following badges of fraud by individual respondents to use the
corporate fiction of respondent Morning Star as a veil or cloak to insulate themselves from
any liability to pay its indebtedness to [sic], to wit:

a. As members of the Board of Directors and at the same time, officers of respondent
Morning Star, individual respondents Estelita Co Wong (President and Member of the
Board), Benny H. Wong (Chairman of the Board), Arsenio Chua (Member of the
Board), Sonny Chua (Secretary and Member of the Board) and Wong Yan Tak
(Treasurer and Member of the Board) undoubtedly exercised complete control and
direction of the financial management and business operations of respondent
Morning Star;

b. Similarly, the individual respondents are likewise in direct control of the

management of two other corporations, Morning Star Management Ventures Corp.
and Pic ‘N Pac Mart[,] Inc., being the shareholders, members of the Board and
officers of the said corporations, as evidenced by the General Information Sheets
(GIS) of the said corporations filed with the Securities and Exchange Commission
(Exhibits "O" to "O-4" and "P" to "P-3" of petitioner’s Formal Offer of Evidence dated
August 15, 2007);

c. Respondent Morning Star has no assets or property in its name that may be levied
upon for attachment and execution to secure and to satisfy any judgment debt, as in
fact the land and building where its offices can be found and situated at J. Bocobo
Street cor. Pedro Gil Street, Ermita Manila is not even registered in its name but in
the name of another corporation "Morning Star Management Ventures Corporation"
which is similarly owned and controlled by the individual respondents (Exhibits "S" to
"S-2" and "T" to "T-2" of petitioner’s Formal Offer of Evidence dated August 15,
2007);

d. As early as 1998, respondent Morning Star had already been incurring huge losses
which clearly show the inability to pay its obligations to IATA but the individual
respondents contracted its huge financial obligations from IATA knowing fully well
that respondent Morning Star will be unable to pay such obligations;

e. Strangely, on the other hand, Pic ‘N Pac Mart, Inc. and Morning Star Management
Ventures Corp., the other two (2) corporations similarly controlled and managed by
the individual respondents, were doing relatively well during the time that respondent
Morning Star was incurring huge losses (Exhibits "U" to "U-7" and "V" to "V-9" of
petitioner’s Formal Offer of Evidence dated August 15, 2007);

f. Individual respondents allowed the indebtedness of respondent Morning Star to

balloon to a staggering amount of Php100,479,171.59 and
US$457,834.14[.]75 (Citations omitted)

This court finds that petitioner was not able to clearly and convincingly establish bad faith by
the individual respondents, nor substantiate the alleged badges of fraud.1avvphi1

IV

First, petitioner failed to substantiate the fourth badge of fraud on "[e]vidence of large
indebtedness or complete insolvency."76

In 1993, International Air Transport Association appointed respondent Morning Star as an

accredited travel agent with the privilege of getting air tickets on credit, and they entered a
Passenger Sales Agency Agreement.77 None of the parties made allegations on the financial
status or business standing of respondent Morning Star during the first five years from its
accreditation in 1993.

Petitioner relies on Atty. Taggueg’s testimony regarding respondent Morning Star’s financial
statements with the Securities and Exchange Commission.

Atty. Taggueg testified on the comparative figures for the years ended 1998, 1999, and 2000
and how the company was "accumulating losses as early as 1998 continuing to 1999 and
2000 resulting to a deficit of Php26,168,1768.00 [sic] as of December 31, 2000 . . . deficit of
Php3,910,763.00 as of December 31, 1998 and another deficit of Php2,841,626.00 as of
December 31, 1999[.]"78 He testified that as of December 31, 2000, respondent Morning Star
had total assets of Php150,579,421.00 and total liabilities of Php160,222,966.00. 79

Atty. Taggueg then testified that despite this insolvency, "Morning Star Travel still contracted
loans and/or obligations from the IATA sometime in December 2002 which indebtedness with
IATA ballooned to the huge amount of Php109,728,051.00 and US$496,403.21 as of April 30,
2003[.]"80

Petitioner did not present Securities and Exchange Commission documents on respondent
Morning Star’s total assets as of December 2002.1a\^/phi1 It did not present respondent
Morning Star’s financial statements for December 2002, the year it incurred obligations from
International Air Transport Association.81

The financial statements for years 1998 to 1999 and 1999 to 2000 testified on by Atty.
Taggueg are not representative of the financial status of respondent Morning Star’s business.
Year 2000 reflected total assets of P150,579,421.00 and total liabilities of
P160,222,966.00.82 On the other hand, year 1999 showed total assets of P134,361,353.00
and total liabilities of P120,678,345.00.83 Businesses may earn profits in some years and
operate at a loss in others as a result of changing economic conditions. These two financial
statements do not show that respondent Morning Star was operating at a loss in 2002.
Deficits in the years 1998 to 2000 do not necessarily mean deficits in 2002. It is unclear if
these figures included previous obligations to International Air Transport Association, or
whether some or all of such obligations were paid in subsequent years as an indication of
respondent Morning Star’s credit history.

In any event, it is in the nature of businesses to take risks when making business judgments,
and this includes taking loans and incurring liabilities.

Atty. Taggueg’s association with respondent Morning Star, or this case, is also unclear.
Respondents submit in their memorandum that "[i]n his testimony[,] Mr. Taggueg admitted
that his knowledge about . . . Morning Star was merely based on his assumptions and his
examination of the [Securities and Exchange Commission] documents."84

Petitioner’s reliance on Atty. Taggueg’s testimony on respondentMorning Star’s financial

statements for previous years fails to clearly and convincingly establish bad faith by the
individual respondents.

Second, petitioner failed to substantiate the fifth badge of fraud on the "transfer of all or nearly
all of his property by a debtor, especially when he is insolvent or greatly embarrassed
financially."85

Mere allegations that Morning Star Management Ventures Corporation and Pic ‘N Pac Mart,
Inc. "were doing relatively well during the time that respondent Morning Star was incurring
huge losses"86 do not establish bad faith or fraud by the individual respondents. Such
allegations alone do not prove that the individual respondents were transferring respondent
Morning Star’s properties in fraud of its creditors.
Neither does the allegation that Morning Star Management Ventures Corporation has title
over the land and building where the offices can be found establish bad faith or fraud.
Petitioner did not show that this title was originally in respondent Morning Star’s name and
was later transferred to respondent Morning Star.

This court has held that the "existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate fiction in the absence of
fraud or other public policy considerations."87

VI

Third, petitioner also failed to substantiate the sixth badge of fraud that "the transfer is made
between father and son, when there are present other of the above circumstances." 88

Petitioner submits that:

It would be the height of injustice to allow individual respondents to get away with their gross
negligence to the prejudice of petitioner, especially since there is now another travel agency
in the name of Morning Star Tour Planners, Inc. operating at the respondent Morning Star’s
former principal place of business at 1600 J. Bocobo St. corner Pedro Gil Malate, Manila. . . .

....

Curiously, among the stockholders, directors and officers of Morning Star Tour Planners, Inc.,
are the following: Belinda Wong, Billy Wong, Barbara C. Wong and Benny C. Wong, Jr., who
all have the same address as individual respondents Estelita Co Wong and Benny H. Wong.

Given, these vital pieces of information, it is at once indubitable that respondents have
established another travel agency in the name of their children in order to escape their
solidary liability to petitioner!89 (Citation omitted)

This court has held that "compliance with the recognized modes of acquisition of jurisdiction
cannot be dispensed with even in piercing the veil of corporate fiction[.]" 90 Morning Star Tour
Planners, Inc. is not a party in this case. It would offend due process rights if what petitioner
ultimately seeks in its allegation is to hold Morning Star Tour Planners, Inc. responsible for
respondent Morning Star’s liability.

In any event, petitioner failed to plead and prove the circumstances that would pass the
following control test for the operation of the alter ego doctrine:

(1) Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must [have] proximately caused the
injury or unjust loss complained of.91

The records do not show that the individual respondents controlled Morning Star Tour
Planners, Inc. and that such control was used to commit fraud against petitioner. Neither does
this suspicion support petitioner’s position that the individual respondents were in bad faith or
gross negligence in directing the affairs of respondent Morning Star.
Finally, pursuant to this court's pronouncement in Nacar v. Gallery Frames,92 the interest rate
should be 6% per annum on the amount owing to petitioner representing respondent Morning
Star's unpaid air transport tickets availed on credit.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision is AFFIRMED with
MODIFICATION in that legal interest is 6% per annum from September 23, 2003 until fully
paid.

SO ORDERED.
CLASSIFICATION OF PIERCING CASES; ELEMENTS

THIRD DIVISION

G.R. No. 198967, March 07, 2016

JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P.

USON, Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules
of Court seeking to annul and set aside the Court of Appeals Decision 1 dated June
8, 2011 and Resolution2 dated October 7, 2011 in CA G.R. SP No. 115485, which
affirmed in toto the decision of the National Labor Relations Commission (NLRC).

The facts of the case follow.

On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment
with Royal Class Venture Phils., Inc. (Royal Class Venture) as an accounting
clerk.3 Eventually, he was promoted to the position of accounting supervisor, with
a salary of Php13,000.00 a month, until he was allegedly dismissed from
employment on December 20, 2000.4

On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1,
Dagupan City, of the NLRC a Complaint for Illegal Dismissal, with prayers for
backwages, reinstatement, salaries and 13thmonth pay, moral and exemplary
damages and attorney's fees against Royal Class Venture. 5

Royal Class Venture did not make an appearance in the case despite its receipt of
summons.6

On May 15, 2001, Uson filed his Position Paper7 as complainant.

On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision 8 in favor
of the complainant Uson and ordering therein respondent Royal Class Venture to
reinstate him to his former position and pay his backwages, 13 th month pay as
well as moral and exemplary damages and attorney's fees.

Royal Class Venture, as the losing party, did not file an appeal of the
decision.9 Consequently, upon Uson's motion, a Writ of Execution10 dated
February 15, 2002 was issued to implement the Labor Arbiter's decision.

On May 17, 2002, an Alias Writ of Execution 11 was issued. But with the judgment
still unsatisfied, a Second Alias Writ of Execution 12 was issued on September 11,
2002.

Again, it was reported in the Sheriff's Return that the Second Alias Writ of
Execution dated September 11, 2002 remained "unsatisfied." Thus, on November
14, 2002, Uson filed a Motion for Alias Writ of Execution and to Hold Directors
and Officers of Respondent Liable for Satisfaction of the Decision. 13 The motion
quoted from a portion of the Sheriffs Return, which states:
chanRoblesvirtualLawlibrary
On September 12, 2002, the undersigned proceeded at the stated present
business office address of the respondent which is at Minien East, Sta. Barbara,
Pangasinan to serve the writ of execution. Upon arrival, I found out that the
establishment erected thereat is not [in] the respondent's name but JOEL and
SONS CORPORATION, a family corporation owned by the Guillermos of which,
Jose Emmanuel F. Guillermo the General Manager of the respondent, is one of the
stockholders who received the writ using his nickname "Joey," [and who]
concealed his real identity and pretended that he [was] the brother of Jose, which
[was] contrary to the statement of the guard-on-duty that Jose and Joey [were]
one and the same person. The former also informed the undersigned that the
respondent's (sic) corporation has been dissolved.

On the succeeding day, as per [advice] by the [complainant's] counsel that the
respondent has an account at the Bank of Philippine Islands Magsaysay Branch,
A.B. Fernandez Ave., Dagupan City, the undersigned immediately served a notice
of garnishment, thus, the bank replied on the same day stating that the
respondent [does] not have an account with the
branch.14ChanRoblesVirtualawlibrary
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an
Order15 granting the motion filed by Uson. The order held that officers of a
corporation are jointly and severally liable for the obligations of the corporation to
the employees and there is no denial of due process in holding them so even if
the said officers were not parties to the case when the judgment in favor of the
employees was rendered.16Thus, the Labor Arbiter pierced the veil of corporate
fiction of Royal Class Venture and held herein petitioner Jose Emmanuel Guillermo
(Guillermo), in his personal capacity, jointly and severally liable with the
corporation for the enforcement of the claims of Uson.17

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To

Set Aside the Order of December 26, 2002.18 The same, however, was not
granted as, this time, in an Order dated November 24, 2003, Labor Arbiter Niña
Fe S. Lazaga-Rafols sustained the findings of the labor arbiters before her and
even castigated Guillenno for his unexplained absence in the prior proceedings
despite notice, effectively putting responsibility on Guillermo for the case's
outcome against him.19

On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above

Order,20 but the same was promptly denied by the Labor Arbiter in an Order
dated January 7, 2004.21

On January 26, 2004, Uson filed a Motion for Alias Writ of Execution, 22 to which
Guillermo filed a Comment and Opposition on April 2, 2004.23

On May 18, 2004, the Labor Arbiter issued an Order 24 granting Uson's Motion for
the Issuance of an Alias Writ of Execution and rejecting Guillermo's arguments
posed in his Comment and Opposition.

Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal

with Prayer for a (Writ of) Preliminary Injunction dated June 10, 2004. 25cralawred

In a Decision26 dated May 11, 2010, the NLRC dismissed Guillermo's appeal and
denied his prayers for injunction.

On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of
Appeals, assailing the NLRC decision.
On June 8, 2011, the Court of Appeals rendered its assailed Decision 28 which
denied Guillermo's petition and upheld all the findings of the NLRC.

The appellate court found that summons was in fact served on Guillermo as
President and General Manager of Royal Class Venture, which was how the Labor
Arbiter acquired jurisdiction over the company.29 But Guillermo subsequently
refused to receive all notices of hearings and conferences as well as the order to
file Royal Class Venture's position paper.30 Then, it was learned during execution
that Royal Class Venture had been dissolved. 31 However, the Court of Appeals
held that although the judgment had become final and executory, it may be
modified or altered "as when its execution becomes impossible or unjust." 32 It
also noted that the motion to hold officers and directors like Guillermo personally
liable, as well as the notices to hear the same, was sent to them by registered
mail, but no pleadings were submitted and no appearances were made by anyone
of them during the said motion's pendency. 33 Thus, the court held Guillermo
liable, citing jurisprudence that hold the president of the corporation liable for the
latter's obligation to illegally dismissed employees.34 Finally, the court dismissed
Guillermo's allegation that the case is an intra-corporate controversy, stating that
jurisdiction is determined by the allegations in the complaint and the character of
the relief sought.35

From the above decision of the appellate court, Guillermo filed a Motion for
Reconsideration36 but the same was again denied by the said court in the assailed
Resolution37 dated October 7, 2011.

Hence, the instant petition.

Guillermo asserts that he was impleaded in the case only more than a year after
its Decision had become final and executory, an act which he claims to be
unsupported in law and jurisprudence. 38 He contends that the decision had
become final, immutable and unalterable and that any amendment thereto is null
and void.39 Guillermo assails the so-called "piercing the veil" of corporate fiction
which allegedly discriminated against him when he alone was belatedly impleaded
despite the existence of other directors and officers in Royal Class Venture. 40 He
also claims that the Labor Arbiter has no jurisdiction because the case is one of
an intra-corporate controversy, with the complainant Uson also claiming to be a
stockholder and director of Royal Class Venture.41

In his Comment,42 Uson did not introduce any new arguments but merely
cited verbatim the disquisitions of the Court of Appeals to counter Guillermo's
assertions in his petition.

To resolve the case, the Court must confront the issue of whether an officer of a
corporation may be included as judgment obligor in a labor case for the first time
only after the decision of the Labor Arbiter had become final and executory, and
whether the twin doctrines of "piercing the veil of corporate fiction" and personal
liability of company officers in labor cases apply.

The petition is denied.

In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C.
Ransom Labor Union-CCLU v. NLRC,44 persons who were not originally impleaded
in the case were, even during execution, held to be solidarity liable with the
employer corporation for the latter's unpaid obligations to complainant-
employees. These included a newly-formed corporation which was considered a
mere conduit or alter ego of the originally impleaded corporation, and/or the
officers or stockholders of the latter corporation.45 Liability attached, especially to
the responsible officers, even after final judgment and during execution, when
there was a failure to collect from the employer corporation the judgment debt
awarded to its workers.46 In Naguiat v. NLRC,47 the president of the corporation
was found, for the first time on appeal, to be solidarily liable to the dismissed
employees. Then, in Reynoso v. Court of Appeals,48 the veil of corporate fiction
was pierced at the stage of execution, against a corporation not previously
impleaded, when it was established that such corporation had dominant control of
the original party corporation, which was a smaller company, in such a manner
that the latter's closure was done by the former in order to defraud its creditors,
including a former worker.

The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have
since been tempered, at least in the aspects of the lifting of the corporate veil and
the assignment of personal liability to directors, trustees and officers in labor
cases. The subsequent cases of McLeod v. NLRC,49Spouses Santos v.
NLRC50 and Carag v. NLRC,51 have all established, save for certain exceptions, the
primacy of Section 3152 of the Corporation Code in the matter of assigning such
liability for a corporation's debts, including judgment obligations in labor cases.
According to these cases, a corporation is still an artificial being invested by law
with a personality separate and distinct from that of its stockholders and from
that of other corporations to which it may be connected.53 It is not in every
instance of inability to collect from a corporation that the veil of corporate fiction
is pierced, and the responsible officials are made liable. Personal liability attaches
only when, as enumerated by the said Section 31 of the Corporation Code, there
is a wilfull and knowing assent to patently unlawful acts of the corporation, there
is gross negligence or bad faith in directing the affairs of the corporation, or there
is a conflict of interest resulting in damages to the corporation. 54 Further, in
another labor case, Pantranco Employees Association (PEA-PTGWO), et al. v.
NLRC, et al.,55 the doctrine of piercing the corporate veil is held to apply only in
three (3) basic areas, namely: ( 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing obligation; (2)
fraud cases or when the corporate entity is used to justify a wrong, protect fraud,
or defend a crime; or (3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation. In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities.56 Indeed, in Reahs Corporation v.
NLRC,57 the conferment of liability on officers for a corporation's obligations to
labor is held to be an exception to the general doctrine of separate personality of
a corporation.

It also bears emphasis that in cases where personal liability attaches, not even all
officers are made accountable. Rather, only the "responsible officer," i.e., the
person directly responsible for and who "acted in bad faith" in committing the
illegal dismissal or any act violative of the Labor Code, is held solidarily liable, in
cases wherein the corporate veil is pierced. 58 In other instances, such as cases of
so-called corporate tort of a close corporation, it is the person "actively engaged"
in the management of the corporation who is held liable. 59 In the absence of a
clearly identifiable officer(s) directly responsible for the legal infraction, the Court
considers the president of the corporation as such officer. 60

The common thread running among the aforementioned cases, however, is that
the veil of corporate fiction can be pierced, and responsible corporate directors
and officers or even a separate but related corporation, may be impleaded and
held answerable solidarily in a labor case, even after final judgment and on
execution, so long as it is established that such persons have deliberately used
the corporate vehicle to unjustly evade the judgment obligation, or have resorted
to fraud, bad faith or malice in doing so. When the shield of a separate corporate
identity is used to commit wrongdoing and opprobriously elude responsibility, the
courts and the legal authorities in a labor case have not hesitated to step in and
shatter the said shield and deny the usual protections to the offending party,
even after final judgment. The key element is the presence of fraud, malice or
bad faith. Bad faith, in this instance, does not connote bad judgment or
negligence but imports a dishonest purpose or some moral obliquity and
conscious doing of wrong; it means breach of a known duty through some motive
or interest or ill will; it partakes of the nature of fraud. 61

As the foregoing implies, there is no hard and fast rule on when corporate fiction
may be disregarded; instead, each case must be evaluated according to its
peculiar circumstances.62 For the case at bar, applying the above criteria, a
finding of personal and solidary liability against a corporate officer like Guillermo
must be rooted on a satisfactory showing of fraud, bad
faith or malice, or the presence of any of the justifications for disregarding the
corporate fiction. As stated in McLeod,63 bad faith is a question of fact and is
evidentiary, so that the records must first bear evidence of malice before a
finding of such may be made.

It is our finding that such evidence exists in the record. Like the A. C. Ransom,
and Naguiat cases, the case at bar involves an apparent family corporation. As in
those two cases, the records of the present case bear allegations and evidence
that Guillermo, the officer being held liable, is the person responsible in the actual
running of the company and for the malicious and illegal dismissal of the
complainant; he, likewise, was shown to have a role in dissolving the original
obligor company in an obvious "scheme to avoid liability" which jurisprudence has
always looked upon with a suspicious eye in order to protect the rights of labor. 64

Part of the evidence on record is the second page of the verified Position Paper of
complainant (herein respondent) Crisanto P. Uson, where it was clearly alleged
that Uson was "illegally dismissed by the President/General Manager of
respondent corporation (herein petitioner) Jose Emmanuel P. Guillermo when
Uson exposed the practice of the said President/General Manager of dictating and
undervaluing the shares of stock of the corporation."65 The statement is proof
that Guillermo was the responsible officer in charge of running the company as
well as the one who dismissed Uson from employment. As this sworn allegation is
uncontroverted - as neither the company nor Guillermo appeared before the
Labor Arbiter despite the service of summons and notices - such stands as a fact
of the case, and now functions as clear evidence of Guillermo's bad faith in his
dismissal of Uson from employment, with the motive apparently being anger at
the latter's reporting of unlawful activities.

Then, it is also clearly reflected in the records that it was Guillermo himself, as
President and General Manager of the company, who received the summons to
the case, and who also subsequently and without justifiable cause refused to
receive all notices and orders of the Labor Arbiter that followed. 66This makes
Guillermo responsible for his and his company's failure to participate in the entire
proceedings before the said office. The fact is clearly narrated in the Decision and
Orders of the Labor Arbiter, Uson's Motions for the Issuance of Alias Writs of
Execution, as well as in the Decision of the NLRC and the assailed Decision of the
Court of Appeals,67 which Guillermo did not dispute in any of his belated motions
or pleadings, including in his petition for certiorari before the Court of Appeals
and even in the petition currently before this Court.68 Thus, again, the same now
stands as a finding of fact of the said lower tribunals which binds this Court and
which it has no power to alter or revisit.69 Guillermo's knowledge of the case's
filing and existence and his unexplained refusal to participate in it as the
responsible official of his company, again is an indicia of his bad faith and
malicious intent to evade the judgment of the labor tribunals.

Finally, the records likewise bear that Guillermo dissolved Royal Class Venture
and helped incorporate a new firm, located in the same address as the former,
wherein he is again a stockl1older. This is borne by the Sherif11s Return which
reported: that at Royal Class Venture's business address at Minien East, Sta.
Barbara, Pangasinan, there is a new establishment named "Joel and Sons
Corporation," a family corporation owned by the Guillermos in which Jose
Emmanuel F. Guillermo is again one of the stockholders; that Guillermo received
the writ of execution but used the nickname "Joey" and denied being Jose
Emmanuel F. Guillermo and, instead, pretended to be Jose's brother; that the
guard on duty confirmed that Jose and Joey are one and the same person; and
that the respondent corporation Royal Class Venture had been dissolved. 70 Again,
the facts contained in the Sheriffs Return were not disputed nor controverted by
Guillermo, either in the hearings of Uson's Motions for Issuance of Alias Writs of
Execution, in subsequent motions or pleadings, or even in the petition before this
Court. Essentially, then, the facts form part of the records and now stand as
further proof of Guillermo's bad faith and malicious intent to evade the judgment
obligation.

The foregoing clearly indicate a pattern or scheme to avoid the obligations to

Uson and frustrate the execution of the judgment award, which this Court, in the
interest of justice, will not countenance.

As for Guillermo's assertion that the case is an intra-corporate controversy, the

Court sustains the finding of the appellate court that the nature of an action and
the jurisdiction of a tribunal are determined by the allegations of the complaint at
the time of its filing, irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein. 71 Although Uson is also a
stockholder and director of Royal Class Venture, it is settled in jurisprudence that
not all conflicts between a stockholder and the corporation are intra-corporate; an
examination of the complaint must be made on whether the complainant is
involved in his capacity as a stockholder or director, or as an employee.72 If the
latter is found and the dispute does not meet the test of what qualities as an
intra-corporate controversy, then the case is a labor case cognizable by the NLRC
and is not within the jurisdiction of any other tribunal. 73In the case at bar, Uson's
allegation was that he was maliciously and illegally dismissed as an Accounting
Supervisor by Guillermo, the Company President and General Manager, an
allegation that was not even disputed by the latter nor by Royal Class Venture. It
raised no intra-corporate relationship issues between him and the corporation or
Guillermo; neither did it raise any issue regarding the regulation of the
corporation. As correctly found by the appellate court, Uson's complaint and
redress sought were centered alone on his dismissal as an employee, and not
upon any other relationship he had with the company or with Guillermo. Thus, the
matter is clearly a labor dispute cognizable by the labor tribunals.chanrobleslaw

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated June
8, 2011 and Resolution dated October 7, 2011 in CA G.R. SP No. 115485
are AFFIRMED.

SO ORDERED.cralawlawlibrary
PARI DELICTO DOCTRINE

G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN,
EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern
Lumber and Commercial Co., Inc.,respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed
and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber business to carry on as
general contractors, operators and managers, etc. Attached to the article was an affidavit of
the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with
certain properties transferred to the corporation described in a list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded
to do business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the
Securities and Exchange Commissioner, for the issuance of the corresponding certificate of
incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid
governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case numbered
381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the
Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished
to have it dissolved because of bitter dissension among the members, mismanagement and
fraud by the managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the
company; and at the request of plaintiffs, appointed of the properties thereof, upon the filing of
a P20,000 bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge
of the receiver, but the respondent judge refused to accept the offer and to discharge the
receiver. Whereupon, the present special civil action was instituted in this court. It is based
upon two main propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the
company, because it being a de facto corporation, dissolution thereof may only be ordered in
a quo warranto proceeding instituted in accordance with section 19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed
that the Securities and Exchange Commission has not, so far, issued the corresponding
certificate of incorporation. All of them know, or sought to know, that the personality of a
corporation begins to exist only from the moment such certificate is issued — not before (sec.
11, Corporation Law). The complaining associates have not represented to the others that
they were incorporated any more than the latter had made similar representations to them.
And as nobody was led to believe anything to his prejudice and damage, the principle of
estoppel does not apply. Obviously this is not an instance requiring the enforcement of
contracts with the corporation through the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far
Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation
Law applies, and therefore the court had not jurisdiction to take cognizance of said civil case
number 381. Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a

corporation under this Act and its right to exercise corporate powers shall not be
inquired into collaterally in any private suit to which the corporation may be a party,
but such inquiry may be had at the suit of the Insular Government on information of
the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having
obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even
its stockholders — may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of
a certificate of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim
is compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply
with the law the claim to be a corporation "under this act" could not be made "in good
faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the
existence of a de jure corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for
dissolution;1 but that question does not affect the court's jurisdiction, and is a matter for
decision by the judge, subject to review on appeal. Whkch brings us to one principal reason
why this petition may not prosper, namely: the petitioners have their remedy by appealing the
order of dissolution at the proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be
admitted that receivership is proper in proceedings for dissolution of a company or
corporation, and it was no error to reject the counter-bond, the court having declared the
dissolution. As to the amount of the bond to be demanded of the receiver, much depends
upon the discretion of the trial court, which in this instance we do not believe has been clearly
abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.
PARI DELICTO DOCTRINE

G.R. No. 119002 October 19, 2000

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

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

DECISION

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through
its president private respondent Henri Kahn, wherein the former offered its services as a
travel agency to the latter.1 The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation
to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's
Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For
the tickets received, the Federation made two partial payments, both in September of 1989, in
the total amount of P176,467.50.2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand
letter requesting for the amount of P265,894.33.3 On 30 October 1989, the Federation,
through the Project Gintong Alay, paid the amount of P31,603.00.4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as
partial payment for the outstanding balance of the Federation. 5 Thereafter, no further
payments were made despite repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila.
Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and
impleaded the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn
liable for the unpaid balance for the tickets purchased by the Federation on the ground that
Henri Kahn allegedly guaranteed the said obligation.6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the
Federation owed the amount P207,524.20, representing the unpaid balance for the plane
tickets, he averred that the petitioner has no cause of action against him either in his personal
capacity or in his official capacity as president of the Federation. He maintained that he did
not guarantee payment but merely acted as an agent of the Federation which has a separate
and distinct juridical personality.7

On the other hand, the Federation failed to file its answer, hence, was declared in default by
the trial court.8

In due course, the trial court rendered judgment and ruled in favor of the petitioner and
declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at
the said ruling, the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly
established that defendant Federation is a corporation. The trouble, however, is that neither
the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate
existence of the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that
"Defendant Philippine Football Federation is a sports association xxx." This has not been
denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation,
its corporate existence is within the personal knowledge of defendant Henri Kahn. He could
have easily denied specifically the assertion of the plaintiff that it is a mere sports association,
if it were a domestic corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to enter into,
or to ratify, a contract. The contract entered into by its officers or agents on behalf of such
association is not binding on, or enforceable against it. The officers or agents are themselves
personally liable.

x x x9

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the
principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5,
1990, the date the complaint was filed, until the principal obligation is fully liquidated; and
another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims
of the defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994,
the respondent court rendered a decision reversing the trial court, the decretal portion of said
decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and
SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S.
Kahn.11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the
Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the same as said entity has a
separate and distinct personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the
Federation be held liable for the unpaid obligation. The same was denied by the appellate
court in its resolution of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the
Philippine Football Federation is not a party to this appeal and consequently, no judgment
may be pronounced by this Court against the PFF without violating the due process clause,
let alone the fact that the judgment dismissing the complaint against it, had already become
final by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore
similarly DENIED.12

Petitioner now seeks recourse to this Court and alleges that the respondent court committed
the following assigned errors:13
 A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF)
AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS
HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE

RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF
THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND
CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL
PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT

PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT
EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE
FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the
Philippine Football Federation as a juridical person. In the assailed decision, the appellate
court recognized the existence of the Federation. In support of this, the CA cited Republic Act
3135, otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation,
and Presidential Decree No. 604 as the laws from which said Federation derives its
existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association
shall have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal,
for the accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation

with the executive committee;

xxx

13. To perform such other acts as may be necessary for the proper accomplishment
of their purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government
which shall be submitted to the Department and any amendment thereto shall take
effect upon approval by the Department: Provided, however, That no team, school,
club, organization, or entity shall be admitted as a voting member of an association
unless 60 per cent of the athletes composing said team, school, club, organization, or
entity are Filipino citizens;
 2. Raise funds by donations, benefits, and other means for their purpose subject to
the approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for
the accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and
Asian Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with
the Department;

xxx

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that
these entities may acquire a juridical personality. The power to purchase, sell, lease and
encumber property are acts which may only be done by persons, whether natural or artificial,
with juridical capacity. However, while we agree with the appellate court that national sports
associations may be accorded corporate status, such does not automatically take place by
the mere passage of these laws.

It is a basic postulate that before a corporation may acquire juridical personality, the State
must give its consent either in the form of a special law or a general enabling act. We cannot
agree with the view of the appellate court and the private respondent that the Philippine
Football Federation came into existence upon the passage of these laws. Nowhere can it be
found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation.
These laws merely recognized the existence of national sports associations and provided the
manner by which these entities may acquire juridical personality. Section 11 of R.A. 3135
provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association
shall be organized for each individual sports in the Philippines in the manner hereinafter
provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition
as a National Sports' Association shall be filed with the executive committee together with,
among others, a copy of the constitution and by-laws and a list of the members of the
proposed association, and a filing fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said
association will promote the purposes of this Act and particularly section three thereof. No
application shall be held pending for more than three months after the filing thereof without
any action having been taken thereon by the executive committee. Should the application be
rejected, the reasons for such rejection shall be clearly stated in a written communication to
the applicant. Failure to specify the reasons for the rejection shall not affect the application
which shall be considered as unacted upon: Provided, however, That until the executive
committee herein provided shall have been formed, applications for recognition shall be
passed upon by the duly elected members of the present executive committee of the
Philippine Amateur Athletic Federation. The said executive committee shall be dissolved upon
the organization of the executive committee herein provided: Provided, further, That the
functioning executive committee is charged with the responsibility of seeing to it that the
National Sports' Associations are formed and organized within six months from and after the
passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a

national sports association for each individual sport in the Philippines shall be filed with the
Department together with, among others, a copy of the Constitution and By-Laws and a list of
the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially
complied with the rules and regulations of the Department: Provided, That the Department
may withdraw accreditation or recognition for violation of this Decree and such rules and
regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall
have exclusive technical control over the development and promotion of the particular sport
for which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a
national sports association, such entity must be recognized by the accrediting organization,
the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth
and Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed
to substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn
attached to his motion for reconsideration before the trial court a copy of the constitution and
by-laws of the Philippine Football Federation. Unfortunately, the same does not prove that
said Federation has indeed been recognized and accredited by either the Philippine Amateur
Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule
that the Philippine Football Federation is not a national sports association within the purview
of the aforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the
unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal
in corporation law that any person acting or purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and becomes personally liable for contract
entered into or for other acts performed as such agent.14 As president of the Federation, Henri
Kahn is presumed to have known about the corporate existence or non-existence of the
Federation. We cannot subscribe to the position taken by the appellate court that even
assuming that the Federation was defectively incorporated, the petitioner cannot deny the
corporate existence of the Federation because it had contracted and dealt with the Federation
in such a manner as to recognize and in effect admit its existence. 15 The doctrine of
corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The
application of the doctrine applies to a third party only when he tries to escape liability on a
contract from which he has benefited on the irrelevant ground of defective incorporation.16 In
the case at bar, the petitioner is not trying to escape liability from the contract but rather is the
one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of
the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby
REINSTATED.

SO ORDERED.
PARI DELICTO DOCTRINE

G.R. No. 125221 June 19, 1997

REYNALDO M. LOZANO, petitioner,

vs.
HON. ELIEZER R. DE LOS SANTOS, Presiding Judge, RTC, Br. 58, Angeles City; and
ANTONIO ANDA, respondents.

PUNO, J.:

This petition for certiorari seeks to annul and set aside the decision of the Regional Trial
Court, Branch 58, Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat
and Magalang, Pampanga to dismiss Civil Case No. 1214 for lack of jurisdiction.

The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil
Case No. 1214 for damages against respondent Antonio Anda before the Municipal Circuit
Trial Court (MCTC), Mabalacat and Magalang, Pampanga. Petitioner alleged that he was the
president of the Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc.
(KAMAJDA) while respondent Anda was the president of the Samahang Angeles-Mabalacat
Jeepney Operators' and Drivers' Association, Inc. (SAMAJODA); in August 1995, upon the
request of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private
respondent agreed to consolidate their respective associations and form the Unified
Mabalacat-Angeles Jeepney Operators' and Drivers Association, Inc. (UMAJODA); petitioner
and private respondent also agreed to elect one set of officers who shall be given the sole
authority to collect the daily dues from the members of the consolidated association; elections
were held on October 29, 1995 and both petitioner and private respondent ran for president;
petitioner won; private respondent protested and, alleging fraud, refused to recognize the
results of the election; private respondent also refused to abide by their agreement and
continued collecting the dues from the members of his association despite several demands
to desist. Petitioner was thus constrained to file the complaint to restrain private respondent
from collecting the dues and to order him to pay damages in the amount of P25,000.00 and
attorney's fees of P500.00. 1

Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that
jurisdiction was lodged with the Securities and Exchange Commission (SEC). The MCTC
denied the motion on February 9, 1996. 2 It denied reconsideration on March 8, 1996. 3

Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58,
Angeles City. 4 The trial court found the dispute to be intracorporate, hence, subject to the
jurisdiction of the SEC, and ordered the MCTC to dismiss Civil Case No. 1214
accordingly. 5 It denied reconsideration on May 31, 1996. 6

Hence this petition. Petitioner claims that:

THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
AND SERIOUS ERROR OF LAW IN CONCLUDING THAT THE
SECURITIES AND EXCHANGE COMMISSION HAS JURISDICTION OVER
A CASE OF DAMAGES BETWEEN HEADS/PRESIDENTS OF TWO (2)
ASSOCIATIONS WHO INTENDED TO CONSOLIDATE/MERGE THEIR
ASSOCIATIONS BUT NOT YET [SIC] APPROVED AND REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION.7

The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of
Presidential Decree No. 902-A. Section 5 reads as follows:
 Sec. 5. . . . [T]he Securities and Exchange Commission [has] original and
exclusive jurisdiction to hear and decide cases involving:

(a) Devices or schemes employed by or any acts of the board of directors,

business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.

(b) Controversies arising out of intracorporate or partnership relations,

between and among stockholders, members or associates; between any 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 entity.

(c) Controversies in the election or appointment of directors, trustees, officers

or managers of such corporations, partnerships or associations.

(d) Petitions of corporations, partnerships or associations to be declared in

the state of suspension of payments in cases where the corporation,
partnership or association possesses sufficient property to cover all its debts
but foresees the impossibility of meeting them when they respectively fall due
or in cases where the corporation, partnership or association has no sufficient
assets to over its liabilities, but is under the management of a Rehabilitation
Receiver or Management Committee created pursuant to this Decree.

The grant of jurisdiction to the SEC must be viewed in the light of its nature and
function under the law. 8 This jurisdiction is determined by a concurrence of two
elements: (1) the status or relationship of the parties; and (2) the nature of the
question that is the subject of their controversy. 9

The first element requires that the controversy must arise out of intracorporate or partnership
relations between and among stockholders, members, or associates; between any 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 in so far as it concerns their individual franchises. 10 The second
element requires that the dispute among the parties be intrinsically connected with the
regulation of the corporation, partnership or association or deal with the internal affairs of the
corporation, partnership or association. 11 After all, the principal function of the SEC is the
supervision and control of corporations, partnership and associations with the end in view that
investments in these entities may be encouraged and protected, and their entities may be
encouraged and protected, and their activities pursued for the promotion of economic
development. 12

There is no intracorporate nor partnership relation between petitioner and private respondent.
The controversy between them arose out of their plan to consolidate their respective jeepney
drivers' and operators' associations into a single common association. This unified
association was, however, still a proposal. It had not been approved by the SEC, neither had
its officers and members submitted their articles of consolidation is accordance with Sections
78 and 79 of the Corporation Code. Consolidation becomes effective not upon mere
agreement of the members but only upon issuance of the certificate of consolidation by the
SEC. 13 When the SEC, upon processing and examining the articles of consolidation, is
satisfied that the consolidation of the corporations is not inconsistent with the provisions of the
Corporation Code and existing laws, it issues a certificate of consolidation which makes the
reorganization official. 14 The new consolidated corporation comes into existence and the
constituent corporations dissolve and cease to exist. 15
The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly
registered with the SEC, but these associations are two separate entities. The dispute
between petitioner and private respondent is not within the KAMAJDA nor the SAMAJODA. It
is between members of separate and distinct associations. Petitioner and private respondent
have no intracorporate relation much less do they have an intracorporate dispute. The SEC
therefore has no jurisdiction over the complaint.

The doctrine of corporation by estoppel 16 advanced by private respondent cannot override

jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of
the parties. 17 It cannot be acquired through or waived, enlarged or diminished by, any act or
omission of the parties, neither can it be conferred by the acquiescence of the court. 18

Corporation by estoppel is founded on principles of equity and is designed to prevent injustice

and unfairness. 19 It applies when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third person. Where there is no third
person involved and the conflict arises only among those assuming the form of a corporation,
who therefore know that it has not been registered, there is no corporation by estoppel. 20

IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the
order dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are set aside.
The Municipal Circuit Trial Court of Mabalacat and Magalang, Pampanga is ordered to
proceed with dispatch in resolving Civil Case No. 1214. No costs.

SO ORDERED.
ULTRA VIRES DOCTRINE

G.R. No. L-15092 May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

REYES, J.B.L., J.:

Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros,
in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel the defendant
Milling Company to increase plaintiff's share in the sugar produced from their cane, from 60%
to 62.33%, starting from the 1951-1952 crop year.1äwphï1.ñët

It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the

Limited co-partnership Gonzaga and Company, had been and are sugar planters adhered to
the defendant-appellee's sugar central mill under identical milling contracts. Originally
executed in 1919, said contracts were stipulated to be in force for 30 years starting with the
1920-21 crop, and provided that the resulting product should be divided in the ratio of 45% for
the mill and 55% for the planters. Sometime in 1936, it was proposed to execute amended
milling contracts, increasing the planters' share to 60% of the manufactured sugar and
resulting molasses, besides other concessions, but extending the operation of the milling
contract from the original 30 years to 45 years. To this effect, a printed Amended Milling
Contract form was drawn up. On August 20, 1936, the Board of Directors of the appellee
Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1) granting
further concessions to the planters over and above those contained in the printed Amended
Milling Contract. The bone of contention is paragraph 9 of this resolution, that reads as
follows:

ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936

xxx xxx xxx

Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta en

consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:

xxx xxx xxx

9.a Que si durante la vigencia de este contrato de Molienda Enmendado,

lascentrales azucareras, de Negros Occidental, cuya produccion anual de
azucar centrifugado sea mas de una tercera parte de la produccion total de
todas lascentrales azucareras de Negros Occidental, concedieren a sus
plantadores mejores condiciones que la estipuladas en el presente contrato,
entonces esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este Contrato
de Molienda Enmendado.

Appellants signed and executed the printed Amended Milling Contract on September 10,
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation —

Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado,
otorgado por — y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had already
granted increased participation (of 62.5%) to their planters, and that under paragraph 9 of the
resolution of August 20, 1936, heretofore quoted, the appellee had become obligated to grant
similar concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling
Co., inc., resisted the claim, and defended by urging that the stipulations contained in the
resolution were made without consideration; that the resolution in question was, therefore,
null and void ab initio, being in effect a donation that was ultra viresand beyond the powers of
the corporate directors to adopt.

After trial, the court below rendered judgment upholding the stand of the defendant Milling
company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.

We agree with appellants that the appealed decisions can not stand. It must be remembered
that the controverted resolution was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that it was approved on August 20,
1936, twenty-one days prior to the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the Milling Contract was executed, the concessions
granted by the disputed resolution had been already incorporated into its terms. No reason
appears of record why, in the face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended milling contract, specially taking
into account that appellant Alfredo Montelibano was, at the time, the President of the Planters
Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the resolution
of August 20, 1936. That the resolution formed an integral part of the amended milling
contract, signed on September 10, and not a separate bargain, is further shown by the fact
that a copy of the resolution was simply attached to the printed contract without special
negotiations or agreement between the parties.

It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
particularly, the extension of its operative period for an additional 15 years over and beyond
the 30 years stipulated in the original contract. Hence, the conclusion of the court below that
the resolution constituted gratuitous concessions not supported by any consideration is legally
untenable.

All disquisition concerning donations and the lack of power of the directors of the respondent
sugar milling company to make a gift to the planters would be relevant if the resolution in
question had embodied a separate agreement after the appellants had already bound
themselves to the terms of the printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were made by the company, the
appellants were not yet obligated by the terms of the printed contract, since they admittedly
did not sign it until twenty-one days later, on September 10, 1936. Before that date, the
printed form was no more than a proposal that either party could modify at its pleasure, and
the appellee actually modified it by adopting the resolution in question. So that by September
10, 1936 defendant corporation already understood that the printed terms were not
controlling, save as modified by its resolution of August 20, 1936; and we are satisfied that
such was also the understanding of appellants herein, and that the minds of the parties met
upon that basis. Otherwise there would have been no consent or "meeting of the minds", and
no binding contract at all. But the conduct of the parties indicates that they assumed, and they
do not now deny, that the signing of the contract on September 10, 1936, did give rise to a
binding agreement. That agreement had to exist on the basis of the printed terms as modified
by the resolution of August 20, 1936, or not at all. Since there is no rational explanation for
the company's assenting to the further concessions asked by the planters before the
contracts were signed, except as further inducement for the planters to agree to the extension
of the contract period, to allow the company now to retract such concessions would be to
sanction a fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no
novation unless two distinct and successive binding contracts take place, with the later
designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.

Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory forms
or solemn agreements (and it is not claimed that this is one), it is the assent and concurrence
(the "meeting of the minds") of the parties, and not the setting down of its terms, that
constitutes a binding contract. And the fact that the addendum is only signed by the General
Manager of the milling company emphasizes that the addition was made solely in order that
the memorial of the terms of the agreement should be full and complete.

Much is made of the circumstance that the report submitted by the Board of Directors of the
appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the planters
having agreed to the 60-40 sharing of the sugar set forth in the printed "amended milling
contracts", and did not make any reference at all to the terms of the resolution of August 20,
1936. But a reading of this report shows that it was not intended to inventory all the details of
the amended contract; numerous provisions of the printed terms are alao glossed over. The
Directors of the appellee Milling Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly modifications in detail of the
printed terms, and the only major change was paragraph 9 heretofore quoted; but when the
report was made, that paragraph was not yet in effect, since it was conditioned on other
centrals granting better concessions to their planters, and that did not happen until after 1950.
There was no reason in 1936 to emphasize a concession that was not yet, and might never
be, in effective operation.

There can be no doubt that the directors of the appellee company had authority to modify the
proposed terms of the Amended Milling Contract for the purpose of making its terms more
acceptable to the other contracting parties. The rule is that —

It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in itself,
and not otherwise prohibited, is done for the purpose of serving corporate ends, and
is reasonably tributary to the promotion of those ends, in a substantial, and not in a
remote and fanciful sense, it may fairly be considered within charter powers. The test
to be applied is whether the act in question is in direct and immediate furtherance of
the corporation's business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it; otherwise,
not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)

As the resolution in question was passed in good faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or decrease the profits of the central, the court
has no authority to review them.

They hold such office charged with the duty to act for the corporation according to
their best judgment, and in so doing they cannot be controlled in the reasonable
exercise and performance of such duty. Whether the business of a corporation should
be operated at a loss during depression, or close down at a smaller loss, is a purely
business and economic problem to be determined by the directors of the corporation
and not by the court. It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment of the board
of directors; the board is the business manager of the corporation, and so long as it
acts in good faith its orders are not reviewable by the courts. (Fletcher on
Corporations, Vol. 2, p. 390).

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted progressively increasing participations
to their adhered planter at an average rate of

62.333% for the 1951-52 crop year;

64.2% for 1952-53;

64.3% for 1953-54;

64.5% for 1954-55; and

63.5% for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August
20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.

WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed
sentencing the defendant-appellee to pay plaintiffs-appellants the differential or increase of
participation in the milled sugar in accordance with paragraph 9 of the appellee Resolution of
August 20, 1936, over and in addition to the 60% expressed in the printed Amended Milling
Contract, or the value thereof when due, as follows:

0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants
having received an additional 2% corresponding to said year in October, 1953;

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter —
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;

with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional increases
as they may be entitled to for the crop years subsequent to those herein adjudged.

Costs against appellee, Bacolod-Murcia Milling Co.

ULTRA VIRES DOCTRINE

G.R. No. 165548 June 13, 2011

PHILIPPINE REALTY AND HOLDINGS CORPORATION, Petitioner,

vs.
LEY CONSTRUCTION AND DEVELOPMENT CORPORATION, Respondent.

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

G.R. No. 167879

LEY CONSTRUCTION AND DEVELOPMENT CORPORATION, Petitioner,

vs.
PHILIPPINE REALTY AND HOLDINGS CORPORATION, Respondent.

DECISION

SERENO, J.:

These are consolidated petitions for review under Rule 45 of the New Rules of Civil
Procedure filed by both parties from a Court of Appeals (CA) Decision in CA-GR No. 71293
dated 30 September 2004. This Decision reversed a Decision of the Regional Trial Court
(RTC), National Capital Judicial Region (NCJR), Branch 135 in Makati City dated 31 January
2001 in Civil Case No. 96-160.

The foregoing are the facts culled from the record, and from the findings of the CA and the
RTC.

Ley Construction and Development Corporation (LCDC) was the project contractor for the
construction of several buildings for Philippine Realty & Holdings Corporation (PRHC), the
project owner. Engineer Dennis Abcede (Abcede) was the project construction manager of
PRHC, while Joselito Santos (Santos) was its general manager and vice-president for
operations.

Sometime between April 1988 and October 1989, the two corporations entered into four major
construction projects, as evidenced by four duly notarized "construction agreements." LCDC
committed itself to the construction of the buildings needed by PRHC, which in turn committed
itself to pay the contract price agreed upon. These were the four construction projects the
parties entered into involving a Project 1, Project 2, Project 3 (all of which involve the
Alexandra buildings) and a Tektite Building:

1. Construction Agreement dated 25 April 1988 – Alexandra-Cluster C – involving the

construction of two units of seven-storey buildings with basement at a contract price
of ₱ 68,000,000 (Project 1);

2. Construction Agreement dated 25 July 1988 – Alexandra-Cluster B – involving the

construction of an eleven-storey twin-tower building with a common basement at a
contract price of ₱ 140,500,000 (Project 2);

3. Construction Agreement dated 23 November 1988 – Alexandra-Cluster E –

involving the construction of an eleven-storey twin-tower building with common
basement at a contract price of ₱ 140,500,000 (Project 3); and
 4. Construction Agreement dated 10 October 1989 – Tektite Towers Phase I –
involving the construction of Tektite Tower Building I at Tektite Road at a contract
price of ₱ 729,138,964 (Tektite Building).

The agreement covering the construction of the Tektite Building was signed by a Mr. Campos
under the words "Phil. Realty & Holdings Corp." and by Santos as a witness. Manuel Ley, the
president of LCDC, signed under the words "Ley Const. & Dev. Corp."

The terms embodied in the afore-listed construction agreements were almost identical. Each
agreement provided for a fixed price to be paid by PRHC for every project.

All the aforementioned agreements contain the following provisions:

ARTICLE IV – CONTRACT PRICE

... ... ...

The Contract Price shall not be subject to escalation except due to work addition, (approved
by the OWNER and the ARCHITECT) and to official increase in minimum wage as covered
by the Labor Adjustment Clause below. All costs and expenses over and above the Contract
Price except as provided in Article V hereof shall be for the account of the CONTRACTOR. It
is understood that there shall be no escalation on the price of materials. However, should
there be any increase in minimum daily wage level, the adjustment on labor cost only shall be
considered based on conditions as stipulated below.

... ... ...

ARTICLE VII – TIME OF COMPLETION

... ... ...

Should the work be delayed by any act or omission of the OWNER or any other person
employed by or contracted by the OWNER in the project, including days in the delivery or
(sic) materials furnished by the OWNER or others, or by any appreciable additions or
alterations in the work ordered by the OWNER or the ARCHITECT, under Article V or by force
majeure, war, rebellion, strikes, epidemics, fires, riots, or acts of the civil or military
authorities, the CONTRACTOR shall be granted time extension.

Sometime after the execution of these agreements, two more were entered into by the
parties:

1. Letter-agreement dated 24 August 1989 – Project 3 – for the construction

of the drivers’ quarters in Project 3; and

2. Agreement dated 7 January 1993 – Tektite Towers – for the concreting

works on "GL, 5, 9, & A" (ground floor to the 5th floor) of the Tektite Towers.

Santos signed the letter-agreement on the construction of the drivers’ quarters in Project
3,1 while both he and Abcede signed the letter-agreement on the concreting works on GL, 5,
9, and A, and also of Project 3.2

In order to jump-start the construction operations, LCDC was required to submit a

performance bond as provided for in the construction agreements. As stated in these
agreements, as soon as PRHC received the performance bond, it would deliver its initial
payment to LCDC. The remaining balance was to be paid in monthly progress payments
based on actual work completed. In practice, these monthly progress payments were used by
LCDC to purchase the materials needed to continue the construction of the remaining parts of
the building.

In the course of the construction of the Tektite Building, it became evident to both parties that
LCDC would not be able to finish the project within the agreed period. Thus, through its
president, LCDC met with Abcede to discuss the cause of the delay. LCDC explained that the
unanticipated delay in construction was due mainly to the sudden, unexpected hike in the
prices of cement and other construction materials. It claimed that, without a corresponding
increase in the fixed prices found in the agreements, it would be impossible for it to finish the
construction of the Tektite Building. In their analysis of the project plans for the building and of
all the external factors affecting the completion of the project, the parties discovered that even
if LCDC were able to collect the entire balance from the contract, the collected amount would
still be insufficient to purchase all the materials needed to complete the construction of the
building.

Both parties agreed that their foremost objective should be to ensure that the Tektite Building
project would be completed. To achieve this goal, they entered into another agreement.
Abcede asked LCDC to advance the amount necessary to complete construction. Its
president acceded, on the absolute condition that it be allowed to escalate the contract price.
It wanted PRHC to allow the escalation and to disregard the prohibition contained in Article
VII of the agreements. Abcede replied that he would take this matter up with the board of
directors of PRHC.

The board of directors turned down the request for an escalation agreement. 3 Neither PRHC
nor Abcede gave notice to LCDC of the alleged denial of the proposal. However, on 9 August
1991 Abcede sent a formal letter to LCDC, asking for its conformity, to the effect that should it
infuse ₱36 million into the project, a contract price escalation for the same amount would be
granted in its favor by PRHC.4

This letter was signed by Abcede above the title "Construction Manager," as well as by
LCDC.5 A plain reading of the letter-agreement will reveal that the blank above the words
"PHIL. REALTY & HOLDINGS CORP." was never signed,6 viz:

Very truly yours,

(Signed)
_______________________
DENNIS A. ABCEDE
Construction Manager

CONFORME:

(Signed)
_______________________
LEY CONST. & DEV. CORP.

APPROVED & ACCEPTED :

_______________________
PHIL. REALTY & HOLDINGS CORP.

Notwithstanding the absence of a signature above PRHC’s name, LCDC proceeded with the
construction of the Tektite Building, expending the entire amount necessary to complete the
project. From August to December 1991, it infused amounts totaling ₱ 38,248,463.92. These
amounts were not deposited into the joint account of LCDC and PRHC, but paid directly to the
suppliers upon the instruction of Santos.7
LCDC religiously submitted to PRHC monthly reports 8 that contained the amounts of infusion
it made from the period August 1991 to December 1991. These monthly reports all had the
following heading:

... ... ...

MR. JOSELITO L. SANTOS

VICE PRESIDENT OPERATION
PHIL. REALTY & HOLDINGS CORP.
4th Floor Quad Alpha Centrum Bldg.
125 Pioneer St., Mandaluyong, M.M.

T H R U : D.A. ABCEDE & ASSOCIATES

Construction Managers

SUBJECT : P 36.0M INFUSION-TEKTITE TOWERS PROJECT

From these monthly reports, it can be gleaned that the following were the cash infusions
made by LCDC:

Month Amount Date of monthly report

August 1991 PhP 6,724,632.26 15 October 19919

September 1991 PhP 7,326,230.69 7 October 199110

October 1991 PhP 7,756,846.88 7 November 199111

November 1991 PhP 8,553,313.50 7 December 199112

December 1991 PhP 7,887,440.50 9 January 199213

PhP 38,248,463.92

PRHC never replied to any of these monthly reports.

On 20 January 1992, LCDC wrote a letter addressed to Santos stating that it had already
complied with its commitment as of 31 December 1991 and was requesting the release of ₱
2,248,463.92. It attached a 16 January 1992 letter written by D.A. Abcede & Associates,
informing PRHC of the total cash infusion made by LCDC to the project, to wit:

in compliance with the commitment of Ley Construction and Dev’t Corp. to infuse ₱36.00M for
the above subject project x x x

x x x we would like to present the total cash infusion by LCDC for the period covering the
month of August, 1991 to December 1991 broken down as follows:

... ... ...

T O T A L: ₱ 38,248,463.92

PRHC never replied to this letter.

In another letter dated 7 September 1992, there was a reconciliation of accounts between the
two corporations with respect to the balances due for Projects 1, 2, and 3. The reconciliation
of accounts resulted in PRHC owing LCDC the sum of ₱ 20,862,546.41, broken down as
follows:

Project 1 ₱ 1,783,046.72

Project 2 ₱ 13,550,003.93

Project 3 ₱ 5,529,495.76

₱ 20,862,546.41

In a letter dated 8 September 1992,14 when 96.43% of Tektite Building had been completed,
LCDC requested the release of the ₱ 36 million escalation price. PRHC did not reply, but after
the construction of the building was completed, it conveyed its decision in a letter on 7
December 1992.15 That decision was to set off, in the form of liquidated damages, its claim to
the supposed liability of LCDC, to wit:

... ... ...

In this regard, please be advised that per owner’s decision; your claim of ₱ 36,000,00.00
adjustment will be applied to the liquidated damages for concreting works computed in the
amount of Thirty Nine Million Three Hundred Twenty Six Thousand Eight Hundred Seventeen
& 15/100 (₱39,326,817.15) as shown in the attached sheet.

Further, the net difference ₱ 3,326,817.15 will also be considered waived as additional
consideration.

... ... ...

In a letter dated 18 January 1993, LCDC, through counsel, demanded payment of the agreed
escalation price of ₱ 36 million. In its reply on 16 February 1993, PRHC suddenly denied any
liability for the escalation price. In the same letter, it claimed that LCDC had incurred 111 days
of delay in the construction of the Tektite Building and demanded that the latter pay ₱
39,326,817.15 as liquidated damages. This claim was set forth in PRHC’s earlier 7 December
1992 letter.

LCDC countered that there were many times when its requests for time extension – although
due to reasonable causes sanctioned by the construction agreement such as power failures,
water supply interruption, and scarcity of construction materials – were unreasonably reduced
to shorter periods by PRHC. In its letter dated 9 December 1992, LCDC claimed that in a
period of over two years, out of the 618 days of extension it requested, only 256 days – or not
even half the number of days originally requested – were considered. It further claimed that its
president inquired from Abcede and Santos why its requests for extension of time were not
granted in full. The two, however, assured him that LCDC would not be penalized with
damages for even a single day of delay, because the fact that it was working hard on the
Tektite Building project was known to PRHC.16

Thereafter, in a letter dated 18 January 1993, LCDC demanded payment of the agreed total
balance for Projects 1, 2, and 3. Through a reply letter dated 16 February 1993, PRHC denied
any liability. During the course of the proceedings, both parties conducted another
reconciliation of their respective records. The reconciliation showed the following balances in
favor of LCDC:

Project 1 ₱ 1,703,955.07

Project 2 ₱ 13,251,152.61
 Project 3 ₱ 5,529,495.76

Total: ₱ 20,484,603.44

In addition to the agreed-upon outstanding balance in favor of LCDC, the latter claimed
another outstanding balance of ₱ 232,367.96 in its favor for the construction of the drivers’
quarters in Project 3.

It also further claimed the amount of ₱ 7,112,738.82, representing the balance for the
concreting works from the ground floor to the fifth floor of the Tektite Building.

Seeking to recover all the above-mentioned amounts, LCDC filed a Complaint with
Application for the Issuance of a Writ of Preliminary Attachment on 2 February 1996 before
the RTC in Makati City docketed as Civil Case No. 96-160:

WHEREFORE, it is respectfully prayed that:

1. Immediately upon the filing of this Complaint, an order of preliminary attachment be

issued over defendant Philrealty’s properties as security for any judgment which
plaintiff may recover against said defendant; and

2. After trial, judgment be rendered as follows:

2.1. On the first, second and third alternative causes of action,

(a) Ordering defendant Philrealty to pay plaintiff actual damages in

the amount of ₱36,000,00.00 with legal interest thereon from the
filing of this Complaint until fully paid;

(b) In the alternative, ordering defendants Abcede and Santos to

jointly and severally, in the event that they acted without necessary
authority, to pay plaintiff actual damages in the amount of
₱36,000,00.00 with legal interest thereon from the filing of this
Complaint until fully paid; and

(c) Ordering defendant Philrealty or defendants Abcede and Santos

to pay plaintiff exemplary damages in the amount to be determined
by the Honorable Court but not less than ₱5,000,000.00

2.2. On the fourth cause of action, ordering defendant Philrealty to pay

plaintiff

(a) Actual damages in the amount of ₱7,112,738.82 with legal

interest thereon from the filing of this Complaint until fully paid; and

(b) Exemplary damages in the amount to be determined by the

Honorable Court but not less than ₱1,000,000.00

2.3. On the fifth cause of action, ordering defendant Philrealty to pay plaintiff

(a) Actual damages in the amount of ₱20,862,546.41 with legal

interest thereon from the filing of this Complaint until fully paid; and

(b) Exemplary damages in an amount to be determined by the

Honorable Court but not less than ₱5,000,000.00.
 2.4. On the sixth cause of action, ordering defendant Philrealty to pay plaintiff

(a) Actual damages in the amount of ₱232,367.96 with legal interest

thereon from the filing of this Complaint until fully paid; and

(b) Exemplary damages in the amount to be determined by the

Honorable Court but not less than ₱100,000.00

2.5. On the seventh cause of action, ordering defendant Philrealty and/or

defendants Abcede and Santos to pay plaintiff attorney’s fees in the amount
of ₱750,000.00 and expenses of litigation in the amount of ₱50,000.00, plus
costs.

Plaintiff prays for such other just and equitable reliefs as may be warranted by the
circumstances.

On 23 July 1999, a joint Stipulation of Facts 17 was filed by the parties. In the said stipulation,
they reconciled their respective claims on the payments made and the balances due for the
construction of the Tektite Building project, Project 1, and Project 2. The reconciliation shows
that the following amounts are due and/or overpaid:

Due to LCDC Overpaid to LCDC

Tektite Building ₱4,646,947.35

Project 1 ₱1,703,955.07

Project 2 ₱3,251,152.61

₱14,955,107.68 ₱4,646,947.35

Both parties agreed that the only remaining issues to be resolved by the court, with respect to
the Tektite Building project and Projects 1 to 3, were as follows:

a) The validity of Ley Construction’s claim that Philrealty had granted the former a contract
price escalation for Tektite Tower I in the amount of ₱36,000,000.00

b) The validity of the claim of Philrealty that the following amounts should be charged to Ley
Construction:

Payments/Advances without LCDC’s conformity and recommendation of the Construction

Manager, D.A. Abcede & Associates that subject items are LCDC’s account:

a. Esicor, Inc. – waterproofing works Cluster B ₱1,121,000.00

b. Ideal Marketing, Inc. – waterproofing works at Cluster B, Quadrant

2 ₱885,000.00 ₱2,006,000.00

c) The claim of Philrealty for liquidated damages for delay in completion of the construction as
follows:

d) Tektite Tower I - ₱39,326,817.15

Alexandra Cluster B - 12,785,000.00

Alexandra Cluster C - 1,100,000.00

 and

e) The claim of Ley Construction for additional sum of ₱2,248,463.92 which it allegedly
infused for the Tektite Tower I project over and above the original ₱36,000,000.00 it had
allegedly bound itself to infuse.18

On 31 January 2001, the RTC promulgated its Decision. LCDC filed a Motion for Partial
Reconsideration, which was granted.

It must be noted that in the Stipulation of Facts, the parties had jointly agreed that the
₱7,112,738.82 unpaid account in the concreting of Tektite Building would no longer be
included in the list of claims submitted to the RTC for decision. Nonetheless, this amount was
still included as an award in the trial court’s 7 May 2001 amended Decision, the dispositive
portion of which provides:

WHEREFORE, premises considered, judgment is hereby rendered:

A. Dismissing the counter-claim of defendant DENNIS ABCEDE and the cross-claim

of defendant JOSELITO SANTOS; and

B. Ordering defendant PHILIPPINE REALTY AND HOLDING CORPORATION to pay

plaintiff LEY CONSTRUCTION AND DEVELOPMENT CORPORATION:

1. ₱33,601,316.17, for the Tektite Tower I Project with legal interest thereon
from date of the filing of the complaint until fully paid;

2. ₱13,251,152.61 for Alexandra Cluster B with legal interest thereon from

date of the filing of the complaint until fully paid;

3. ₱1,703,955.07 for Alexandra Cluster C with legal interest thereon from

date of the filing of the complaint until fully paid;

4. ₱7,112,738.82 in actual damages for the concreting works of Tektite

Tower I, with legal interest thereon from the date of the filing of the complaint
until fully paid;

5. ₱5,529,495.76 in actual damages for the construction of Alexandra Cluster

E, with legal interest thereon from the date of the filing of the complaint until
fully paid;

6. ₱232,367.96 in actual damages for the construction of the driver’s quarters

of Alexandra Cluster E, with legal interest thereon from the date of the filing
of the complaint until fully paid;

7. ₱750,000.00 for attorney’s fees and expenses of litigation; and

8. Costs.

SO ORDERED.19

PRHC filed a Notice of Appeal on 14 June 2001. The Court of Appeals, in CA-G.R. CV No.
71293,20 reversed the lower court’s amended Decision on 30 September 2004 and ruled thus:

WHEREFORE, premises considered, the assailed January 31, 2001 decision and the May 7,
2001 amended decision are hereby REVERSED and SET ASIDE and a new one is entered:
I. FINDING plaintiff-appellee LCDC LIABLE to defendant-appellant PRHC in the amount of
Sixty million Four Hundred Sixty Four (Thousand) Seven Hundred Sixty Four 90/100
(P60,464,764.90) PESOS detailed as follows:

[1] P39,326,817.15 liquidated damages pursuant to contract for delay incurred by

plaintiff-appellee LCDC in the construction of Tektite Tower Phase I, the length of
delay having been signed and confirmed by LCDC;

[2] P12,785,000.00 liquidated damages pursuant to contract for delay incurred by

plaintiff-appellee LCDC in the construction of Alexandra Cluster B, the length of delay
having been signed and confirmed by LCDC;

[3] P1,700,000.00 liquidated damages pursuant to contract for delay incurred by

plaintiff appellee LCDC in the construction of Alexandra Cluster C, the length of delay
having been confirmed by LCDC;

[4] P4,646,947.75 overpayment by defendant-appellant PRHC to plaintiff-appellee

LCDC for the Tektite Tower Phase I Project;

[5] P1,121,000.00 expenses incurred by defendant-appellant PRHC for corrective

works to redo/repair allegedly defective Waterproofing construction work or plaintiff-
appellee LCDC in the Alexander Cluster B Project which was paid by defendant-
appellant PRHC to contractor Escritor, Inc.;

[6] P885,000.00 expenses incurred by defendant-appellant PRHC for corrective

works to redo/repair allegedly defective Waterproofing construction work of plaintiff-
appellee LCDC at the Alexandra Cluster B Quadrant in the Alexander Cluster B
Project which was paid by defendant-appellant PRHC to contractor Ideal Marketing
Inc., and consideration.

... ... ...

In a letter dated 18 January 1993, LCDC, through counsel, demanded payment of the agreed
escalation price of ₱ 36 million. In its reply on 16 February 1993, PRHC suddenly denied any
liability for the escalation price. In the same letter, it claimed that LCDC had incurred 111 days
of delay in the construction of the Tektite Building and demanded that the latter pay ₱
39,326,817.15 as liquidated damages. This claim was set forth in PRHC’s earlier 7 December
1992 letter.

LCDC countered that there were many times when its requests for time extension – although
due to reasonable causes sanctioned by the construction agreement such as power failures,
water supply interruption, and scarcity of construction materials – were unreasonably reduced
to shorter periods by PRHC. In its letter dated 9 December 1992, LCDC claimed that in a
period of over two years, out of the 618 days of extension it requested, only 256 days – or not
even half the number of days originally requested – were considered. It further claimed that its
president inquired from Abcede and Santos why its requests for extension of time were not
granted in full. The two, however, assured him that LCDC would not be penalized with
damages for even a single day of delay, because the fact that it was working hard on the
Tektite Building project was known to PRHC.16

Thereafter, in a letter dated 18 January 1993, LCDC demanded payment of the agreed total
balance for Projects 1, 2, and 3. Through a reply letter dated 16 February 1993, PRHC denied
any liability. During the course of the proceedings, both parties conducted another
reconciliation of their respective records. The reconciliation showed the following balances in
favor of LCDC:

Project 1 ₱ 1,703,955.07
 Project 2 ₱ 13,251,152.61

Project 3 ₱ 5,529,495.76

Total: ₱ 20,484,603.44

In addition to the agreed-upon outstanding balance in favor of LCDC, the latter claimed
another outstanding balance of ₱ 232,367.96 in its favor for the construction of the drivers’
quarters in Project 3.

It also further claimed the amount of ₱ 7,112,738.82, representing the balance for the
concreting works from the ground floor to the fifth floor of the Tektite Building.

Seeking to recover all the above-mentioned amounts, LCDC filed a Complaint with
Application for the Issuance of a Writ of Preliminary Attachment on 2 February 1996 before
the RTC in Makati City docketed as Civil Case No. 96-160:

WHEREFORE, it is respectfully prayed that:

1. Immediately upon the filing of this Complaint, an order of preliminary attachment be

issued over defendant Philrealty’s properties as security for any judgment which
plaintiff may recover against said defendant; and

2. After trial, judgment be rendered as follows:

2.1. On the first, second and third alternative causes of action,

(a) Ordering defendant Philrealty to pay plaintiff actual damages in

the amount of ₱36,000,00.00 with legal interest thereon from the
filing of this Complaint until fully paid;

(b) In the alternative, ordering defendants Abcede and Santos to

jointly and severally, in the event that they acted without necessary
authority, to pay plaintiff actual damages in the amount of
₱36,000,00.00 with legal interest thereon from the filing of this
Complaint until fully paid; and

(c) Ordering defendant Philrealty or defendants Abcede and Santos

to pay plaintiff exemplary damages in the amount to be determined
by the Honorable Court but not less than ₱5,000,000.00

2.2. On the fourth cause of action, ordering defendant Philrealty to pay

plaintiff

(a) Actual damages in the amount of ₱7,112,738.82 with legal

interest thereon from the filing of this Complaint until fully paid; and

(b) Exemplary damages in the amount to be determined by the

Honorable Court but not less than ₱1,000,000.00

2.3. On the fifth cause of action, ordering defendant Philrealty to pay plaintiff

(a) Actual damages in the amount of ₱20,862,546.41 with legal

interest thereon from the filing of this Complaint until fully paid; and
 (b) Exemplary damages in an amount to be determined by the
Honorable Court but not less than ₱5,000,000.00.

2.4. On the sixth cause of action, ordering defendant Philrealty to pay plaintiff

(a) Actual damages in the amount of ₱232,367.96 with legal interest

thereon from the filing of this Complaint until fully paid; and

(b) Exemplary damages in the amount to be determined by the

Honorable Court but not less than ₱100,000.00

2.5. On the seventh cause of action, ordering defendant Philrealty and/or

defendants Abcede and Santos to pay plaintiff attorney’s fees in the amount
of ₱750,000.00 and expenses of litigation in the amount of ₱50,000.00, plus
costs.

Plaintiff prays for such other just and equitable reliefs as may be warranted by the
circumstances.

On 23 July 1999, a joint Stipulation of Facts 17 was filed by the parties. In the said stipulation,
they reconciled their respective claims on the payments made and the balances due for the
construction of the Tektite Building project, Project 1, and Project 2. The reconciliation shows
that the following amounts are due and/or overpaid:

Due to LCDC Overpaid to LCDC

Tektite Building ₱4,646,947.35

Project 1 ₱1,703,955.07

Project 2 ₱3,251,152.61

₱14,955,107.68 ₱4,646,947.35

Both parties agreed that the only remaining issues to be resolved by the court, with respect to
the Tektite Building project and Projects 1 to 3, were as follows:

a) The validity of Ley Construction’s claim that Philrealty had granted the former a
contract price escalation for Tektite Tower I in the amount of ₱36,000,000.00

b) The validity of the claim of Philrealty that the following amounts should be charged
to Ley Construction:

Payments/Advances without LCDC’s conformity and recommendation of the

Construction Manager, D.A. Abcede & Associates that subject items are LCDC’s
account:

a. Esicor, Inc. – waterproofing works Cluster B ₱1,121,000.00

b. Ideal Marketing, Inc. – waterproofing works at Cluster B, Quadrant

2 ₱885,000.00 ₱2,006,000.00

c) The claim of Philrealty for liquidated damages for delay in completion of the
construction as follows:

d) Tektite Tower I - ₱39,326,817.15

 Alexandra Cluster B - 12,785,000.00

Alexandra Cluster C - 1,100,000.00

and

e) The claim of Ley Construction for additional sum of ₱2,248,463.92 which it

allegedly infused for the Tektite Tower I project over and above the original
₱36,000,000.00 it had allegedly bound itself to infuse.18

On 31 January 2001, the RTC promulgated its Decision. LCDC filed a Motion for Partial
Reconsideration, which was granted.

It must be noted that in the Stipulation of Facts, the parties had jointly agreed that the
₱7,112,738.82 unpaid account in the concreting of Tektite Building would no longer be
included in the list of claims submitted to the RTC for decision. Nonetheless, this amount was
still included as an award in the trial court’s 7 May 2001 amended Decision, the dispositive
portion of which provides:

WHEREFORE, premises considered, judgment is hereby rendered:

A. Dismissing the counter-claim of defendant DENNIS ABCEDE and the cross-claim

of defendant JOSELITO SANTOS; and

B. Ordering defendant PHILIPPINE REALTY AND HOLDING CORPORATION to pay

plaintiff LEY CONSTRUCTION AND DEVELOPMENT CORPORATION:

1. ₱33,601,316.17, for the Tektite Tower I Project with legal interest thereon
from date of the filing of the complaint until fully paid;

2. ₱13,251,152.61 for Alexandra Cluster B with legal interest thereon from

date of the filing of the complaint until fully paid;

3. ₱1,703,955.07 for Alexandra Cluster C with legal interest thereon from

date of the filing of the complaint until fully paid;

4. ₱7,112,738.82 in actual damages for the concreting works of Tektite

Tower I, with legal interest thereon from the date of the filing of the complaint
until fully paid;

5. ₱5,529,495.76 in actual damages for the construction of Alexandra Cluster

E, with legal interest thereon from the date of the filing of the complaint until
fully paid;

6. ₱232,367.96 in actual damages for the construction of the driver’s quarters

of Alexandra Cluster E, with legal interest thereon from the date of the filing
of the complaint until fully paid;

7. ₱750,000.00 for attorney’s fees and expenses of litigation; and

8. Costs.

SO ORDERED.19

PRHC filed a Notice of Appeal on 14 June 2001. The Court of Appeals, in CA-G.R. CV No.
71293,20 reversed the lower court’s amended Decision on 30 September 2004 and ruled thus:
WHEREFORE, premises considered, the assailed January 31, 2001 decision and the May 7,
2001 amended decision are hereby REVERSED and SET ASIDE and a new one is entered:

I. FINDING plaintiff-appellee LCDC LIABLE to defendant-appellant PRHC in the

amount of Sixty million Four Hundred Sixty Four (Thousand) Seven Hundred Sixty
Four 90/100 (P60,464,764.90) PESOS detailed as follows:

[1] P39,326,817.15 liquidated damages pursuant to contract for delay

incurred by plaintiff-appellee LCDC in the construction of Tektite Tower
Phase I, the length of delay having been signed and confirmed by LCDC;

[2] P12,785,000.00 liquidated damages pursuant to contract for delay

incurred by plaintiff-appellee LCDC in the construction of Alexandra Cluster
B, the length of delay having been signed and confirmed by LCDC;

[3] P1,700,000.00 liquidated damages pursuant to contract for delay incurred

by plaintiff appellee LCDC in the construction of Alexandra Cluster C, the
length of delay having been confirmed by LCDC;

[4] P4,646,947.75 overpayment by defendant-appellant PRHC to plaintiff-

appellee LCDC for the Tektite Tower Phase I Project;

[5] P1,121,000.00 expenses incurred by defendant-appellant PRHC for

corrective works to redo/repair allegedly defective Waterproofing construction
work or plaintiff-appellee LCDC in the Alexander Cluster B Project which was
paid by defendant-appellant PRHC to contractor Escritor, Inc.;

[6] P885,000.00 expenses incurred by defendant-appellant PRHC for

corrective works to redo/repair allegedly defective Waterproofing construction
work of plaintiff-appellee LCDC at the Alexandra Cluster B Quadrant in the
Alexander Cluster B Project which was paid by defendant-appellant PRHC to
contractor Ideal Marketing Inc., and

II. FINDING defendant-appellant PRHC LIABLE to plaintiff-appellee LCDC in the

amount of Fifty Six million Seven Hundred Sixteen Thousand Nine Hundred Seventy
One 40/100 (P56,716,971.40) detailed as follows:

In Yao Ka Sin Trading v. Court of Appeals, et al,.43 this Court discussed the applicable rules
on the doctrine of apparent authority, to wit:

The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of,
his actual authority if he acts within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting him to appear as having such
authority, the corporation is bound thereby in favor of a person who deals with him in good
faith in reliance on such apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a particular branch of it, continuously and
publicly, for a considerable time." Also, "if a private corporation intentionally or negligently
clothes its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent third persons dealing in
good faith with such officers or agents." 44

In People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals, et al., 45 we held that
apparent authority is derived not merely from practice:

Its existence may be ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether within or beyond the
scope of his ordinary powers.

We rule that Santos and Abcede held themselves out as possessing the authority to act,
negotiate and sign documents on behalf of PRHC; and that PRHC sanctioned these acts. It
would be the height of incongruity to now allow PRHC to deny the extent of the authority with
which it had clothed both individuals. We find that Abcede’s role as construction manager,
with regard to the construction projects, was akin to that of a general manager with regard to
the general operations of the corporation he or she is representing.

Consequently, the escalation agreement entered into by LCDC and Abcede is a valid
agreement that PRHC is obligated to comply with. This escalation agreement – whether
written or verbal – has lifted, through novation, the prohibition contained in the Tektite Building
Agreement.

In order for novation to take place, the concurrence of the following requisites is
indispensable:

1. There must be a previous valid obligation.

2. The parties concerned must agree to a new contract.

3. The old contract must be extinguished.

4. There must be a valid new contract.46

All the aforementioned requisites are present in this case. The obligation of both parties not to
increase the contract price in the Tektite Building Agreement was extinguished, and a new
obligation increasing the old contract price by ₱ 36 million was created by the parties to take
its place.

What makes this Court believe that it is incorrect to allow PRHC to escape liability for the
escalation price is the fact that LCDC was never informed of the board of directors’ supposed
non-approval of the escalation agreement until it was too late. Instead, PRHC, for its own
benefit, waited for the former to finish infusing the entire amount into the construction of the
building before informing it that the said agreement had never been approved by the board of
directors. LCDC diligently informed PRHC each month of the partial amounts the former
infused into the project. PRHC must be deemed estopped from denying the existence of the
escalation agreement for having allowed LCDC to continue infusing additional money
spending for its own project, when it could have promptly notified LCDC of the alleged
disapproval of the proposed escalation price by its board of directors.

Estoppel is an equitable principle rooted in natural justice; it is meant to prevent persons from
going back on their own acts and representations, to the prejudice of others who have relied
on them.47 Article 1431 of the Civil Code provides:

Through estoppel an admission or representation is rendered conclusive upon the person

making it, and cannot be denied or disproved as against the person relying thereon.

Article 1431 is reflected in Rule 131, Section 2 (a) of the Rules of Court, viz.:

Sec. 2. Conclusive presumptions. — The following are instances of conclusive presumptions:

(a) Whenever a party has by his own declaration, act or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act or omission be permitted to falsify
it.
This Court has identified the elements of estoppel as:

[F]irst, the actor who usually must have knowledge, notice or suspicion of the true facts,
communicates something to another in a misleading way, either by words, conduct or silence;
second, the other in fact relies, and relies reasonably or justifiably, upon that communication;
third, the other would be harmed materially if the actor is later permitted to assert any claim
inconsistent with his earlier conduct; and fourth, the actor knows, expects or foresees that the
other would act upon the information given or that a reasonable person in the actor's position
would expect or foresee such action.48

This liability of PRHC, however, has a ceiling. The escalation agreement entered into was for
₱ 36 million—the maximum amount that LCDC contracted itself to infuse and that PRHC
agreed to reimburse. Thus, the Court of Appeals was correct in ruling that the ₱ 2,248,463.92
infused by LCDC over and above the ₱ 36 million should be for its account, since PRHC
never agreed to pay anything beyond the latter amount. While PRHC benefited from this
excess infusion, this did not result in its unjust enrichment, as defined by law.

Unjust enrichment exists "when a person unjustly retains a benefit to the loss of another, or
when a person retains money or property of another against the fundamental principles of
justice, equity and good conscience."49 Under Art. 22 of the Civil Code, there is unjust
enrichment when (1) a person is unjustly benefited, and (2) such benefit is derived at the
expense of or with damages to another.50 The term is further defined thus:

Unjust enrichment is a term used to depict result or effect of failure to make remuneration of
or for property or benefits received under circumstances that give rise to legal or equitable
obligation to account for them; to be entitled to remuneration, one must confer benefit by
mistake, fraud, coercion, or request.51

In order for an unjust enrichment claim to prosper, one must not only prove that the other
party benefited from one’s efforts or the obligations of others; it must also be shown that the
other party was unjustly enriched in the sense that the term "unjustly" could mean "illegally" or
"unlawfully."52 LCDC was aware that the escalation agreement was limited to ₱36 million. It is
not entitled to remuneration of the excess, since it did not confer this benefit by mistake,
fraud, coercion, or request. Rather, it voluntarily infused the excess amount with full
knowledge that PRHC had no obligation to reimburse it.

Parenthetically, we note that the CA had ruled that the 7 December 1992 letter demonstrates
that PRHC treated the ₱ 36 million as a loan deductible from the liquidated damages for
which LCDC is supposedly liable.53 It ruled that when PRHC informed LCDC that it would
apply the ₱ 36 million to the liquidated damages, PRHC, in effect, acknowledged that it was in
debt to LCDC in the amount of ₱ 36 million, and that forms the basis for PRHC’s liability to
LCDC for the said amount.

We disagree with this analysis.

In a contract of loan, ownership of the money is transferred from the lender to the
borrower.54 In this case, ownership of the ₱ 36 million was never transferred to PRHC. As
previously mentioned, such amount was paid directly to the suppliers. 55 We find that
arrangement between PRHC and LCDC cannot be construed as a loan agreement but rather,
it was an agreement to advance the costs of construction. In Liwanag v. Court of Appeals et
al., we state:

Neither can the transaction be considered a loan, since in a contract of loan once the money
is received by the debtor, ownership over the same is transferred. Being the owner, the
borrower can dispose of it for whatever purpose he may deem proper. In the instant petition,
however, it is evident that Liwanag could not dispose of the money as she pleased because it
was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if
this was not possible then to return the money to Rosales.
 LCDC is not liable for liquidated damages for delay in the construction of the buildings for
PRHC.

There is no question that LCDC was not able to fully construct the Tektite Building and
Projects 1, 2, and 3 on time. It reasons that it should not be made liable for liquidated
damages, because its rightful and reasonable requests for time extension were denied by
PRHC.56

It is important to note that PRHC does not question the veracity of the factual representations
of LCDC to justify the latter’s requests for extension of time. It insists, however, that in any
event LCDC agreed to the limits of the time extensions it granted.57

The practice of the parties is that each time LCDC requests for more time, an extension
agreement is executed and signed by both parties to indicate their joint approval of the
number of days of extension agreed upon.

The applicable provision in the parties’ agreements is as follows:

ARTICLE VII – TIME OF COMPLETION

... ... ...

Should the work be delayed by any act or omission of the OWNER or any other person
employed by or contracted by the OWNER in the project, including days in the delivery or
(sic) materials furnished by the OWNER or others, or by any appreciable additions or
alterations in the work ordered by the OWNER or the ARCHITECT, under Article V or by force
majeure, war, rebellion, strikes, epidemics, fires, riots, or acts of the civil or military
authorities, the CONTRACTOR shall be granted time extension.

In case the CONTRACTOR encounters any justifiable cause or reason for delay, the
CONTRACTOR shall within ten (10) days, after encountering such cause of delay submit to
the OWNER in writing a written request for time extension indicating therein the requested
contract time extension. Failure by the CONTRACTOR to comply with this requirements (sic)
will be adequate reason for the OWNER not to grant the time extension.1avvphi1

The following table shows the dates of LCDC’s letter-requests, the supposed causes justifying
them, the number of days requested, and the number of days granted by PRHC and
supposedly conformed to by LCDC:

1avvphi1
# of days
Cause # of days requested
granted

1 Mar 1990 Due to additional works and shortage of supplies and cement 30 11

14 Apr 1990 Shortage of cement supply 18 6

10 May 1990 Frequent power failures 10 2

9 Jul 1990 Bad weather which endangered the lives of the construction workers ("heavy winds") 10 2

4 Sep 1990 Inclement weather that endangered the lives of the construction workers 10 3

28 Feb 1991 Architectural and structural revisions of R.C. beams at the 8th floor level 20 8

For change order work and revisions in the plans initiated by the architect and Abcede’s
28 Aug 1991 271 136
delay in giving the revised plans to contractor
2 Sep 1991 Inclement weather and scarcity of cement 25 17

13 Oct 1991 Water supply interruption and power failures preventing the mixing of cement 15 6

Typhoon Uring and water supply interruption (typhoon Uring alone caused a delay for
5 Dec 1991 15 2
more than 10 days due to strong and continuous rains)

2 Apr 1992 Inadequate supply of Portland cement and frequent power failures 15 12

5 May 1992 Inadequate supply of cement and frequent power failures 17 12

456 217

additions and alterations in the work ordered by the owner and architect 108 20

564 237

As previously mentioned, LCDC sent a 9 December 1992 letter to PRHC claiming that, in a
period of over two years, only 256 out of the 618 days of extension requested were
considered. We disregard these numbers presented by LCDC because of its failure to present
evidence to prove its allegation. The tally that we will accept—as reflected by the evidence
submitted to the lower court—is as follows: out of the 564 days requested, only 237 were
considered.

Essentially the same aforementioned reasons or causes are presented by LCDC as defense
against liability for both Projects 1 and 2.58 In this regard, the CA ruled:

Plaintiff-appellee’s allegation that determination by PHRC of extensions of time were

unreasonable or arbitrary is untenable in the light of express provisions of the Construction
Agreements which prescribed precise procedures for extensions of time. In fact the procedure
is fool-proof because both OWNER and CONTRACTOR sign to indicate approval of the
number of days of extension. Computation of the penalty becomes mechanical after that.
Each extension as signed by the parties is a contract by itself and has the force of law
between them.

In fact, the parties followed that prescribed procedure strictly – the CONTRACTOR first
requested the OWNER to approve the number of days applied for as extension of time to
finish the particular project and the OWNER will counter-offer by approving only a lower
number of days extension of time for CONTRACTOR to finish the contract as recommended
by the CONSTRUCTION MANAGER ABCEDE, and in the end, both CONTRACTOR and
OWNER sign jointly the approved number of days agreed upon. That signed extension of
time is taken to be the contract between the parties.59

The appellate court further ruled that each signed extension is a separate contract that
becomes the law between the parties:60

there is nothing arbitrary or unreasonable about the number of days extension of time
because each extension is a meeting of the minds between the parties, each under joint
signature OWNER and CONTRACTOR witnessed by the CONSTRUCTION MANAGER.61

Inasmuch as LCDC’s claimed exemption from liability are beyond the approved time
extensions, LCDC, according to the majority of the CA, is liable therefor.

Justice Juan Q. Enriquez, in his Dissenting Opinion, held that the reasons submitted by LCDC
fell under the definition of force majeure.62 This specific point was not refuted by the majority.
We agree with Justice Enriquez on this point and thereby disagree with the majority ruling of
the CA.

Article 1174 of the Civil Code provides: "Except in cases expressly specified by the law, or
when it is otherwise declared by stipulation or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which could not be
foreseen, or which though foreseen, were inevitable." A perusal of the construction
agreements shows that the parties never agreed to make LCDC liable even in cases of force
majeure. Neither was the assumption of risk required. Thus, in the occurrence of events that
could not be foreseen, or though foreseen were inevitable, neither party should be held
responsible.

Under Article 1174 of the Civil Code, to exempt the obligor from liability for a breach of an
obligation due to an "act of God" or force majeure, the following must concur:

(a) the cause of the breach of the obligation must be independent of the will of the debtor; (b)
the event must be either unforseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the
debtor must be free from any participation in, or aggravation of the injury to the creditor. 63

The shortage in supplies and cement may be characterized as force majeure.64 In the present
case, hardware stores did not have enough cement available in their supplies or stocks at the
time of the construction in the 1990s. Likewise, typhoons, power failures and interruptions of
water supply all clearly fall under force majeure. Since LCDC could not possibly continue
constructing the building under the circumstances prevailing, it cannot be held liable for any
delay that resulted from the causes aforementioned.

Further, PRHC is barred by the doctrine of promissory estoppel from denying that it agreed,
and even promised, to hold LCDC free and clear of any liquidated damages. Abcede and
Santos also promised that the latter corporation would not be held liable for liquidated
damages even for a single day of delay despite the non-approval of the requests for
extension.65 Mr. Ley testified to this fact as follows:

Q: So, Mr. Witness in all those requests for extension and whenever the D.A. Abcede &
Associates did not grant you the actual number of days stated in your requests for extension,
what did Ley construction and Development do, if any?

A: We talked to Dennis Abcede and Mr. Santos, Ma’am.

Q: And what did you tell them?

A: I will tell them why did you not grant the extension for us, Ma’am.

Q: What was the response of Mr. Abcede and Mr. Santos?

A: Mr. Abcede and Mr. Santos told me, Mr. Ley don’t worry, you will not be liquidated of any
single day for this because we can see that you worked so hard for this project, Ma’am.

Q: And what did you do after you were given that response of Mr. Abcede and Mr. Santos?

A: They told me you just relax and finish the project, and we will pay you up to the last
centavos, Ma’am.

Q: What did you do after taking that statement or assurance?

A: As gentleman’s agreement I just continued working without complaining anymore,

Ma’am.66
The above testimony is uncontradicted. Even assuming that all the reasons LCDC presented
do not qualify as fortuitous events, as contemplated by law, this Court finds that PRHC is
estopped from denying that it had granted a waiver of the liquidated damages the latter
corporation may collect from the former due to a delay in the construction of any of the
buildings.

Courts may rule on causes of action not included in the Complaint, as long as these have
been proven during trial without the objection of the opposing party.

PRHC argues that since the parties had already limited the issues to those reflected in their
joint stipulation of facts, neither the trial court nor the appellate court has the authority to rule
upon issues not included therein. Thus it was wrong for the trial court and the CA to have
awarded the amounts of ₱ 5,529,495.76 representing the remaining balance for Project 3 as
well as for the ₱ 232,367.96 representing the balance for the construction of the drivers’
quarters in Project 3. PRHC claims that in the Stipulation of Facts, all the issues regarding
Project 3 were already made part of the computation of the balances for the other projects. It
thus argues that the computation for the Tektite Building showed that the overpayment for
Project 3 in the amount of ₱ 9,531,181.80 was credited as payment for the Tektite Tower
Project.67 It reasons that, considering that it actually made an overpayment for Project 3, it
should not be made liable for the remaining balances for Project 3 and the drivers’ quarters in
Project 3.68 It is LCDC’s position, however, that the Stipulation of Facts covers the balances
due only for the Tektite Tower Project, Project 1, and Project 2. 69 Since Project 3 was not
included in the reconciliation contained in the said stipulation, it maintains that the balance for
Project 3 remains at ₱ 5,529,495.76,70 and that the balance for the construction of the drivers’
quarters in Project 3 remains at ₱ 232,367.96.

On its part, LCDC disputes the deletion by the CA of the lower court’s grant of the alleged ₱
7,112,738.82 unpaid balance for the concreting works in the Tektite Building. The CA had
ruled that this cause of action was withdrawn by the parties when they did not include it in
their Joint Stipulation of Facts. LCDC argues that to the contrary, the silence of the Stipulation
of Facts on this matter proves that the claim still stands.71

Considering that the unpaid balances for Project 3, its driver’s quarters, and the concreting
works in the Tektite Building were not covered by the Stipulation of Facts entered into by the
parties, we rule that no judicial admission could have been made by LCDC regarding any
issue involving the unpaid balances for those pieces of work.

We affirm in this case the doctrine that courts may rule or decide on matters that, although not
submitted as issues, were proven during trial. The admission of evidence, presented to
support an allegation not submitted as an issue, should be objected to at the time of its
presentation by the party to be affected thereby; otherwise, the court may admit the evidence,
and the fact that such evidence seeks to prove a matter not included or presented as an issue
in the pleadings submitted becomes irrelevant, because of the failure of the appropriate party
to object to the presentation.

No objection was raised when LCDC presented evidence to prove the outstanding balances
for Project 3, its driver’s quarters, and the concreting works in the Tektite Building.

In Phil. Export and Foreign Loan Guarantee Corp. v. Phil. Infrastructures, et al., 72 this Court
held:

It is settled that even if the complaint be defective, but the parties go to trial thereon, and the
plaintiff, without objection, introduces sufficient evidence to constitute the particular cause of
action which it intended to allege in the original complaint, and the defendant voluntarily
produces witnesses to meet the cause of action thus established, an issue is joined as fully
and as effectively as if it had been previously joined by the most perfect pleadings. Likewise,
when issues not raised by the pleadings are tried by express or implied consent of the parties,
they shall be treated in all respects as if they had been raised in the pleadings.
Considering the absence of timely and appropriate objections, the trial court did not err in
admitting evidence of the unpaid balances for Project 3, its driver’s quarters, and the
concreting works in the Tektite Building. Furthermore, both the lower and the appellate courts
found that the supporting evidence presented by LCDC were sufficient to prove that the
claimed amounts were due, but that they remained unpaid.

LCDC should be held liable for the corrective works to redo or repair the defective
waterproofing in Project 2.

The waterproofing of Project 2 was not undertaken by LCDC. Instead, Vulchem Corporation
(Vulchem), which was recommended by Santos and Abcede, was hired for that task.
Vulchem’s waterproofing turned out to be defective. In order to correct or repair the defective
waterproofing, PRHC had to contract the services of another corporation, which charged it
₱2,006,000.

Denying liability by alleging that PRHC forced it into hiring Vulchem Corporation for the
waterproofing works in Project 2, LCDC argues that under Article 1892, an agent is
responsible for the acts of the substitute if he was given the power to appoint a substitute.
Conversely, if it is the principal and not the agent who appointed the substitute, the agent
bears no responsibility for the acts of the sub-agent.73 The provision reads:

"Art. 1892. The agent may appoint a substitute if the principal has not prohibited him from
doing so; but he shall be responsible for the acts of the substitute:

(1) When he was not given the power to appoint one;

(2) When he was given such power, but without designating the person, and the
person appointed was notoriously incompetent or insolvent."

LCDC argues that because PRHC, as the principal, had designated Vulchem as sub-agent,
LCDC, as the agent, should not be made responsible for the acts of the substitute, even in the
instance where the latter were notoriously incompetent.74

LCDC’s reliance on Art. 1892 is misplaced. The principles of agency are not to be applied to
this case, since the legal relationship between PRHC and LCDC was not one of agency, but
was rather that between the owner of the project and an independent contractor under a
contract of service. Thus, it is the agreement between the parties and not the Civil Code
provisions on agency that should be applied to resolve this issue.

Art. XIV of the Project 2 Agreement clearly states that if the contractor sublets any part of the
agreement to a third party, who in effect becomes a sub-contractor, the losses or expenses
that result from the acts/inactions of the sub-contractor should be for the contractor’s account,
to wit:

ARTICLE XIV – ASSIGNMENT

This Agreement, and/or any of the payments to be due hereunder shall not be assigned in
whole or in part by the CONTRACTOR nor shall any part of the works be sublet by
CONTRACTOR without the prior written consent of OWNER, and such consent shall not
relieve the CONTRACTOR from full responsibility and liability for the works hereunder shall
not be granted in any event until CONTRACTOR has furnished OWNER with satisfactory
evidence that the Sub-Contractor is carrying ample insurance to the same extent and in the
same manner as herein provided to be furnished by CONTRACTOR. If the agreement is
assigned or any part thereof is sublet, CONTRACTOR shall exonerate, indemnify and save
harmless the OWNER from and against any and all losses or expenses caused thereby. 75

LCDC had every right to reject Vulchem as sub-contractor for the waterproofing work of
Project 2 but it did not do so and proceeded to hire the latter. It is not unusual for project
owners to recommend sub-contractors, and such recommendations do not diminish the
liability of contractors in the presence of an Article XIV-type clause in the construction
agreement. The failure of LCDC to ensure that the work of its sub-contractor is satisfactory
makes it liable for the expenses PRHC incurred in order to correct the defective works of the
sub-contractor. The CA did not err in ruling that the contract itself gave PRHC the authority to
recover the expenses for the "re-do" works arising from the defective work of Vulchem.76

LCDC is entitled to attorney’s fees and the expenses of litigation and costs.

According to the CA, LCDC was not entitled to attorney’s fees, because it was not the
aggrieved party, but was the one that violated the terms of the construction agreements and
should thus be made to pay costs.77 LCDC claims, on the other hand, that the CA seriously
erred in deleting the lower court’s award of ₱750,000 attorney’s fees and the expenses of
litigation in its favor, since this award is justified under the law. 78 To support its claim, LCDC
cites Article 2208(5), which provides:

ART. 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

... ... ...

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff’s plainly valid, just and demandable claim;

... ... ...

Attorney's fees may be awarded when the act or omission of the defendant compelled the
plaintiff to incur expenses to protect the latter’s interest.79 In ABS-CBN Broadcasting Corp. v.
CA,80 we held thus:

The general rule is that attorney's fees cannot be recovered as part of damages because of
the policy that no premium should be placed on the right to litigate. They are not to be
awarded every time a party wins a suit. The power of the court to award attorney's fees under
Article 2208 demands factual, legal, and equitable justification. Even when a claimant is
compelled to litigate with third persons or to incur expenses to protect his rights, still
attorney's fees may not be awarded where no sufficient showing of bad faith could be
reflected in a party's persistence in a case other than an erroneous conviction of the
righteousness of his cause.

LCDC has failed to establish bad faith on the part of PRHC so as to sustain its position that it
is entitled to attorney’s fees. Nevertheless, the CA erred in reversing the lower court’s
Decision granting LCDC’s claim for attorney’s fees considering that the construction
agreements contain a penal clause that deals with the award of attorney’s fees, as follows:

In the event the OWNER/CONTRACTOR institutes a judicial proceeding in order to enforce

any terms or conditions of this Agreement, the CONTRACTOR/OWNER should it be
adjudged liable in whole or in part, shall pay the OWNER/CONTRACTOR reasonable
attorney’s fees in the amount equivalent to Twenty Percent (20%) of the total amount claimed
in addition to all expenses of litigation and costs of the suit.

Equivalent to at least Twenty Percent (20%) of the total amount claimed in addition to all
expenses of litigation and costs of the suit.

As long as a stipulation does not contravene the law, morals, and public order, it is binding
upon the obligor.81 Thus, LCDC is entitled to recover attorney’s fees. Nevertheless, this Court
deems it proper to equitably reduce the stipulated amount. Courts have the power to reduce
the amount of attorney’s fees when found to be excessive,82viz:
We affirm the equitable reduction in attorney’s fees. These are not an integral part of the cost
of borrowing, but arise only when collecting upon the Notes becomes necessary. The purpose
of these fees is not to give respondent a larger compensation for the loan than the law
already allows, but to protect it against any future loss or damage by being compelled to
retain counsel – in-house or not—to institute judicial proceedings for the collection of its
credit. Courts have has the power to determine their reasonableness based on quantum
meruit and to reduce the amount thereof if excessive.83

We reverse the appellate court’s Decision and reinstate the lower court’s award of attorney’s
fees, but reduce the amount from ₱750,000 to ₱200,000.

WHEREFORE, we SET ASIDE the Decision of the Court of Appeals and RULE as follows:

I. We find Philippine Realty and Holdings Corporation (PRHC) LIABLE to Ley Construction
Development Corporation (LCDC) in the amount of ₱ 64,029,710.22, detailed as follows:

1. ₱ 13,251,152.61 as balance yet unpaid by PRHC for Project 2;

2. ₱ 1,703,955.07 as balance yet unpaid by PRHC for Project 1;

3. ₱ 5,529,495.76 as balance yet unpaid by PRHC for Project 3;

4. ₱ 232,367.96 as balance yet unpaid by PRHC for the drivers’ quarters for
Project 3;

5. ₱ 36,000,000.00 as agreed upon in the escalation agreement entered into

by PRHC’s representatives and LCDC for the Tektite Building;

6. ₱ 7,112,738.82 as balance yet unpaid by PRHC for the concreting works

from the ground floor to the fifth floor of the Tektite Building;

7. ₱ 200,000.00 as LCDC’s reduced attorney’s fees.

II. Further, we find LCDC LIABLE to PRHC in the amount of ₱ 6,652,947.75 detailed as
follows:

1. ₱ 4,646,947.75 for the overpayment made by PRHC for the Tektite

Building;

2. ₱ 2,006,000.00 for the expenses incurred by PRHC for corrective works to

redo/repair the allegedly defective waterproofing construction work done by
LCDC in Project 2.

The respective liabilities of the parties as enumerated above are hereby SET OFF against
each other, and PRHC is hereby DIRECTED to pay LCDC the net amount due, which is ₱
57,376,762.47, with legal interest from the date of the filing of Complaint.

SO ORDERED.
PARI DELICTO DOCTRINE

G.R. No. 109491 February 28, 2001

ATRIUM MANAGEMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON,
RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents.

----------------------------------------

G.R. No. 121794 February 28, 2001

LOURDES M. DE LEON, petitioner,

vs.
COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION,respondents.

PARDO, J.:

What is before the Court are separate appeals from the decision of the Court of
Appeals,1 ruling that Hi-Cement Corporation is not liable for four checks amounting to P2
million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.

On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court,
Manila an action for collection of the proceeds of four postdated checks in the total amount of
P2 million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de
Leon,2 treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T.
Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to
petitioner Atrium Management Corporation for valuable consideration. Upon presentment for
payment, the drawee bank dishonored all four checks for the common reason "payment
stopped". Atrium, thus, instituted this action after its demand for payment of the value of the
checks was denied.3

After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes
M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement
Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million
corresponding to the value of the four checks, plus interest and attorney's fees. 4

On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its
decision modifying the decision of the trial court, absolving Hi-Cement Corporation from
liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes
M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2)
The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable
consideration.5

At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February
1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to
discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of
E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-
Cement the fact that the checks represented payment for petroleum products which E.T.
Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981
and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer,
confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum
products.6
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was
once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was
familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T.
Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-
Cement a loan which the subject checks would secure as collateral.7

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the
dispositive portion of which reads:

"WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its
cause of action by preponderance of evidence, judgment is hereby rendered ordering
all the defendants except defendant Antonio de las Alas to pay plaintiff jointly and
severally the amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of
interest from the filling of the complaint until fully paid, plus the sum of TWENTY
THOUSAND (P20,000.00) PESOS as and for attorney's fees and the cost of suit."

All other claims are, for lack of merit dismissed.

SO ORDERED."8

In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable
with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that Atrium
was an ordinary holder, not a holder in due course of the rediscounted checks.10

Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did
not authorize the issuance of the checks, it could still be held liable for the checks. And
assuming that the checks were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and that the liability shall be
borne alone by E.T. Henry.11

On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the
trial court, the dispositive portion of which reads:

"Judgement is hereby rendered:

(1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation

and Antonio De las Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly
and severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00)
with interest at the legal rate from the filling of the complaint until fully paid, plus
P20,000.00 for attorney's fees.

(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de
Leon, jointly and severally to pay defendant Hi-Cement Corporation, the sum of
P20,000.00 as and for attorney's fees.

With cost in this instance against the appellee Atrium Management Corporation and
appellant Lourdes Victoria M. de Leon.

So ordered."12

Hence, the recourse to this Court.13

The issues raised are the following:

In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act;

2. Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and
ordering it to pay P20,000.00 as attorney's fees.14

In G. R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the
Hi-Cement checks issued to E.T. Henry;

2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as
signatory of the checks was personally liable for the value of the checks, which were
declared to be issued without consideration;

4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement

attorney's fees and costs.15

We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was an ultra vires act. The
record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial
assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of
hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for
counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by
E.T. Henry to Hi-Cement?

Hi-Cement, however, maintains that the checks were not issued for consideration and that
Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the
corporation and is authorized to sign checks for the corporation. At the time of the issuance of
the checks, there were sufficient funds in the bank to cover payment of the amount of P2
million pesos.

It is, however, our view that there is basis to rule that the act of issuing the checks was well
within the ambit of a valid corporate act, for it was for securing a loan to finance the activities
of the corporation, hence, not an ultra viresact.

"An ultra vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon it by
law"16 The term "ultra vires" is "distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel, while the latter is
void and cannot be validated."17

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were
personally liable for the checks issued as corporate officers and authorized signatories of the
check.

"Personal liability of a corporate director, trustee or officer along (although not necessarily)
with the corporation may so validly attach, as a rule, only when:
 "1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;

"2. He consents to the issuance of watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;

"3. He agrees to hold himself personally and solidarily liable with the corporation; or

"4. He is made, by a specific provision of law, to personally answer for his corporate
action."18

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of
Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when
she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T.
Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was
aware that the checks were strictly endorsed for deposit only to the payee's account and not
to be further negotiated. What is more, the confirmation letter contained a clause that was not
true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-
Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms.
de Leon may be held personally liable therefor.1âwphi1.nêt

The next issue is whether or not petitioner Atrium was a holder of the checks in due course.
The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:

"A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it."

In the instant case, the checks were crossed checks and specifically indorsed for deposit to
payee's account only. From the beginning, Atrium was aware of the fact that the checks were
all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.

However, it does not follow as a legal proposition that simply because petitioner Atrium was
not a holder in due course for having taken the instruments in question with notice that the
same was for deposit only to the account of payee E.T. Henry that it was altogether precluded
from recovering on the instrument. The Negotiable Instruments Law does not provide that a
holder not in due course can not recover on the instrument.19

The disadvantage of Atrium in not being a holder in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable.20 One such defense is absence
or failure of consideration.21

We need not rule on the other issues raised, as they merely follow as a consequence of the
foregoing resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of
Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.

No costs.

SO ORDERED.
PARI DELICTO DOCTRINE

G.R. No. 137686 February 8, 2000

RURAL BANK OF MILAOR (CAMARINES SUR), petitioner,

vs.
FRANCISCA OCFEMIA, ROWENA BARROGO, MARIFE O. NIÑO, FELICISIMO OCFEMIA,
RENATO OCFEMIA JR, and WINSTON OCFEMIA, respondents.

PANGANIBAN, J.:

When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset in the normal course of business, it is legally obliged to
confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. It has a duty to perform necessary and lawful acts to enable the other
parties to enjoy all benefits of the contract which it had authorized.

The Case

Before this Court is a Petition for Review on Certiorari challenging the December 18, 1998
Decision of the Court of Appeals 1 (CA) in CA-GR SP No. 46246, which affirmed the May 20,
1997 Decision 2 of the Regional Trial Court (RTC) of Naga City (Branch 28). The CA disposed
as follows:

Wherefore, premises considered, the Judgment appealed from is hereby AFFIRMED.

Costs against the respondent-appellant. 3

The dispositive portion of the judgment affirmed by the CA ruled in this wise:

WHEREFORE, in view of all the foregoing findings, decision is hereby rendered

whereby the [petitioner] Rural Bank of Milaor (Camarines Sur), Inc. through its Board
of Directors is hereby ordered to immediately issue a Board Resolution confirming the
Deed of Sale it executed in favor of Renato Ocfemia marked Exhibits C, C-1 and C-
2); to pay [respondents] the sum of FIVE HUNDRED (P500.00) PESOS as actual
damages; TEN THOUSAND (P10,000.00) PESOS as attorney's fees; THIRTY
THOUSAND (P30,000.00) PESOS as moral damages; THIRTY THOUSAND
(P30,000.00) PESOS as exemplary damages; and to pay the costs. 4

Also assailed is the February 26, 1999 CA Resolution 5 which denied petitioner's Motion for
Reconsideration.

The Facts

The trial court's summary of the undisputed facts was reproduced in the CA Decision as
follows:

This is an action for mandamus with damages. On April 10, 1996, [herein petitioner]
was declared in default on motion of the [respondents] for failure to file an answer
within the reglementary-period after it was duly served with summons. On April 26,
1996, [herein petitioner] filed a motion to set aside the order of default with objection
thereto filed by [herein respondents].

On June 17, 1996, an order was issued denying [petitioner's] motion to set aside the
order of default. On July 10, 1996, the defendant filed a motion for reconsideration of
the order of June 17, 1996 with objection thereto by [respondents]. On July 12, 1996,
an order was issued denying [petitioner's] motion for reconsideration. On July 31,
1996, [respondents] filed a motion to set case for hearing. A copy thereof was duly
furnished the [petitioner] but the latter did not file any opposition and so [respondents]
were allowed to present their evidence ex-parte. A certiorari case was filed by the
[petitioner] with the Court of Appeals docketed as CA GR No. 41497-SP but the
petition was denied in a decision rendered on March 31, 1997 and the same is now
final.

The evidence presented by the [respondents] through the testimony of Marife O.

Niño, one of the [respondents] in this case, show[s] that she is the daughter of
Francisca Ocfemia, a co-[respondent] in this case, and the late Renato Ocfemia who
died on July 23, 1994. The parents of her father, Renato Ocfemia, were Juanita
Arellano Ocfemia and Felicisimo Ocfemia. Her other co-[respondents] Rowena O.
Barrogo, Felicisimo Ocfemia, Renato Ocfemia, Jr. and Winston Ocfemia are her
brothers and sisters.1âwphi1.nêt

Marife O. Niño knows the five (5) parcels of land described in paragraph 6 of the
petition which are located in Bombon, Camarines Sur and that they are the ones
possessing them which [were] originally owned by her grandparents, Juanita Arellano
Ocfemia and Felicisimo Ocfemia. During the lifetime of her grandparents,
[respondents] mortgaged the said five (5) parcels of land and two (2) others to the
[petitioner] Rural Bank of Milaor as shown by the Deed of Real Estate Mortgage
(Exhs. A and A-1) and the Promissory Note (Exh. B).

The spouses Felicisimo Ocfemia and Juanita Arellano Ocfemia were not able to
redeem the mortgaged properties consisting of seven (7) parcels of land and so the
mortgage was foreclosed and thereafter ownership thereof was transferred to the
[petitioner] bank. Out of the seven (7) parcels that were foreclosed, five (5) of them
are in the possession of the [respondents] because these five (5) parcels of land
described in paragraph 6 of the petition were sold by the [petitioner] bank to the
parents of Marife O. Niño as evidenced by a Deed of Sale executed in January 1988
(Exhs. C, C-1 and C-2).

The aforementioned five (5) parcels of land subject of the deed of sale (Exh. C), have
not been, however transferred in the name of the parents of Merife O. Niño after they
were sold to her parents by the [petitioner] bank because according to the Assessor's
Office the five (5) parcels of land, subject of the sale, cannot be transferred in the
name of the buyers as there is a need to have the document of sale registered with
the Register of Deeds of Camarines Sur.

In view of the foregoing, Marife O. Niño went to the Register of Deeds of Camarines
Sur with the Deed of Sale (Exh. C) in order to have the same registered. The Register
of Deeds, however, informed her that the document of sale cannot be registered
without a board resolution of the [petitioner] Bank. Marife Niño then went to the bank,
showed to if the Deed of Sale (Exh. C), the tax declaration and receipt of tax
payments and requested the [petitioner] for a board resolution so that the property
can be transferred to the name of Renato Ocfemia the husband of petitioner
Francisca Ocfemia and the father of the other [respondents] having died already.

The [petitioner] bank refused her request for a board resolution and made many
alibi[s]. She was told that the [petitioner] bank ha[d] a new manager and it had no
record of the sale. She was asked and she complied with the request of the
[petitioner] for a copy of the deed of sale and receipt of payment. The president of the
[petitioner] bank told her to get an authority from her parents and other [respondents]
and receipts evidencing payment of the consideration appearing in the deed of sale.
She complied with said requirements and after she gave all these documents, Marife
O. Niño was again told to wait for two (2) weeks because the [petitioner] bank would
still study the matter.
 After two (2) weeks, Marife O. Niño returned to the [petitioner] bank and she was told
that the resolution of the board would not be released because the [petitioner] bank
ha[d] no records from the old manager. Because of this, Marife O. Niño brought the
matter to her lawyer and the latter wrote a letter on December 22, 1995 to the
[petitioner] bank inquiring why no action was taken by the board of the request for the
issuance of the resolution considering that the bank was already fully paid [for] the
consideration of the sale since January 1988 as shown by the deed of sale itself
(Exh. D and D-1 ).

On January 15, 1996 the [petitioner] bank answered [respondents'] lawyer's letter
(Exh. D and D-1) informing the latter that the request for board resolution ha[d]
already been referred to the board of directors of the [petitioner] bank with another
request that the latter should be furnished with a certified machine copy of the receipt
of payment covering the sale between the [respondents] and the [petitioner] (Exh. E).
This request of the [petitioner] bank was already complied [with] by Marife O. Niño
even before she brought the matter to her lawyer.

On January 23, 1996 [respondents'] lawyer wrote back the branch manager of the
[petitioner] bank informing the latter that they were already furnished the receipts the
bank was asking [for] and that the [respondents] want[ed] already to know the stand
of the bank whether the board [would] issue the required board resolution as the deed
of sale itself already show[ed] that the [respondents were] clearly entitled to the land
subject of the sale (Exh. F). The manager of the [petitioner] bank received the letter
which was served personally to him and the latter told Marife O. Niño that since he
was the one himself who received the letter he would not sign anymore a copy
showing him as having already received said letter (Exh. F).

After several days from receipt of the letter (Exh. F) when Marife O. Niño went to the
[petitioner] again and reiterated her request, the manager of the [petitioner] bank told
her that they could not issue the required board resolution as the [petitioner] bank
ha[d] no records of the sale. Because of this Merife O. Niño already went to their
lawyer and ha[d] this petition filed.

The [respondents] are interested in having the property described in paragraph 6 of

the petition transferred to their names because their mother and co-petitioner,
Francisca Ocfemia, is very sickly and they want to mortgage the property for the
medical expenses of Francisca Ocfemia. The illness of Francisca Ocfemia beg[a]n
after her husband died and her suffering from arthritis and pulmonary disease already
became serious before December 1995.

Marife O. Niño declared that her mother is now in serious condition and they could
not have her hospitalized for treatment as they do not have any money and this is
causing the family sleepless nights and mental anguish, thinking that their mother
may die because they could not submit her for medication as they do not have
money. 6

The trial court granted the Petition. As noted earlier, the CA affirmed the RTC Decision.

Hence, this recourse. 7 In a Resolution dated June 23, 1999, this Court issued a Temporary
Restraining Order directing the trial court "to refrain and desist from executing [pending
appeal] the decision dated May 20, 1997 in Civil Case No. RTC-96-3513, effective
immediately until further orders from this Court." 8

Ruling of the Court of Appeals

The CA held that herein respondents were "able to prove their present cause of action"
against petitioner. It ruled that the RTC had jurisdiction over the case, because (1) the Petition
involved a matter incapable of pecuniary estimation; (2) mandamus fell within the jurisdiction
of RTC; and (3) assuming that the action was for specific performance as argued by the
petitioner, it was still cognizable by the said court.

Issues

In its Memorandum, 9 the bank posed the following questions:

1. Question of Jurisdiction of the Regional Trial Court. — Has a Regional Trial Court
original jurisdiction over an action involving title to real property with a total assessed
value of less than P20,000.00?

2. Question of Law. — May the board of directors of a rural banking corporation be

compelled to confirm a deed of absolute sale of real property owned by the
corporation which deed of sale was executed by the bank manager without prior
authority of the board of directors of the rural banking corporation? 10

This Court's Ruling

The present Petition has no merit.

First Issue:
Jurisdiction of the Regional Trial Court

Petitioner submits that the RTC had no jurisdiction over the case. Disputing the ruling of the
appellate court that the present action was incapable of pecuniary estimation, petitioner
argues that the matter in fact involved title to real property worth less than P20,000. Thus,
under RA 7691, the case should have been filed before a metropolitan trial court, a municipal
trial court or a municipal circuit trial court.

We disagree. The well-settled rule is that jurisdiction is determined by the allegations of the
complaint. 11 In the present case, the Petition for Mandamus filed by respondents before the
trial court prayed that petitioner-bank be compelled to issue a board resolution confirming the
Deed of Sale covering five parcels of unregistered land, which the bank manager had
executed in their favor. The RTC has jurisdiction over such action pursuant to Section 21 of
BP 129, which provides:

Sec. 21. Original jurisdiction in other cases. — Regional Trial Courts shall exercise
original jurisdiction;

(1) in the issuance of writ of certiorari, prohibition, mandamus, quo warranto, habeas
corpus and injunction which may be enforced in any part of their respective regions;
and

(2) In actions affecting ambassadors and other public ministers and consuls.

A perusal of the Petition shows that the respondents did not raise any question involving the
title to the property, but merely asked that petitioner's board of directors be directed to issue
the subject resolution. Moreover, the bank did not controvert the allegations in the said
Petition. To repeat, the issue therein was not the title to the property; it was respondents' right
to compel the bank to issue a board resolution confirming the Deed of Sale.

Second Issue:
Authority of the Bank Manager

Respondents initiated the present proceedings, so that they could transfer to their names the
subject five parcels of land; and subsequently, to mortgage said lots and to use the loan
proceeds for the medical expenses of their ailing mother. For the property to be transferred in
their names, however, the register of deeds required the submission of a board resolution
from the bank confirming both the Deed of Sale and the authority of the bank manager, Fe S.
Tena, to enter into such transaction. Petitioner refused. After being given the runaround by
the bank, respondents sued in exasperation.

Allegations in the Petition for Mandamus Deemed Admitted

Respondents based their action before the trial court on the Deed of Sale, the substance of
which was alleged in and a copy thereof was attached to the Petition for Mandamus. The
Deed named Fe S. Tena as the representative of the bank. Petitioner, however, failed to
specifically deny under oath the allegations in that contract. In fact, it filed no answer at all, for
which reason it was declared in default. Pertinent provisions of the Rules of Court read:

Sec. 7. Action or defense based on document. — Whenever an action or defense is

based upon a written instrument or document, the substance of such instrument or
document shall be set forth in the pleading, and the original or a copy thereof shall be
attached to the pleading as an exhibit, which shall be deemed to be a part of the
pleading, or said copy may with like effect be set forth in the pleading.

Sec. 8. How to contest genuineness of such documents.— When an action or

defense is founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse party,
under oath, specifically denies them, and sets forth what he claims to be the facts; but
this provision does not apply when the adverse party does not appear to be a party to
the instrument or when compliance with an order for an inspection of the original
instrument is refused. 12

In failing to file its answer specifically denying under oath the Deed of Sale, the bank admitted
the due execution of the said contract. Such admission means that it acknowledged that Tena
was authorized to sign the Deed of Sale on its behalf. 13 Thus, defenses that are inconsistent
with the due execution and the genuineness of the written instrument are cut off by an
admission implied from a failure to make a verified specific denial.

Other Acts of the Bank

In any event, the bank acknowledged, by its own acts or failure to act, the authority of Fe S.
Tena to enter into binding contracts. After the execution of the Deed of Sale, respondents
occupied the properties in dispute and paid the real estate taxes due thereon. If the bank
management believed that it had title to the property, it should have taken some measures to
prevent the infringement or invasion of its title thereto and possession thereof.

Likewise, Tena had previously transacted business on behalf of the bank, and the latter had
acknowledged her authority. A bank is liable to innocent third persons where representation is
made in the course of its normal business by an agent like Manager Tena, even though such
agent is abusing her authority. 14 Clearly, persons dealing with her could not be blamed for
believing that she was authorized to transact business for and on behalf of the bank. Thus,
this Court has ruled in Board of Liquidators v. Kalaw: 15

Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general manager
may bind the company without formal authorization of the board of directors. In
varying language, existence of such authority is established, by proof of the course of
business, the usages and practices of the company and by the knowledge which the
board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. So also,
 . . . authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised.

. . . Thus, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has been permitted by the
directors to manage its business.

Notwithstanding the putative authority of the manager to bind the bank in the Deed of Sale,
petitioner has failed to file an answer to the Petition below within the reglementary period, let
alone present evidence controverting such authority. Indeed, when one of herein
respondents, Marife S. Nino, went to the bank to ask for the board resolution, she was merely
told to bring the receipts. The bank failed to categorically declare that Tena had no authority.
This Court stresses the following:

. . . Corporate transactions would speedily come to a standstill were every person

dealing with a corporation held duty-bound to disbelieve every act of its responsible
officers, no matter how regular they should appear on their face. This Court has
observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that —

In passing upon the liability of a corporation in cases of this kind it is always

well to keep in mind the situation as it presents itself to the third party with
whom the contract is made. Naturally he can have little or no information as
to what occurs in corporate meetings; and he must necessarily rely upon the
external manifestation of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law; and we would be
sorry to announce a doctrine which would permit the property of man in the
city of Paris to be whisked out of his hands and carried into a remote quarter
of the earth without recourse against the corporation whose name and
authority had been used in the manner disclosed in this case. As already
observed, it is familiar doctrine that if a corporation knowingly permits one of
its officers, or any other agent, to do acts within the scope of an apparent
authority, and thus holds him out to the public as possessing power to do
those acts, the corporation will, as against any one who has in good faith
dealt with the corporation through such agent, be estopped from denying his
authority; and where it is said "if the corporation permits this means the same
as "if the thing is permitted by the directing power of the corporation." 16

In this light, the bank is estopped from questioning the authority of the bank manager to enter
into the contract of sale. If a corporation knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, it holds the agent out to the public as
possessing the power to do those acts; thus, the corporation will, as against anyone who has
in good faith dealt with it through such agent, be estopped from denying the agent's
authority. 17

Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale. Accordingly, it
has a clear legal duty to issue the board resolution sought by respondent's. Having authorized
her to sell the property, it behooves the bank to confirm the Deed of Sale so that the buyers
may enjoy its full use.

The board resolution is, in fact, mere paper work. Nonetheless, it is paper work necessary in
the orderly operations of the register of deeds and the full enjoyment of respondents' rights.
Petitioner-bank persistently and unjustifiably refused to perform its legal duty. Worse, it was
less than candid in dealing with respondents regarding this matter. In this light, the Court finds
it proper to assess the bank treble costs, in addition to the award of damages.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision and Resolution
AFFIRMED. The Temporary Restraining Order issued by this Court is hereby LIFTED. Treble
costs against petitioner.

SO ORDERED.
PARI DELICTO DOCTRINE

G.R. No.176897 December 11, 2013

ADVANCE PAPER CORPORATION and GEORGE HAW, in his capacity as President of

Advance Paper Corporation, Petitioners,
vs.
ARMA TRADERS CORPORATION, MANUEL TING, CHENG GUI and BENJAMIN
NG, Respondents.

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

ANTONIO TAN and UY SENG KEE WILLY, Respondents.

DECISION

BRION, J.:

Before us is a Petition for Review1 seeking to set aside the Decision of the Court of
Appeals (CA) in CA-G.R. CV No. 71499 dated March 31, 2006 and the Resolution dated
March 7, 2007.2 The Decision reversed and set aside the ruling of the Regional Trial
Court (RTC) of Manila, Branch 18 in Civil Case No. 94-72526 which ordered Arma Traders
Corporation (Arma Traders) to pay Advance Paper Corporation (Advance Paper) the sum of
₱15,321,798.25 with interest, and ₱1,500,000.00 for attorney’s fees, plus the cost of the suit. 3

Factual Antecedents

Petitioner Advance Paper is a domestic corporation engaged in the business of producing,

printing, manufacturing, distributing and selling of various paper products. 4 Petitioner George
Haw (Haw) is the President while his wife, Connie Haw, is the General Manager. 5

Respondent Arma Traders is also a domestic corporation engaged in the wholesale and
distribution of school and office supplies, and novelty products. 6 Respondent Antonio Tan
(Tan) was formerly the President while respondent Uy Seng Kee Willy (Uy) is the Treasurer of
Arma Traders.7 They represented Arma Traders when dealing with its supplier, Advance
Paper, for about 14 years.8

On the other hand, respondents Manuel Ting, Cheng Gui and Benjamin Ng worked for Arma
Traders as Vice-President, General Manager and Corporate Secretary, respectively.9

On various dates from September to December 1994, Arma Traders purchased on credit
notebooks and other paper products amounting to ₱7,533,001.49 from Advance Paper. 10

Upon the representation of Tan and Uy, Arma Traders also obtained three loans from
Advance Paper in November 1994 in the amounts of ₱3,380,171.82, ₱1,000,000.00, and
₱3,408,623.94 or a total of ₱7,788,796.76.11 Arma Traders needed the loan to settle its
obligations to other suppliers because its own collectibles did not arrive on time. 12 Because of
its good business relations with Arma Traders, Advance Paper extended the loans. 13

As payment for the purchases on credit and the loan transactions, Arma Traders issued 82
postdated checks14payable to cash or to Advance Paper. Tan and Uy were Arma Traders’
authorized bank signatories who signed and issued these checks which had the aggregate
amount of ₱15,130,636.87.15
Advance Paper presented the checks to the drawee bank but these were dishonored either
for "insufficiency of funds" or "account closed." Despite repeated demands, however, Arma
Traders failed to settle its account with Advance Paper.16

On December 29, 1994, the petitioners filed a complaint17 for collection of sum of money with
application for preliminary attachment against Arma Traders, Tan, Uy, Ting, Gui, and Ng.

Claims of the petitioners

The petitioners claimed that the respondents fraudulently issued the postdated checks as
payment for the purchases and loan transactions knowing that they did not have sufficient
funds with the drawee banks.18

To prove the purchases on credit, the petitioners presented the summary of the transactions
and their corresponding sales invoices as their documentary evidence. 19

During the trial, Haw also testified that within one or two weeks upon delivery of the paper
products, Arma Traders paid the purchases in the form of postdated checks. Thus, he
personally collected these checks on Saturdays and upon receiving the checks, he
surrendered to Arma Traders the original of the sales invoices while he retained the duplicate
of the invoices.20

To prove the loan transactions, the petitioners presented the copies of the checks21 which
Advance Paper issued in favor of Arma Traders. The petitioners also filed a
manifestation22 dated June 14, 1995, submitting a bank statement from Metrobank EDSA
Kalookan Branch. This was to show that Advance Paper’s credit line with Metrobank has
been transferred to the account of Arma Traders as payee from October 1994 to December
1994.

Moreover, Haw testified to prove the loan transactions. When asked why he considered
extending the loans without any collateral and loan agreement or promissory note, and only
on the basis of the issuance of the postdated checks, he answered that it was because he
trusted Arma Traders since it had been their customer for a long time and that none of the
previous checks ever bounced.23

Claims of the respondents

The respondents argued that the purchases on credit were spurious, simulated and
fraudulent since there was no delivery of the ₱7,000,000.00 worth of notebooks and other
paper products.24

During the trial, Ng testified that Arma Traders did not purchase notebooks and other paper
products from September to December 1994. He claimed that during this period, Arma
Traders concentrated on Christmas items, not school and office supplies. He also narrated
that upon learning about the complaint filed by the petitioners, he immediately looked for
Arma Traders’ records and found no receipts involving the purchases of notebooks and other
paper products from Advance Paper.25

As to the loan transactions, the respondents countered that these were the personal
obligations of Tan and Uy to Advance Paper. These loans were never intended to benefit the
respondents.

The respondents also claimed that the loan transactions were ultra vires because the board of
directors of Arma Traders did not issue a board resolution authorizing Tan and Uy to obtain
the loans from Advance Paper. They claimed that the borrowing of money must be done only
with the prior approval of the board of directors because without the approval, the corporate
officers are acting in excess of their authority or ultra vires. When the acts of the corporate
officers are ultra vires, the corporation is not liable for whatever acts that these officers
committed in excess of their authority. Further, the respondents claimed that Advance Paper
failed to verify Tan and Uy’s authority to transact business with them. Hence, Advance Paper
should suffer the consequences.26

The respondents accused Tan and Uy for conspiring with the petitioners to defraud Arma
Traders through a series of transactions known as rediscounting of postdated checks. In
rediscounting, the respondents explained that Tan and Uy would issue Arma Traders’
postdated checks to the petitioners in exchange for cash, discounted by as much as 7% to
10% depending on how long were the terms of repayment. The rediscounted percentage
represented the interest or profit earned by the petitioners in these transactions. 27

Tan did not file his Answer and was eventually declared in default.

On the other hand, Uy filed his Answer28 dated January 20, 1995 but was subsequently
declared in default upon his failure to appear during the pre-trial. In his Answer, he admitted
that Arma Traders together with its corporate officers have been transacting business with
Advance Paper.29 He claimed that he and Tan have been authorized by the board of directors
for the past 13 years to issue checks in behalf of Arma Traders to pay its obligations with
Advance Paper.30 Furthermore, he admitted that Arma Traders’ checks were issued to
pay its contractual obligations with Advance Paper. 31 However, according to him,
Advance Paper was informed beforehand that Arma Traders’ checks were funded out of the
₱20,000,000.00 worth of collectibles coming from the provinces. Unfortunately, the expected
collectibles did not materialize for unknown reasons.32

Ng filed his Answer33 and claimed that the management of Arma Traders was left entirely to
Tan and Uy. Thus, he never participated in the company’s daily transactions. 34

Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders’ Vice-President for Legal Affairs and Credit
and Collection, testified that he investigated the transactions involving Tan and Uy and
discovered that they were financing their own business using Arma Traders’ resources. He
also accused Haw for conniving with Tan and Uy in fraudulently making Arma Traders liable
for their personal debts. He based this conclusion from the following: First, basic human
experience and common sense tell us that a lender will not agree to extend additional loan to
another person who already owes a substantial sum from the lender – in this case, petitioner
Advance Paper. Second, there was no other document proving the existence of the loan other
than the postdated checks. Third, the total of the purchase and loan transactions vis-à-vis the
total amount of the postdated checks did not tally. Fourth, he found out that the certified true
copy of Advance Paper’s report with the Securities and Exchange Commission (SEC report)
did not reflect the ₱15,000,000.00 collectibles it had with Arma Traders. 35

Atty. Ang also testified that he already filed several cases of estafa and qualified
theft36 against Tan and Uy and that several warrants of arrest had been issued against them.

In their pre-trial brief,37 the respondents named Sharow Ong, the secretary of Tan and Uy, to
testify on how Tan and Uy conspired with the petitioners to defraud Arma Traders. However,
the respondents did not present her on the witness stand.

The RTC Ruling

On June 18, 2001, the RTC ruled that the purchases on credit and loans were sufficiently
proven by the petitioners. Hence, the RTC ordered Arma Traders to pay Advance Paper the
sum of ₱15,321,798.25 with interest, and ₱1,500,000.00 for attorney’s fees, plus the cost of
the suit.

The RTC held that the respondents failed to present hard, admissible and credible evidence
to prove that the sale invoices were forged or fictitious, and that the loan transactions were
personal obligations of Tan and Uy. Nonetheless, the RTC dismissed the complaint against
Tan, Uy, Ting, Gui and Ng due to the lack of evidence showing that they bound themselves,
either jointly or solidarily, with Arma Traders for the payment of its account. 38

Arma Traders appealed the RTC decision to the CA.

The CA Ruling

The CA held that the petitioners failed to prove by preponderance of evidence the existence
of the purchases on credit and loans based on the following grounds:

First, Arma Traders was not liable for the loan in the absence of a board resolution
authorizing Tan and Uy to obtain the loan from Advance Paper. 39 The CA acknowledged that
Tan and Uy were Arma Traders’ authorized bank signatories. However, the CA explained that
this is not sufficient because the authority to sign the checks is different from the required
authority to contract a loan.40

Second, the CA also held that the petitioners presented incompetent and inadmissible
evidence to prove the purchases on credit since the sales invoices were hearsay.41 The CA
pointed out that Haw’s testimony as to the identification of the sales invoices was not an
exception to the hearsay rule because there was no showing that the secretaries who
prepared the sales invoices are already dead or unable to testify as required by the Rules of
Court.42 Further, the CA noted that the secretaries were not identified or presented in court. 43

Third, the CA ruling heavily relied on Ng’s Appellant’s Brief 44 which made the detailed
description of the "badges of fraud." The CA averred that the petitioners failed to satisfactorily
rebut the badges of fraud45 which include the inconsistencies in:

(1) "Exhibit E-26," a postdated check, which was allegedly issued in favor of Advance
Paper but turned out to be a check payable to Top Line, Advance Paper’s sister
company;46

(2) "Sale Invoice No. 8946," an evidence to prove the existence of the purchases on
credit, whose photocopy failed to reflect the amount stated in the duplicate
copy,47 and;

(3) The SEC report of Advance Paper for the year ended 1994 reflected its account
receivables amounting to ₱219,705.19 only – an amount far from the claimed
₱15,321,798.25 receivables from Arma Traders.48

Hence, the CA set aside the RTC’s order for Arma Traders to pay Advance Paper the sum of
₱15,321,798.25, ₱1,500,000.00 for attorney’s fees, plus cost of suit. 49 It affirmed the RTC
decision dismissing the complaint against respondents Tan, Uy, Ting, Gui and Ng.50 The CA
also directed the petitioners to solidarily pay each of the respondents their counterclaims of
₱250,000.00 as moral damages, ₱250,000.00 as exemplary damages, and ₱250,000.00 as
attorney’s fees.51

The Petition

The petitioners raise the following arguments.

First, Arma Traders led the petitioners to believe that Tan and Uy had the authority to obtain
loans since the respondents left the active and sole management of the company to Tan and
Uy since 1984. In fact, Ng testified that Arma Traders’ stockholders and board of directors
never conducted a meeting from 1984 to 1995. Therefore, if the respondents’ position will be
sustained, they will have the absurd power to question all the business transactions of Arma
Traders.52 Citing Lipat v. Pacific Banking Corporation,53 the petitioners said that if a
corporation knowingly permits one of its officers or any other agent to act within the scope of
an apparent authority, it holds him out to the public as possessing the power to do those acts;
thus, the corporation will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority.

Second, the petitioners argue that Haw’s testimony is not hearsay. They emphasize that Haw
has personal knowledge of the assailed purchases and loan transactions because he dealt
with the customers, and supervised and directed the preparation of the sales invoices and the
deliveries of the goods.54 Moreover, the petitioners stress that the respondents never objected
to the admissibility of the sales invoices on the ground that they were hearsay. 55

Third, the petitioners dispute the CA’s findings on the existence of the badges of fraud. The
petitioners countered:

(1) The discrepancies between the figures in the 15 out of the 96 photocopies and
duplicate originals of the sales invoices amounting to ₱4,624.80 – an insignificant
amount compared to the total purchases of ₱7,533,001.49 – may have been
caused by the failure to put the carbon paper.56 Besides, the remaining 81 sales
invoices are uncontroverted. The petitioners also raise the point that this
discrepancy is a nonissue because the duplicate originals were surrendered in the
RTC.57

(2) The respondents misled Haw during the cross-examination and took his answer
out of context.58 The petitioners argue that this maneuver is insufficient to discredit
Haw’s entire testimony.59

(3) Arma Traders should be faulted for indicating Top Line as the payee in Exhibit E-
26 or PBC check no. 091014. Moreover, Exhibit E-26 does not refer to PBC check
no. 091014 but to PBC check no. 091032 payable to the order of cash. 60

(4) The discrepancy in the total amount of the checks which is ₱15,130,363.87 as
against the total obligation of ₱15,321,798.25 does not necessarily prove that the
transactions are spurious.61

(5) The difference in Advance Paper’s accounts receivables in the SEC report and in
Arma Traders’ obligation with Advance Paper was based on non-existent evidence
because Exhibit 294-NG does not pertain to any balance sheet. 62 Moreover, the term
"accounts receivable" is not synonymous with "cause of action." The respondents
cannot escape their liability by simply pointing the SEC report because the petitioners
have established their cause of action – that the purchases on credit and loan
transactions took place, the respondents issued the dishonored checks to cover their
debts, and they refused to settle their obligation with Advance Paper. 63

The Case for the Respondents

The respondents argue that the Petition for Review should be dismissed summarily because
of the following procedural grounds: first, for failure to comply with A.M. No. 02-8-13-
SC;64 and second, the CA decision is already final and executory since the petitioners filed
their Motion for Reconsideration out of time. They explain that under the rules of the CA, if the
last day for filing of any pleading falls on a Saturday not a holiday, the same must be filed on
said Saturday, as the Docket and Receiving Section of the CA is open on a Saturday. 65

The respondents argue that while as a general rule, a corporation is estopped from denying
the authority of its agents which it allowed to deal with the general public; this is only true if
the person dealing with the agent dealt in good faith.66 In the present case, the respondents
claim that the petitioners are in bad faith because the petitioners connived with Tan and Uy to
make Arma Traders liable for the non-existent deliveries of notebooks and other paper
products.67 They also insist that the sales invoices are manufactured evidence. 68
As to the loans, the respondents aver that these were Tan and Uy’s personal obligations with
Advance Paper.69Moreover, while the three cashier’s checks were deposited in the account of
Arma Traders, it is likewise true that Tan and Uy issued Arma Traders’ checks in favor of
Advance Paper. All these checks are evidence of Tan, Uy and Haw’s systematic conspiracy
to siphon Arma Traders corporate funds.70

The respondents also seek to discredit Haw’s testimony on the basis of the
following. First, his testimony as regards the sales invoices is hearsay because he did not
personally prepare these documentary evidence.71 Second, Haw suspiciously never had any
written authority from his own Board of Directors to lend money. Third, the respondents also
questioned why Advance Paper granted the ₱7,000,000.00 loan without requiring Arma
Traders to present any collateral or guarantees.72

The Issues

The main procedural and substantive issues are:

I. Whether the petition for review should be dismissed for failure to comply with A.M.
No. 02-8-13-SC.

II. Whether the petition for review should be dismissed on the ground of failure to file
the motion for reconsideration with the CA on time.

III. Whether Arma Traders is liable to pay the loans applying the doctrine of apparent
authority.

IV. Whether the petitioners proved Arma Traders’ liability on the purchases on credit
by preponderance of evidence.

The Court's Ruling

We grant the petition.

The procedural issues.

First, the respondents correctly cited A.M. No. 02-8-13-SC dated February 19, 2008 which
refer to the amendment of the 2004 Rules on Notarial Practice. It deleted the Community Tax
Certificate among the accepted proof of identity of the affiant because of its inherent
unreliability. The petitioners violated this when they used Community Tax Certificate No.
05730869 in their Petition for Review.73 Nevertheless, the defective jurat in the
Verification/Certification of Non-Forum Shopping is not a fatal defect because it is only a
formal, not a jurisdictional, requirement that the Court may waive. 74 Furthermore, we cannot
simply ignore the millions of pesos at stake in this case. To do so might cause grave injustice
to a party, a situation that this Court intends to avoid.

Second, no less than the CA itself waived the rules on the period to file the motion for
reconsideration. A review of the CA Resolution75 dated March 7, 2007, reveals that the
petitioners’ Motion for Reconsideration was denied because the allegations were a mere
rehash of what the petitioners earlier argued – not because the motion for reconsideration
was filed out of time.

The substantive issues.

Arma Traders is liable to pay the

loans on the basis of the doctrine of
apparent authority.
The doctrine of apparent authority provides that a corporation will be estopped from denying
the agent’s authority if it knowingly permits one of its officers or any other agent to act within
the scope of an apparent authority, and it holds him out to the public as possessing the power
to do those acts.76 The doctrine of apparent authority does not apply if the principal did not
commit any acts or conduct which a third party knew and relied upon in good faith as a result
of the exercise of reasonable prudence. Moreover, the agent’s acts or conduct must have
produced a change of position to the third party’s detriment.77

In Inter-Asia Investment Industries v. Court of Appeals, 78 we explained:

Under this provision [referring to Sec. 23 of the Corporation Code], the power and
responsibility to decide whether the corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant
provisions of law. However, just as a natural person who may authorize another to do
certain acts for and on his behalf, the board of directors may validly delegate some of
its functions and powers to officers, committees or agents. The authority of such
individuals to bind the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business, viz.:

A corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that [the] authority to do so has been conferred upon him, and this
includes powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused person dealing with the officer or agent to believe that it has
conferred.

[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an officer or
agent as having the power to act or, in other words the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of his ordinary
powers. It requires presentation of evidence of similar act(s) executed either in its
favor or in favor of other parties. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of a corporate officer with the power to bind the
corporation. [emphases and underscores ours]

In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 79 we ruled that the
doctrine of apparent authority is applied when the petitioner, through its president Antonio
Punsalan Jr., entered into the First Contract without first securing board approval. Despite
such lack of board approval, petitioner did not object to or repudiate said contract, thus
"clothing" its president with the power to bind the corporation.

"Inasmuch as a corporate president is often given general supervision and control over
corporate operations, the strict rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such officer has certain limited powers
in the transaction of the usual and ordinary business of the corporation."80 "In the absence of
a charter or bylaw provision to the contrary, the president is presumed to have the
authority to act within the domain of the general objectives of its business and within
the scope of his or her usual duties."81

In the present petition, we do not agree with the CA’s findings that Arma Traders is not liable
to pay the loans due to the lack of board resolution authorizing Tan and Uy to obtain the
loans. To begin with, Arma Traders’ Articles of Incorporation 82 provides that the
corporation may borrow or raise money to meet the financial requirements of its
business by the issuance of bonds, promissory notes and other evidence of
indebtedness. Likewise, it states that Tan and Uy are not just ordinary corporate officers and
authorized bank signatories because they are also Arma Traders’ incorporators along with
respondents Ng and Ting, and Pedro Chao. Furthermore, the respondents, through Ng who is
Arma Traders’ corporate secretary, incorporator, stockholder and director, testified that the
sole management of Arma Traders was left to Tan and Uy and that he and the other
officers never dealt with the business and management of Arma Traders for 14 years.
He also confirmed that since 1984 up to the filing of the complaint against Arma
Traders, its stockholders and board of directors never had its meeting. 83

Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to transact
with third persons without the necessary written authority from its non-performing board of
directors. Arma Traders failed to take precautions to prevent its own corporate officers from
abusing their powers. Because of its own laxity in its business dealings, Arma Traders is now
estopped from denying Tan and Uy’s authority to obtain loan from Advance Paper.

We also reject the respondents’ claim that Advance Paper, through Haw, connived with Tan
and Uy. The records do not contain any evidence to prove that the loan transactions were
personal to Tan and Uy. A different conclusion might have been inferred had the cashier’s
checks been issued in favor of Tan and Uy, and had the postdated checks in favor of
Advance Paper been either Tan and/or Uy’s, or had the respondents presented convincing
evidence to show how Tan and Uy conspired with the petitioners to defraud Arma
Traders.84 We note that the respondents initially intended to present Sharow Ong, the
secretary of Tan and Uy, to testify on how Advance Paper connived with Tan and Uy. As
mentioned, the respondents failed to present her on the witness stand.

The respondents failed to object to

the admissibility of the sales invoices
on the ground that they are hearsay

The rule is that failure to object to the offered evidence renders it admissible, and the court
cannot, on its own, disregard such evidence. 85 When a party desires the court to reject the
evidence offered, it must so state in the form of a timely objection and it cannot raise the
objection to the evidence for the first time on appeal. Because of a party’s failure to timely
object, the evidence becomes part of the evidence in the case. Thereafter, all the parties are
considered bound by any outcome arising from the offer of evidence properly presented. 86

In Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M. Ureta,87 however, we held:

[H]earsay evidence whether objected to or not cannot be given credence for having no
probative value.1âwphi1 This principle, however, has been relaxed in cases where, in
addition to the failure to object to the admissibility of the subject evidence, there were other
pieces of evidence presented or there were other circumstances prevailing to support
the fact in issue. (emphasis and underscore ours; citation omitted)

We agree with the respondents that with respect to the identification of the sales invoices,
Haw’s testimony was hearsay because he was not present during its preparation 88 and the
secretaries who prepared them were not presented to identify them in court. Further, these
sales invoices do not fall within the exceptions to the hearsay rule even under the "entries in
the course of business" because the petitioners failed to show that the entrant was deceased
or was unable to testify.89

But even though the sales invoices are hearsay, nonetheless, they form part of the records of
the case for the respondents’ failure to object as to the admissibility of the sales invoices on
the ground that they are hearsay.90Based on the records, the respondents through Ng
objected to the offer "for the purpose [to] which they are being offered" only – not on the
ground that they were hearsay.91

The petitioners have proven their

claims for the unpaid purchases on
credit by preponderance of evidence.
We are not convinced by the respondents’ argument that the purchases are spurious because
no less than Uy admitted that all the checks issued were in payments of the contractual
obligations of the Arma Traders with Advance Paper.92 Moreover, there are other pieces
of evidence to prove the existence of the purchases other than the sales invoices themselves.
For one, Arma Traders’ postdated checks evince the existence of the purchases on credit.
Moreover, Haw testified that within one or two weeks, Arma Traders paid the purchases in the
form of postdated checks. He personally collected these checks on Saturdays and upon
receiving the checks, he surrendered to Arma Traders the original of the sales invoices while
he retained the duplicate of the invoices.93

The respondents attempted to impugn the credibility of Haw by pointing to the inconsistencies
they can find from the transcript of stenographic notes. However, we are not persuaded that
these inconsistencies are sufficiently pervasive to affect the totality of evidence showing the
general relationship between Advance Paper and Arma Traders.

Additionally, the issue of credibility of witnesses is to be resolved primarily by the trial court
because it is in the better position to assess the credibility of witnesses as it heard the
testimonies and observed the deportment and manner of testifying of the witnesses.
Accordingly, its findings are entitled to great respect and will not be disturbed on appeal in the
absence of any showing that the trial court overlooked, misunderstood, or misapplied some
facts or circumstances of weight and substance which would have affected the result of the
case.94

In the present case, the RTC judge took into consideration the substance and the manner by
which Haw answered each propounded questions to him in the witness stand. Hence, the
minor inconsistencies in Haw’s testimony notwithstanding, the RTC held that the respondents
claim that the purchase and loan transactions were spurious is "not worthy of serious
consideration." Besides, the respondents failed to convince us that the RTC judge
overlooked, misunderstood, or misapplied some facts or circumstances of weight and
substance which would have affected the result of the case.

On the other hand, we agree with the petitioners that the discrepancies in the photocopy of
the sales invoices and its duplicate copy have been sufficiently explained. Besides, this is
already a non-issue since the duplicate copies were surrendered in the RTC.95 Furthermore,
the fact that the value of Arma Traders' checks does not tally with the total amount of their
obligation with Advance Paper is not inconsistent with the existence of the purchases and
loan transactions.

As against the case and the evidence Advance Paper presented, the respondents relied on
the core theory of an alleged conspiracy between Tan, Uy and Haw to defraud Arma Traders.
However, the records are bereft of supporting evidence to prove the alleged conspiracy.
Instead, the respondents simply dwelled on the minor inconsistencies from the petitioners'
evidence that the respondents appear to have magnified. From these perspectives, the
preponderance of evidence thus lies heavily in the petitioners' favor as the RTC found. For
this reason, we find the petition meritorious.

WHEREFORE, premises considered, we GRANT the petition. The decision dated March 31,
2006 and the resolution dated March 7, 2007 of the Court of Appeals in CA-G.R. CV No.
71499 are REVERSED and SET ASIDE. The Regional Trial Court decision in Civil Case No.
94-72526 dated June 18, 2001 is REINSTATED. No costs.

SO ORDERED.