Corporation Law Cases

A.
CORPORATION
1. DEFINITION
2. ATTRIBUTES OF A CORPORATION
B. CLASSES OF CORPORATION
C. NATIONALITY OF CORPORATIONS
G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and
MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining
Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc.
(McArthur), which seeks to reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the
Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic
corporation organized and existing under Philippine laws, took interest in mining and exploring certain areas
of the province of Palawan. After inquiring with the Department of Environment and Natural Resources
(DENR), it learned that the areas where it wanted to undertake exploration and mining activities where
already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro
and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application
for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office
of the Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720
hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos
Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise
Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB,
Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering
an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently,
PLMDC conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of
Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154
(formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra,
Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the
said MPSA application to Tesoro.
1|Page
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
2|Page
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 Order22 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:
3|Page
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
4|Page
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.
5|Page
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
6|Page
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.
7|Page
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
8|Page
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.
9|Page
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.
10 | P a g e
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
11 | P a g e
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Corporation
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
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. 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 PhP 2,708,174.60
10,000,000.00 (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

Shares Subscribed
Olympic Mines Filipino 6,663 PhP 6,663,000.00 PhP 0
&
Development
Corp.
MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Resources,
Inc.
Amanti Limson 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. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
12 | P a g e
(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.pdf]]
Shares Subscribed
Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Mining, Inc.
Resources, Inc.
Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Total 10,000 PhP PhP 2,708,174.60

13 | P a g e
10,000,000.00
(emphasis
supplied)
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the
corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same:
MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares,"
"Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s
corporate structure:
Sara Marie Mining, Inc.
[[reference =
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 2,794,000.00
Inc.
Amanti Limson 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
Total 10,000 PhP PhP 2,809,900.00

10,000,000.00
(emphasis
supplied)
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).
14 | P a g e
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 =
Shares Subscribed
Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00
Mining &
Development
Corp.
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
Total 10,000 PhP PhP 2,800,000.00

10,000,000.00 (emphasis
supplied)
15 | P a g e
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:

Shares Subscribed
Palawan Alpha South Filipino 6,596 PhP PhP 0
Resources Development 6,596,000.00
Corporation
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 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
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
Total 10,000 PhP PhP
10,000,000.00 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%
16 | P a g e
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
17 | P a g e
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
18 | P a g e
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.-
19 | P a g e
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.
20 | P a g e
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.
21 | P a g e
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."57 Petitioners stress that there should no longer be any issue left as regards their
qualification to enter into FTAA contracts since they are qualified to engage in mining activities in the
Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the nationalities of petitioners
cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact
should be disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R.
No. 202877 pending before this Court.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
G.R. No. 177592 June 9, 2014
AVELINO S. ALILIN, TEODORO CALESA, CHARLIE HINDANG, EUTIQUIO GINDANG, ALLAN SUNGAHID,
MAXIMO LEE, JOSE G. MORA TO, REX GABILAN, AND EUGEMA L. LAURENTE, Petitioners,
vs.
PETRON CORPORATION, Respondent.
DECISION
DEL CASTILLO, J.:
A contractor is presumed to be a labor-only contractor, unless it proves that it has the substantial capital,
investment, tools and the like. However, where the principal is the one claiming that the contractor is a
legitimate contractor, the burden of proving the supposed status of the contractor rests on the principal.1
22 | P a g e
This Petition for Review on Certiorari2 assails the Decision3 dated May 10, 2006 of the Court of Appeals (CA)
in CA-G.R. SP No. 01291 which granted the Petition for Certiorari filed therewith, reversed and set aside the
February 18, 2005 Decision4 and August 24, 2005 Resolution5 of the National Labor Relations Commission
(NLRC) in NLRC Case No. V-000481-2003 and dismissed the Complaint for illegal dismissal filed by petitioners
Avelino Alilin (Alilin), Teodoro Calesa (Calesa), Charlie Hindang (Hindang), Eutiquio Gindang (Gindang), Allan
Sungahid (Sungahid), Maximo Lee (Lee), Jose G. Morato (Morato), Rex Gabilan (Gabilan) and Eugema L.
Laurente (Laurente) against respondent Petron Corporation (Petron). Also assailed in this Petition is the CA
Resolution6 dated March 30, 2007 which denied petitioners’ Motion for Reconsideration7 and Supplemental
Motion for Reconsideration.8
Factual Antecedents
Petron is a domestic corporation engaged in the oil business. It owns several bulk plants in the country for
receiving, storing and distributing its petroleum products.
In 1968, Romualdo D. Gindang Contractor, which was owned and operated by Romualdo D. Gindang
(Romualdo), started recruiting laborers for fielding to Petron’s Mandaue Bulk Plant. When Romualdo died
in1989, his son Romeo D. Gindang (Romeo), through Romeo D. Gindang Services(RDG), took over the business
and continued to provide manpower services to Petron. Petitioners were among those recruited by Romualdo
D. Gindang Contractor and RDG to work in the premises of the said bulk plant, with the corresponding dates of
hiring and work duties, to wit:
Employees Date of Hiring Duties

Eutiquio Gindang 1968 utility/tanker receiver/barge loader/warehouseman/mixer
Eugema L. Laurente June 1979 telephone operator/order taker
Teodoro Calesa August 1, 1981 utility/tanker receiver/barge loader/sounder/gauger
Rex Gabilan July 1, 1987 warehouseman/forklift driver/tanker receiver/barge loader
Charlie T. Hindang September 18, 1990 utility/tanker receiver/barge loader/sounder/gauger
Allan P. Sungahid September 18, 1990 filler/sealer/painter/tanker receiver/utility
Maximo S. Lee September 18, 1990 gasul filler/painter/utility
Avelino S. Alilin July 16, 1992 carpenter/driver
Jose Gerry M. Morato March 16, 1993 cylinder checker/tanker receiver/grass cutter/janitor/utility
On June 1, 2000, Petron and RDG entered into a Contract for Services9 for the period from June 1, 2000 to
May 31, 2002, whereby RDG undertook to provide Petron with janitorial, maintenance, tanker receiving,
packaging and other utility services in its Mandaue Bulk Plant. This contract was extended on July 31, 2002 and
further extended until September 30, 2002. Upon expiration thereof, no further renewal of the service
contract was done.
Proceedings before the Labor Arbiter
Alleging that they were barred fromcontinuing their services on October 16, 2002, petitioners Alilin, Calesa,
Hindang, Gindang, Sungahid, Lee, Morato and Gabilan filed a Complaint10 for illegal dismissal, underpayment
of wages, damages and attorney’s fees against Petron and RDG on November 12, 2002. Petitioner Laurente
filed another Complaint11 for illegal dismissal, underpayment of wages, non-payment of overtime pay, holiday
pay, premium pay for holiday, rest day, 13th month pay, service incentive leave pay, allowances, separation
pay, retirement benefits, damages and attorney’s fees against Petron and RDG. The said complaints were later
consolidated.
Petitioners did not deny that RDG hired them and paid their salaries. They, however, claimed that the latter is
a labor-only contractor, which merely acted as an agent of Petron, their true employer. They asseverated that
their jobs, which are directly related to Petron’s business, entailed them to work inside the premises of Petron
23 | P a g e
using the required equipment and tools furnished by it and that they were subject to Petron’s supervision.
Claiming to be regular employees, petitioners thus asserted that their dismissal allegedly in view of the
expiration of the service contract between Petron and RDG is illegal.
RDG corroborated petitioners’ claim that they are regular employees of Petron. It alleged that Petron directly
supervised their activities; they performed jobs necessary and desirable to Petron’s business; Petron provided
petitioners with supplies, tools and equipment used in their jobs; and that petitioners’ workplace since the
start of their employment was at Petron’s bulk plant in Mandaue City. RDG denied liability over petitioners’
claim of illegal dismissal and further argued that Petron cannot capitalize on the service contract to escape
liability.
Petron, on the other hand, maintained that RDG is an independent contractor and the real employer of the
petitioners. It was RDG which hired and selected petitioners, paid their salaries and wages, and directly
supervised their work. Attesting to these were two former employees of RDG and Petron’s Mandaue Terminal
Superintendent whose joint affidavit12 and affidavit,13 respectively, were submitted by Petron. Anent its
allegation that RDG is an independent contractor, Petron presented the following documents: (1) RDG’s
Certificate of Registration issued by the Department of Labor and Employment (DOLE) on December 27,
2000;14 (2) RDG’s Certificate of Registration of Business Name issued by the Department of Trade and
Industry (DTI) on August 18, 2000;15 (3) Contractor’s Pre-Qualification Statement;16 (4) Conflict of Interest
Statement signed by Romeo Gindang as manager of RDG;17 (5) RDG’s Audited Financial Statements for the
years 199818 199919 and 2000;20 (6) RDG’s Mayor’s Permit for the years 200021 and 2001;22 (7) RDG’s
Certificate of Accreditation issued by DTI in October 1991;23 (8) performance bond24 and insurance policy25
posted to insure against liabilities; (9) Social Security System (SSS) Online Inquiry System Employee
Contributions and Employee Static Information;26 and, (10) Romeo’s affidavit27 stating that he had paid the
salaries of his employees assigned to Petron for the period of November 4, 2001 to December 31, 2001.
Petron argued that with the expiration of the service contract it entered with RDG, petitioners’ term of
employment has concomitantly ended. And not being the employer, Petron cannot be held liable for
petitioners’ claim of illegal dismissal.
In a Decision28 dated June 12, 2003,the Labor Arbiter ruled that petitioners are regular employees of Petron.
It found that their jobs were directly related to Petron’s business operations; they worked under the
supervision of Petron’s foreman and supervisor; and they were using Petron’s tools and equipment in the
performance of their works. The Labor Arbiter also found that Petron merely utilized RDG in its attempt to
hide the existence of employee-employer relationship between it and petitioners and avoid liability under
labor laws. And there being no showing that petitioners’ dismissal was for just or authorized cause, the Labor
Arbiter declared them to have been illegally dismissed. Petron was thus held solidarily liable with Romeo for
the payment of petitioners’ separation pay (in lieu of reinstatement due to strained relations with Petron)
fixed at one month pay for every year of service and backwages computed on the basis of the last salary rate
at the time of dismissal. The dispositive portion of the Decision reads: WHEREFORE, premises considered,
judgment is hereby rendered ordering the respondents Petron Corporation and Romeo Gindang to pay the
complainants as follows:
1. Teodoro Calesa P 136,890.00

2. Eutiquio Gindang P 202,800.00
3. Charlie T. Gindang P 91,260.00
4. Allan P. Sungahid P 91,260.00
5. Jose Gerry Morato P 76,050.00
6. Avelino A. Alilin P 95,680.00
7. Rex S. Gabilan P 106,470.00
8. Maximo S. Lee P 91,260.00
9. Eugema Minao Laurente P 150,800.00
Total award ₱1,042,470.00
24 | P a g e
The other claims are dismissed for lack of merit.
SO ORDERED.29
Proceedings before the National Labor Relations Commission
Petron continued to insist that there is no employer-employee relationship between it and petitioners. The
NLRC, however, was not convinced. In its Decision30 of February 18, 2005, the NLRC ruled that petitioners are
Petron’s regular employees because they are performing job assignments which are germane to its main
business. Thus:
WHEREFORE, premises considered, the Decision of the Labor Arbiter is hereby affirmed. It is understood that
the grant of backwages shall be until finality of the Decision.
The appeal of respondent Petron Corporation is hereby DISMISSED for lack of merit.
SO ORDERED.31
The NLRC also denied Petron’s Motion for Reconsideration in its Resolution32 of August 24, 2005.
Proceedings before the Court of Appeals
Petron filed a Petition for Certiorari with prayer for the issuance of a temporary restraining order or writ of
injunction before the CA. The said court resolved to grant the injunction.33 Hence, a Writ of Preliminary
Injunction34 to restrain the implementation of the February 18, 2005 Decision and August 24, 2005 Resolution
of the NLRC was issued on March 3, 2006.
In a Decision35 dated May 10, 2006, the CA found no employer-employee relationship between the parties.
According to it, the records of the case do not show that petitioners were directly hired, selected or employed
by Petron; that their wages and other wage related benefits were paid by the said company; and that Petron
controlled the manner by which they carried out their tasks. On the other hand, RDG was shown to be
responsible for paying petitioners’ wages. In fact, SSS records show that RDG is their employer and actually the
one remitting their contributions thereto. Also, two former employees of RDG who were likewise assigned in
the Mandaue Bulk Plant confirmed by way of a joint affidavit that it was Romeo and his brother Alejandre
Gindang who supervised their work, not Petron’s foreman or supervisor. This was even corroborated by the
Terminal Superintendent of the Mandaue Bulk Plant.
The CA also found RDG to be an independent labor contractor with sufficient capitalization and investment as
shown by its financial statement for year-end 2000. In addition, the works for which RDG was contracted to
provide were menial which were neither directly related nor sensitive and critical to Petron’s principal
business. The CA disposed of the case as follows:
WHEREFORE, the Petition is GRANTED. The February 18, 2005 Decision and the August 24, 2005 Resolution of
the Fourth Division of the National Labor Relations Commission in NLRC Case No. V-000481-2003, entitled
"Teodoro Calesa et al. vs. Petron Corporation and R.D. Gindang Services", having been rendered with grave
abuse of discretion amounting to excess of jurisdiction, are hereby REVERSED and SET ASIDE and a NEW ONE
is entered DISMISSING private respondents’ complaint against petitioner. It is so ordered.36
Petitioners filed a Motion for Reconsideration37 insisting that Petron illegally dismissed them; that RDG is a
labor-only contractor; and that they performed jobs which are sensitive to Petron’s business operations. To
support these, they attached to their Supplemental Motion for Reconsideration38 Affidavits39 of former
employees of Petron attesting to the fact that their jobs were critical to Petron’s business operations and that
they were carried out under the control of a Petron employee.
Petitioners’ motions were, however, denied by the CA in a Resolution40 dated March 30, 2007.
Hence, this Petition.
25 | P a g e
Issue
The primary issue to be resolved in this case is whether RDG is a legitimate job contractor. Upon such finding
hinges the determination of whether an employer-employee relationship exists between the parties as to
make Petron liable for petitioners’ dismissal.
Our Ruling
The Petition is impressed with merit. The conflicting findings of the Labor Arbiter and the NLRC on one hand,
and of the CA on the other, constrains the Court to review the factual issues involved in this case.
As a general rule, the Court does not review errors that raise factual questions.41 Nonetheless, while it is true
that the determination of whether an employer-employee relationship existed between the parties basically
involves a question of fact, the conflicting findings of the Labor Arbiter and the NLRC on one hand, and of the
CA on the other, constrains the Court to review and reevaluate such factual findings.42
Labor-only contracting, distinguished
from permissible job contracting.
The prevailing rule on labor-only contracting at the time Petron and RDG entered into the Contract for
Services in June 2000 is DOLE Department Order No. 10, series of 1997,43 the pertinent provision of which
reads:
Section 4. x x x
xxxx
(f) "Labor-only contracting" prohibited under this Rule is an arrangement where the contractor or
subcontractor merely recruits, supplies or places workers to perform a job, work or service for a principal and
the following elements are present:
(i) The contractor or subcontractor does not have substantial capital or investment to actually perform
the job, work or service under its own account and responsibility; and
(ii) The employees recruited, supplied or placed by such contractor or subcontractor are performing
activities which are directly related to the main business of the principal.
xxxx
Section 6. Permissible contracting or subcontracting. - Subject to the conditions set forth in Section 3 (d) and
(e) and Section 5 hereof, the principal may engage the services of a contractor or subcontractor for the
performance of any of the following:
(a) Works or services temporarily or occasionally needed to meet abnormal increase in the demand of
products or services, provided that the normal production capacity or regular workforce of the
principal cannot reasonably cope with such demands;
(b) Works or services temporarily or occasionally needed by the principal for undertakings requiring
expert or highly technical personnel to improve the management or operations of an enterprise;
(c) Services temporarily needed for the introduction or promotion of new products, only for the
duration of the introductory or promotional period;
(d) Works or services not directly related or not integral to the main business or operation of the
principal, including casual work, janitorial, security, landscaping, and messengerial services, and work
not related to manufacturing processes in manufacturing establishments;
26 | P a g e
(e) Services involving the public display of manufacturers’ products which do not involve the act of
selling or issuance of receipts or invoices;
(f) Specialized works involving the use of some particular, unusual or peculiar skills, expertise, tools or
equipment the performance of which is beyond the competence of the regular workforce or
production capacity of the principal; and
(g) Unless a reliever system is in place among the regular workforce, substitute services for absent
regular employees, provided that the period of service shall be coextensive with the period of absence
and the same is made clear to the substitute employee at the time of engagement. The phrase "absent
regular employees" includes those who are serving suspensions or other disciplinary measures not
amounting to termination of employment meted out by the principal, but excludes those on strike
where all the formal requisites for the legality of the strike have been prima facie complied with based
on the records filed with the National Conciliation and Mediation Board.
"Permissible job contracting or subcontracting refers to an arrangement whereby a principal agrees to farm
out with a contractor or subcontractor the performance of a specific job, work, or service within a definite or
predetermined period, regardless of whether such job, work or, service is to be performed or completed
within or outside the premises of the principal. Under this arrangement, the following conditions must be met:
(a) the contractor carries on a distinct and independent business and undertakes the contract work on his
account under his own responsibility according to his own manner and method, free from the control and
direction of his employer or principal in all matters connected with the performance of his work except as to
the results thereof; (b) the contractor has substantial capital or investment; and (c) the agreement between
the principal and contractor or subcontractor assures the contractual employees’ entitlement to all labor and
occupational safety and health standards, free exercise of the right to self-organization, security of tenure, and
social welfare benefits."44 Labor-only contracting, on the other hand, is a prohibited act, defined as "supplying
workers to an employer who does not have substantial capital or investment in the form of tools, equipment,
machineries, work premises, among others, and the workers recruited and placed by such person are
performing activities which are directly related to the principal business of such employer."45 "[I]n
distinguishing between prohibited labor-only contracting and permissible job contracting, the totality of the
facts and the surrounding circumstances of the case shall be considered."46 Generally, the contractor is
presumed to be a labor-only contractor, unless such contractor overcomes the burden of proving that it has
the substantial capital, investment, tools and the like. However, where the principal is the one claiming that
the contractor is a legitimate contractor, as in the present case, said principal has the burden of proving that
supposed status.47 It is thus incumbent upon Petron, and not upon petitioners as Petron insists,48 to prove
that RDG is an independent contractor.
Petron failed to discharge the burden of

proving that RDG is a legitimate
contractor. Hence, the presumption that
RDG is a labor-only contractor stands.
Here, the audited financial statements and other financial documents of RDG for the years 1999 to 2001
establish that it does have sufficient working capital to meet the requirements of its service contract. In fact,
the financial evaluation conducted by Petron of RDG’s financial statements for years 1998-2000 showed RDG
to have a maximum financial capability of Php4.807 Million as of December 1998,49 and Php1.611 Million as
of December 2000.50 Petron was able to establish RDG’s sufficient capitalization when it entered into the
service contract in 2000. The Court stresses though that this determination of RDG’s status as an independent
contractor is only with respect to its financial capability for the period covered by the financial and other
documents presented. In other words, the evidence adduced merely proves that RDG was financially qualified
as a legitimate contractor but only with respect to its last service contract with Petron in the year 2000.
As may be recalled, petitioners have rendered work for Petron for a long period of time even before the
service contract was executed in 2000. The respective dates on which petitioners claim to have started
working for Petron, as well as the fact that they have rendered continuous service to it until October 16, 2002,
when they were prevented from entering the premises of Petron’s Mandaue Bulk Plant, were not at all
disputed by Petron. In fact, Petron even recognized that some of the petitioners were initially fielded by
27 | P a g e
Romualdo Gindang, the father of Romeo, through RDG’s precursor, Romualdo D.Gindang Contractor, while
the others were provided by Romeo himself when he took over the business of his father in 1989.1âwphi1
Hence, while Petron was able to establish that RDG was financially capable as a legitimate contractor at the
time of the execution of the service contract in 2000, it nevertheless failed to establish the financial capability
of RDG at the time when petitioners actually started to work for Petron in 1968, 1979, 1981, 1987, 1990,1992
and 1993.
Sections 8 and 9,Rule VIII, Book III51 of the implementing rules of the Labor Code, in force since 1976 and
prior to DOLE Department Order No. 10, series of 1997,52 provide that for job contracting to be permissible,
one of the conditions that has to be met is that the contractor must have substantial capital or investment.
Petron having failed to show that this condition was met by RDG, it can be concluded, on this score alone, that
RDG is a mere labor-only contractor. Otherwise stated, the presumption that RDG is a labor-only contractor
stands due to the failure of Petron to discharge the burden of proving the contrary.
The Court also finds, as will be discussed below, that the works performed by petitioners were directly related
to Petron’s business, another factor which negates Petron’s claim that RDG is an independent contractor.
Petron’s power of control over

petitioners exists in this case.
"[A] finding that a contractor is a ‘labor-only’ contractor is equivalent to declaring that there is an employer-
employee relationship between the principal and the employees of the supposed contractor."53 In this case,
the employer employee relationship between Petron and petitioners becomes all the more apparent due to
the presence of the power of control on the part of the former over the latter.
It was held in Orozco v. The Fifth Division of the Hon. Court of Appeals54 that:
This Court has constantly adhered to the "four-fold test" to determine whether there exists an employer-
employee relationship between the parties. The four elements of an employment relationship are: (a) the
selection and engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the
power to control the employee’s conduct.
Of these four elements, it is the power to control which is the most crucial and most determinative factor, so
important, in fact, that, the other elements may even be disregarded." (Emphasis supplied)
Hence, the facts that petitioners were hired by Romeo or his father and that their salaries were paid by them
do not detract from the conclusion that there exists an employer-employee relationship between the parties
due to Petron’s power of control over the petitioners. One manifestation of the power of control is the power
to transfer employees from one work assignment to another.55 Here, Petron could order petitioners to do
work outside of their regular "maintenance/utility" job. Also, petitioners were required to report for work
everyday at the bulk plant, observe an 8:00 a.m. to 5:00 p.m. daily work schedule, and wear proper uniform
and safety helmets as prescribed by the safety and security measures being implemented within the bulk
plant. All these imply control. In an industry where safety is of paramount concern, control and supervision
over sensitive operations, such as those performed by the petitioners, are inevitable if not at all necessary.
Indeed, Petron deals with commodities that are highly volatile and flammable which, if mishandled or not
properly attended to, may cause serious injuries and damage to property and the environment. Naturally,
supervision by Petron is essential in every aspect of its product handling in order not to compromise the
integrity, quality and safety of the products that it distributes to the consuming public.
Petitioners already attained regular

status as employees of Petron.
Petitioners were given various work assignments such as tanker receiving, barge loading, sounding, gauging,
warehousing, mixing, painting, carpentry, driving, gasul filling and other utility works. Petron refers to these
work assignments as menial works which could be performed by any able-bodied individual. The Court finds,
however, that while the jobs performed by petitioners may be menial and mechanical, they are nevertheless
necessary and related to Petron’s business operations. If not for these tasks, Petron’s products will not reach
28 | P a g e
the consumers in their proper state. Indeed, petitioners’ roles were vital inasmuch as they involve the
preparation of the products that Petron will distribute to its consumers.
Furthermore, while it may be true that any able-bodied individual can perform the tasks assigned to
petitioners, the Court notes the undisputed fact that for many years, it was the same able-bodied individuals
(petitioners) who performed the tasks for Petron. The engagement of petitioners for the same works for a
long period of time is a strong indication that such works were indeed necessary to Petron’s business. In view
of these, and considering further that petitioners’ length of service entitles them to become regular
employees under the Labor Code, petitioners are deemed by law to have already attained the status as
Petron’s regular employees. As such, Petron could not terminate their services on the pretext that the service
contract it entered with RDG has already lapsed. For one, and as previously discussed, such regular status had
already attached to them even before the execution of the service contract in 2000. For another, the same
does not constitute a just or authorized cause for a valid dismissal of regular employees.
In sum, the Court finds that RDG is a labor-only contractor. As such, it is considered merely as an agent of
Petron. Consequently, the employer-employee relationship which the Court finds to exist in this case is
between petitioners as employees and Petron as their employer. Petron therefore, being the principal
employer and RDG, being the labor-only contractor, are solidarily liable for petitioners' illegal dismissal and
monetary claims.56
WHEREFORE, the Petition is GRANTED. The May 10, 2006 Decision and March 30, 2007 Resolution of the Court
of Appeals in CA-G.R. SP No. 01291 are REVERSED and SET ASIDE. The February 18, 2005 Decision and August
24, 2005 Resolution of the National Labor Relations Commission in NLRC Case No. V-000481-2003 are hereby
REINSTATED and AFFIRMED.
SO ORDERED
2. PLACE OF INCORPORATION TEST

3. CONTROL TEST
4. GRANDFATHER RULE
D. CORPORATE JURIDICAL PERSONALITY
G.R. No. 194964-65
UNIVERSITY OF MINDANAO, INC., Petitioner,

vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.
DECISION
LEONEN, J.:
29 | P a g e
Acts of an officer that are not authorized by the board of directors/trustees do not bind the corporation unless
the corporation ratifies the acts or holds the officer out as a person with authority to transact on its behalf.
This is a Petition for Review on Certiorari1 of the Court of Appeals' December 17, 2009 Decision2 and
December 20, 2010 Resolution.3 The Court of Appeals reversed the Cagayan De Oro City trial court’s and the
Iligan City trial court’s Decisions to nullify mortgage contracts involving University of Mindanao’s properties.4
University of Mindanao is an educational institution. For the year 1982, its Board of Trustees was chaired by
Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanao’s Assistant Treasurer.5
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift banks: (1)
First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and Loan Association, Inc. (DSLAI).
Guillermo B. Torres chaired both thrift banks. He acted as FISLAI’s President, while his wife, Dolores P. Torres,
acted as DSLAI’s President and FISLAI’s Treasurer.6
Upon Guillermo B. Torres’ request, Bangko Sentral ng Pilipinas issued a P1.9 million standby emergency credit
to FISLAI. The release of standby emergency credit was evidenced by three (3) promissory notes dated
February 8, 1982, April 7, 1982, and May 4, 1982 in the amounts of P500,000.00, P600,000.00, and
P800,000.00, respectively. All these promissory notes were signed by Guillermo B. Torres, and were co-signed
by either his wife, Dolores P. Torres, or FISLAI’s Special Assistant to the President, Edmundo G. Ramos, Jr.7
On May 25, 1982, University of Mindanao’s Vice President for Finance, Saturnino Petalcorin, executed a deed
of real estate mortgage over University of Mindanao’s property in Cagayan de Oro City (covered by Transfer
Certificate of Title No. T-14345) in favor of Bangko Sentral ng Pilipinas.8 "The mortgage served as security for
FISLAI’s P1.9 Million loan[.]"9 It was allegedly executed on University of Mindanao’s behalf.10
As proof of his authority to execute a real estate mortgage for University of Mindanao, Saturnino Petalcorin
showed a Secretary’s Certificate signed on April 13, 1982 by University of Mindanao’s Corporate Secretary,
Aurora de Leon.11 The Secretary’s Certificate stated:
That at the regular meeting of the Board of Trustees of the aforesaid corporation [University of Mindanao]
duly convened on March 30, 1982, at which a quorum was present, the following resolution was unanimously
adopted:
"Resolved that the University of Mindanao, Inc. be and is hereby authorized, to mortgage real
estate properties with the Central Bank of the Philippines to serve as security for the credit
facility of First Iligan Savings and Loan Association, hereby authorizing the President and/or
Vice-president for Finance, Saturnino R. Petalcorin of the University of Mindanao, Inc. to sign,
execute and deliver the covering mortgage document or any other documents which may be
proper[l]y required."12
The Secretary’s Certificate was supported by an excerpt from the minutes of the January 19, 1982 alleged
meeting of University of Mindanao’s Board of Trustees. The excerpt was certified by Aurora de Leon on March
13, 1982 to be a true copy of University of Mindanao’s records on file.13 The excerpt reads:
3 – Other Matters:
(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to represent the
University of Mindanao to transact, transfer, convey, lease, mortgage, or otherwise hypothecate any or all of
the following properties situated at Cagayan de Oro and Iligan City and authorizing further Mr. Petalcorin to
sign any or all documents relative thereto:
1. A parcel of land situated at Cagayan de Oro City, covered and technically described in
TRANSFER CERTIFICATE OF TITLE No. T-14345 of the Registry of Deeds of Cagayan de Oro City;
30 | P a g e
2. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15696 (a.t.) of the Registry of Deeds of Iligan City; and
3. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds of Iligan City.14
The mortgage deed executed by Saturnino Petalcorin in favor of Bangko Sentral ng Pilipinas was annotated on
the certificate of title of the Cagayan de Oro City property (Transfer Certificate of Title No. 14345) on June 25,
1982. Aurora de Leon’s certification was also annotated on the Cagayan de Oro City property’s certificate of
title (Transfer Certificate of Title No. 14345).15
On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional loan of P620,700.00. Guillermo
B. Torres and Edmundo Ramos executed a promissory note on October 21, 1982 to cover that amount.16
On November 5, 1982, Saturnino Petalcorin executed another deed of real estate mortgage, allegedly on
behalf of University of Mindanao, over its two properties in Iligan City.1âwphi1 This mortgage served as
additional security for FISLAI’s loans. The two Iligan City properties were covered by Transfer Certificates of
Title Nos. T-15696 and T-15697.17
On January 17, 1983, Bangko Sentral ng Pilipinas’ mortgage lien over the Iligan City properties and Aurora de
Leon’s certification were annotated on Transfer Certificates of Title Nos. T-15696 and T-15697.18 On January
18, 1983, Bangko Sentral ng Pilipinas’ mortgage lien over the Iligan City properties was also annotated on the
tax declarations covering the Iligan City properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on May 27, 1983 and on August 20,
1984 in the amounts of P1,633,900.00 and P6,489,000.00, respectively.20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a Memorandum of
Agreement intended to rehabilitate the thrift banks, which had been suffering from their depositors’ heavy
withdrawals. Among the terms of the agreement was the merger of FISLAI and DSLAI, with DSLAI as the
surviving corporation. DSLAI later became known as Mindanao Savings and Loan Association, Inc. (MSLAI).21
Guillermo B. Torres died on March 2, 1989.22
MSLAI failed to recover from its losses and was liquidated on May 24, 1991.23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao, informing it that the
bank would foreclose its properties if MSLAI’s total outstanding obligation of P12,534,907.73 remained
unpaid.24
In its reply to Bangko Sentral ng Pilipinas’ June 18, 1999 letter, University of Mindanao, through its Vice
President for Accounting, Gloria E. Detoya, denied that University of Mindanao’s properties were mortgaged.
It also denied having received any loan proceeds from Bangko Sentral ng Pilipinas.25
On July 16, 1999, University of Mindanao filed two Complaints for nullification and cancellation of mortgage.
One Complaint was filed before the Regional Trial Court of Cagayan de Oro City, and the other Complaint was
filed before the Regional Trial Court of Iligan City.26
University of Mindanao alleged in its Complaints that it did not obtain any loan from Bangko Sentral ng
Pilipinas. It also did not receive any loan proceeds from the bank.27
University of Mindanao also alleged that Aurora de Leon’s certification was anomalous. It never authorized
Saturnino Petalcorin to execute real estate mortgage contracts involving its properties to secure FISLAI’s
debts. It never ratified the execution of the mortgage contracts. Moreover, as an educational institution, it
cannot mortgage its properties to secure another person’s debts.28
31 | P a g e
On November 23, 2001, the Regional Trial Court of Cagayan de Oro City rendered a Decision in favor of
University of Mindanao,29 thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and against defendants:
1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of BANGKO
SENTRAL NG PILIPINAS involving Lot 421-A located in Cagayan de Oro City with an area of 482
square meters covered by TCT No. T-14345 as annuled [sic];
2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry No. 9951 and Entry
No. 9952 annotated at the back of said TCT No. T-14345, Registry of Deeds of Cagayan de Oro
City;
Prayer for attorney’s fee [sic] is hereby denied there being no proof that in demanding payment of the
emergency loan, defendant BANGKO SENTRAL NG PILIPINAS was motivated by evident bad faith,
SO ORDERED.30 (Citation omitted)
The Regional Trial Court of Cagayan de Oro City found that there was no board resolution giving Saturnino
Petalcorin authority to execute mortgage contracts on behalf of University of Mindanao. The Cagayan de Oro
City trial court gave weight to Aurora de Leon’s testimony that University of Mindanao’s Board of Trustees did
not issue a board resolution that would support the Secretary’s Certificate she issued. She testified that she
signed the Secretary’s Certificate only upon Guillermo B. Torres’ orders.31
Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on University of
Mindanao’s behalf. He merely executed the contract because of Guillermo B. Torres’ request.32
Bangko Sentral ng Pilipinas’ witness Daciano Pagui, Jr. also admitted that there was no board resolution giving
Saturnino Petalcorin authority to execute mortgage contracts on behalf of University of Mindanao.33
The Regional Trial Court of Cagayan de Oro City ruled that Saturnino Petalcorin was not authorized to execute
mortgage contracts for University of Mindanao. Hence, the mortgage of University of Mindanao’s Cagayan de
Oro City property was unenforceable. Saturnino Petalcorin’s unauthorized acts should be annulled.34
Similarly, the Regional Trial Court of Iligan City rendered a Decision on December 7, 2001 in favor of University
of Mindanao.35 The dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendants, as follows:
1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage dated November 5, 1982 for
being unenforceable or void contract;
2. Ordering the Office of the Register of Deeds of Iligan City to cancel the entries on TCT No. T-15696
and TCT No. T-15697 with respect to the aforesaid Deed of Real Estate Mortgage dated November 5,
1982 and all other entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owner’s duplicate copies of TCT No.
T-15696 and TCT No. 15697 to the plaintiff;
4. Nullifying the subject [f]oreclosure [p]roceedings and the [a]uction [s]ale conducted by defendant
Atty. Gerardo Paguio, Jr. on October 8, 1999 including all the acts subsequent thereto and ordering the
Register of Deeds of Iligan City not to register any Certificate of Sale pursuant to the said auction sale
nor make any transfer of the corresponding titles, and if already registered and transferred, to cancel
all the said entries in TCT No. T-15696 and TCT No. T-15697 and/or cancel the corresponding new TCTs
in the name of defendant Bangko Sentral ng Pilipinas;
32 | P a g e
5. Making the Preliminary Injunction per Order of this Court dated October 13, 2000 permanent.
No pronouncement as to costs.36 (Citation omitted)
The Iligan City trial court found that the Secretary’s Certificate issued by Aurora de Leon was fictitious37 and
irregular for being unnumbered.38 It also did not specify the identity, description, or location of the
mortgaged properties.39
The Iligan City trial court gave credence to Aurora de Leon’s testimony that the University of Mindanao’s
Board of Trustees did not take up the documents in its meetings. Saturnino Petalcorin corroborated her
testimony.40
The Iligan City trial court ruled that the lack of a board resolution authorizing Saturnino Petalcorin to execute
documents of mortgage on behalf of University of Mindanao made the real estate mortgage contract
unenforceable under Article 140341 of the Civil Code.42 The mortgage contract and the subsequent acts of
foreclosure and auction sale were void because the mortgage contract was executed without University of
Mindanao’s authority.43
The Iligan City trial court also ruled that the annotations on the titles of University of Mindanao’s properties
do not operate as notice to the University because annotations only bind third parties and not owners.44
Further, Bangko Sentral ng Pilipinas’ right to foreclose the University of Mindanao’s properties had already
prescribed.45
Bangko Sentral ng Pilipinas separately appealed the Decisions of both the Cagayan de Oro City and the Iligan
City trial courts.46
After consolidating both cases, the Court of Appeals issued a Decision on December 17, 2009 in favor of
Bangko Sentral ng Pilipinas, thus:
FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial Court of Cagayan de
Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7 December 2001 of the Regional Trial
Court of Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and SET ASIDE. The Complaints in both
cases before the trial courts are DISMISSED. The Writ of Preliminary Injunction issued by the Regional Trial
Court of Iligan City, Branch 1 in Civil Case No. 4790 is LIFTED and SET ASIDE.
SO ORDERED.47
The Court of Appeals ruled that "[a]lthough BSP failed to prove that the UM Board of Trustees actually passed
a Board Resolution authorizing Petalcorin to mortgage the subject real properties,"48 Aurora de Leon’s
Secretary’s Certificate "clothed Petalcorin with apparent and ostensible authority to execute the mortgage
deed on its behalf[.]"49 Bangko Sentral ng Pilipinas merely relied in good faith on the Secretary’s Certificate.50
University of Mindanao is estopped from denying Saturnino Petalcorin’s authority.51
Moreover, the Secretary’s Certificate was notarized. This meant that it enjoyed the presumption of regularity
as to the truth of its statements and authenticity of the signatures.52 Thus, "BSP cannot be faulted for relying
on the [Secretary’s Certificate.]"53
The Court of Appeals also ruled that since University of Mindanao’s officers, Guillermo B. Torres and his wife,
Dolores P. Torres, signed the promissory notes, University of Mindanao was presumed to have knowledge of
the transaction.54 Knowledge of an officer in relation to matters within the scope of his or her authority is
notice to the corporation.55
The annotations on University of Mindanao’s certificates of title also operate as constructive notice to it that
its properties were mortgaged.56 Its failure to disown the mortgages for more than a decade was implied
ratification.57
33 | P a g e
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas’ action for foreclosure had not yet prescribed
because the due date extensions that Bangko Sentral ng Pilipinas granted to FISLAI extended the due date of
payment to five (5) years from February 8, 1985.58 The bank’s demand letter to Dolores P. Torres on June 18,
1999 also interrupted the prescriptive period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for Reconsideration60 and Motion for
Partial Reconsideration respectively of the Court of Appeals’ Decision. On December 20, 2010, the Court of
Appeals issued a Resolution, thus:
Acting on the foregoing incidents, the Court RESOLVES to:
1. GRANT the appellant’s twin motions for extension of time to file comment/opposition and
NOTE the Comment on the appellee’s Motion for Reconsideration it subsequently filed on June
23, 2010;
2. GRANT the appellee’s three (3) motions for extension of time to file comment/opposition
and NOTE the Comment on the appellant’s Motion for Partial Reconsideration it filed on July
26, 2010;
3. NOTE the appellant’s "Motion for Leave to File Attached Reply Dated August 11, 2010" filed
on August 13, 2010 and DENY the attached "Reply to Comment Dated July 26, 2010";
4. DENY the appellee’s Motion for Reconsideration as it does not offer any arguments
sufficiently meritorious to warrant modification or reversal of the Court’s 17 December 2009
Decision. The Court finds that there is no compelling reason to reconsider its ruling; and
5. GRANT the appellant’s Motion for Partial Reconsideration, as the Court finds it meritorious,
considering that it ruled in its Decision that "BSP can still foreclose on the UM’s real property in
Cagayan de Oro City covered by TCT No. T-14345." It then follows that the injunctive writ issued
by the RTC of Cagayan de Oro City, Branch 24 must be lifted. The Court’s 17 December 2009
Decision is accordingly MODIFIED and AMENDED to read as follows:
"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial
Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated
7 December 2001 of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No.
4790 are REVERSED and SET ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writs of Preliminary Injunction issued by the Regional Trial Court of
Iligan City, Branch 1 in Civil Case No. 4790 and in the Regional Trial Court of Cagayan de
Oro City, Branch 24 in Civil Case No. 99-414 are LIFTED and SET ASIDE."
SO ORDERED.61 (Citation omitted)
Hence, University of Mindanao filed this Petition for Review.
The issues for resolution are:
First, whether respondent Bangko Sentral ng Pilipinas’ action to foreclose the mortgaged properties had
already prescribed; and
Second, whether petitioner University of Mindanao is bound by the real estate mortgage contracts executed
by Saturnino Petalcorin.
We grant the Petition.
Petitioner argues that respondent’s action to foreclose its mortgaged properties had already prescribed.
34 | P a g e
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the lapse of time.62 Its purpose is "to protect the
diligent and vigilant, not those who sleep on their rights."63
The prescriptive period for actions on mortgages is ten (10) years from the day they may be brought.64
Actions on mortgages may be brought not upon the execution of the mortgage contract but upon default in
payment of the obligation secured by the mortgage.65
A debtor is considered in default when he or she fails to pay the obligation on due date and, subject to
exceptions, after demands for payment were made by the creditor. Article 1169 of the Civil Code provides:
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
Article 1193 of the Civil Code provides that an obligation is demandable only upon due date. It provides:
ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that
day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily come, although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be
regulated by the rules of the preceding Section.
In other words, as a general rule, a person defaults and prescriptive period for action runs when (1) the
obligation becomes due and demandable; and (2) demand for payment has been made.
The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive
period necessarily run on the date when the loan becomes due and demandable.66 Prescriptive period runs
from the date of demand,67 subject to certain exceptions.
In other words, ten (10) years may lapse from the date of the execution of contract, without barring a cause of
action on the mortgage when there is a gap between the period of execution of the contract and the due date
or between the due date and the demand date in cases when demand is necessary.68
The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The maturity dates of
FISLAI’s loans were repeatedly extended until the loans became due and demandable only in 1990.69
Respondent informed petitioner of its decision to foreclose its properties and demanded payment in 1999.
The running of the prescriptive period of respondent’s action on the mortgages did not start when it executed
the mortgage contracts with Saturnino Petalcorin in 1982.
35 | P a g e
The prescriptive period for filing an action may run either (1) from 1990 when the loan became due, if the
obligation was covered by the exceptions under Article 1169 of the Civil Code; (2) or from 1999 when
respondent demanded payment, if the obligation was not covered by the exceptions under Article 1169 of the
Civil Code.
In either case, respondent’s Complaint with cause of action based on the mortgage contract was filed well
within the prescriptive period.
Given the termination of all traces of FISLAI’s existence,70 demand may have been rendered unnecessary
under Article 1169(3)71 of the Civil Code. Granting that this is the case, respondent would have had ten (10)
years from due date in 1990 or until 2000 to institute an action on the mortgage contract.
However, under Article 115572 of the Civil Code, prescription of actions may be interrupted by (1) the filing of
a court action; (2) a written extrajudicial demand; and (3) the written acknowledgment of the debt by the
debtor.
Therefore, the running of the prescriptive period was interrupted when respondent sent its demand letter to
petitioner on June 18, 1999. This eventually led to petitioner’s filing of its annulment of mortgage complaints
before the Regional Trial Courts of Iligan City and Cagayan De Oro City on July 16, 1999.
Assuming that demand was necessary, respondent’s action was within the ten (10)-year prescriptive period.
Respondent demanded payment of the loans in 1999 and filed an action in the same year.
II
Petitioner argues that the execution of the mortgage contract was ultra vires. As an educational institution, it
may not secure the loans of third persons.73 Securing loans of third persons is not among the purposes for
which petitioner was established.74
Petitioner is correct.
Corporations are artificial entities granted legal personalities upon their creation by their incorporators in
accordance with law. Unlike natural persons, they have no inherent powers. Third persons dealing with
corporations cannot assume that corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly defined by the law and their articles of
incorporation.75
A corporation may exercise its powers only within those definitions. Corporate acts that are outside those
express definitions under the law or articles of incorporation or those "committed outside the object for which
a corporation is created"76 are ultra vires.
The only exception to this rule is when acts are necessary and incidental to carry out a corporation’s purposes,
and to the exercise of powers conferred by the Corporation Code and under a corporation’s articles of
incorporation.77 This exception is specifically included in the general powers of a corporation under Section
36 of the Corporation Code:
SEC. 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 of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
36 | P a g e
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 as may be essential or necessary to carry out its purpose or purposes
as stated in its articles of incorporation. (Emphasis supplied)
Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test to determine if a corporate act is in
accordance with its purposes:
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.79 (Emphasis supplied)
As an educational institution, petitioner serves:
a. To establish, conduct and operate a college or colleges, and/or university;
b. To acquire properties, real and/or personal, in connection with the establishment and operation of
such college or colleges;
c. To do and perform the various and sundry acts and things permitted by the laws of the Philippines
unto corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or commercial pursuits in line with educational program of
the corporation and to acquire all properties, real and personal[,] necessary for the purposes[;]
e. To establish, operate, and/or acquire broadcasting and television stations also in line with the
educational program of the corporation and for such other purposes as the Board of Trustees may
determine from time to time;
f. To undertake housing projects of faculty members and employees, and to acquire real estates for
this purpose;
g. To establish, conduct and operate and/or invest in educational foundations; [As amended on
December 15, 1965][;]
37 | P a g e
h. To establish, conduct and operate housing and dental schools, medical facilities and other related
undertakings;
i. To invest in other corporations. [As amended on December 9, 1998]. [Amended Articles of

Incorporation of the University of Mindanao, Inc. – the Petitioner].80
Petitioner does not have the power to mortgage its properties in order to secure loans of other persons. As an
educational institution, it is limited to developing human capital through formal instruction. It is not a
corporation engaged in the business of securing loans of others.
Hiring professors, instructors, and personnel; acquiring equipment and real estate; establishing housing
facilities for personnel and students; hiring a concessionaire; and other activities that can be directly
connected to the operations and conduct of the education business may constitute the necessary and
incidental acts of an educational institution.
Securing FISLAI’s loans by mortgaging petitioner’s properties does not appear to have even the remotest
connection to the operations of petitioner as an educational institution. Securing loans is not an adjunct of the
educational institution’s conduct of business.81 It does not appear that securing third-party loans was
necessary to maintain petitioner’s business of providing instruction to individuals.
This court upheld the validity of corporate acts when those acts were shown to be clearly within the
corporation’s powers or were connected to the corporation’s purposes.
In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the donation given to the children
of a deceased person who contributed to the growth of the corporation.83 This court found that this donation
was within the broad scope of powers and purposes of the corporation to "aid in any other manner any
person . . . in which any interest is held by this corporation or in the affairs or prosperity of which this
corporation has a lawful interest."84
In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this court declared valid a rule by Twin
Towers Condominium denying delinquent members the right to use condominium facilities.86 This court ruled
that the condominium’s power to promulgate rules on the use of facilities and to enforce provisions of the
Master Deed was clear in the Condominium Act, Master Deed, and By-laws of the condominium.87 Moreover,
the promulgation of such rule was "reasonably necessary" to attain the purposes of the condominium
project.88
This court has, in effect, created a presumption that corporate acts are valid if, on their face, the acts were
within the corporation’s powers or purposes. This presumption was explained as early as in 1915 in Coleman v.
Hotel De France89 where this court ruled that contracts entered into by corporations in the exercise of their
incidental powers are not ultra vires.90
Coleman involved a hotel’s cancellation of an employment contract it executed with a gymnast. One of the
hotel’s contentions was the supposed ultra vires nature of the contract. It was executed outside its express
and implied powers under the articles of incorporation.91
In ruling in favor of the contract’s validity, this court considered the incidental powers of the hotel to include
the execution of employment contracts with entertainers for the purpose of providing its guests
entertainment and increasing patronage.92
This court ruled that a contract executed by a corporation shall be presumed valid if on its face its execution
was not beyond the powers of the corporation to do.93 Thus:
When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it
was made, it will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed
to contract within their powers. The doctrine of ultra vires, when invoked for or against a corporation, should
not be allowed to prevail where it would defeat the ends of justice or work a legal wrong.94
38 | P a g e
However, this should not be interpreted to mean that such presumption applies to all cases, even when the
act in question is on its face beyond the corporation’s power to do or when the evidence contradicts the
presumption.
Presumptions are "inference[s] as to the existence of a fact not actually known, arising from its usual
connection with another which is known, or a conjecture based on past experience as to what course human
affairs ordinarily take."95 Presumptions embody values and revealed behavioral expectations under a given
set of circumstances.
Presumptions may be conclusive96 or disputable.97
Conclusive presumptions are presumptions that may not be overturned by evidence, however strong the
evidence is.98 They are made conclusive not because there is an established uniformity in behavior whenever
identified circumstances arise. They are conclusive because they are declared as such under the law or the
rules. Rule 131, Section 2 of the Rules of Court identifies two (2) conclusive presumptions:
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;
(b) The tenant is not permitted to deny the title of his landlord at the time of the commencement of
the relation of landlord and tenant between them.
On the other hand, disputable presumptions are presumptions that may be overcome by contrary evidence.99
They are disputable in recognition of the variability of human behavior. Presumptions are not always true.
They may be wrong under certain circumstances, and courts are expected to apply them, keeping in mind the
nuances of every experience that may render the expectations wrong.
Thus, the application of disputable presumptions on a given circumstance must be based on the existence of
certain facts on which they are meant to operate. "[P]resumptions are not allegations, nor do they supply
their absence[.]"100 Presumptions are conclusions. They do not apply when there are no facts or allegations
to support them.
If the facts exist to set in motion the operation of a disputable presumption, courts may accept the
presumption. However, contrary evidence may be presented to rebut the presumption.
Courts cannot disregard contrary evidence offered to rebut disputable presumptions. Disputable
presumptions apply only in the absence of contrary evidence or explanations. This court explained in
Philippine Agila Satellite Inc. v. Usec. Trinidad-Lichauco:101
We do not doubt the existence of the presumptions of "good faith" or "regular performance of official duty,"
yet these presumptions are disputable and may be contradicted and overcome by other evidence. Many civil
actions are oriented towards overcoming any number of these presumptions, and a cause of action can
certainly be geared towards such effect. The very purpose of trial is to allow a party to present evidence to
overcome the disputable presumptions involved. Otherwise, if trial is deemed irrelevant or unnecessary, owing
to the perceived indisputability of the presumptions, the judicial exercise would be relegated to a mere
ascertainment of what presumptions apply in a given case, nothing more. Consequently, the entire Rules of
Court is rendered as excess verbiage, save perhaps for the provisions laying down the legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a jurisprudential rule, no public officer could
ever be sued for acts executed beyond their official functions or authority, or for tortious conduct or behavior,
since such acts would "enjoy the presumption of good faith and in the regular performance of official duty."
Indeed, few civil actions of any nature would ever reach the trial stage, if a case can be adjudicated by a mere
determination from the complaint or answer as to which legal presumptions are applicable. For example, the
presumption that a person is innocent of a wrong is a disputable presumption on the same level as that of the
39 | P a g e
regular performance of official duty. A civil complaint for damages necessarily alleges that the defendant
committed a wrongful act or omission that would serve as basis for the award of damages. With the rationale
of the Court of Appeals, such complaint can be dismissed upon a motion to dismiss solely on the ground that
the presumption is that a person is innocent of a wrong.102 (Emphasis supplied, citations omitted)
In this case, the presumption that the execution of mortgage contracts was within petitioner’s corporate
powers does not apply. Securing third-party loans is not connected to petitioner’s purposes as an educational
institution.
III
Respondent argues that petitioner’s act of mortgaging its properties to guarantee FISLAI’s loans was
consistent with petitioner’s business interests, since petitioner was presumably a FISLAI shareholder whose
officers and shareholders interlock with FISLAI. Respondent points out that petitioner and its key officers held
substantial shares in MSLAI when DSLAI and FISLAI merged. Therefore, it was safe to assume that when the
mortgages were executed in 1982, petitioner held substantial shares in FISLAI.103
Parties dealing with corporations cannot simply assume that their transaction is within the corporate powers.
The acts of a corporation are still limited by its powers and purposes as provided in the law and its articles of
incorporation.
Acquiring shares in another corporation is not a means to create new powers for the acquiring corporation.
Being a shareholder of another corporation does not automatically change the nature and purpose of a
corporation’s business. Appropriate amendments must be made either to the law or the articles of
incorporation before a corporation can validly exercise powers outside those provided in law or the articles of
incorporation. In other words, without an amendment, what is ultra vires before a corporation acquires shares
in other corporations is still ultra vires after such acquisition.
Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI, securing loans of
third persons is still beyond petitioner’s power to do. It is still inconsistent with its purposes under the law104
and its articles of incorporation.105
In attempting to show petitioner’s interest in securing FISLAI’s loans by adverting to their interlocking
directors and shareholders, respondent disregards petitioner’s separate personality from its officers,
shareholders, and other juridical persons.
The separate personality of corporations means that they are "vest[ed] [with] rights, powers, and attributes
[of their own] as if they were natural persons[.]"106 Their assets and liabilities are their own and not their
officers’, shareholders’, or another corporation’s. In the same vein, the assets and liabilities of their officers
and shareholders are not the corporations’. Obligations incurred by corporations are not obligations of their
officers and shareholders. Obligations of officers and shareholders are not obligations of corporations.107 In
other words, corporate interests are separate from the personal interests of the natural persons that comprise
corporations.
Corporations are given separate personalities to allow natural persons to balance the risks of business as they
accumulate capital. They are, however, given limited competence as a means to protect the public from
fraudulent acts that may be committed using the separate juridical personality given to corporations.
Petitioner’s key officers, as shareholders of FISLAI, may have an interest in ensuring the viability of FISLAI by
obtaining a loan from respondent and securing it by whatever means. However, having interlocking officers
and stockholders with FISLAI does not mean that petitioner, as an educational institution, is or must
necessarily be interested in the affairs of FISLAI.
Since petitioner is an entity distinct and separate not only from its own officers and shareholders but also from
FISLAI, its interests as an educational institution may not be consistent with FISLAI’s.
40 | P a g e
Petitioner and FISLAI have different constituencies. Petitioner’s constituents comprise persons who have
committed to developing skills and acquiring knowledge in their chosen fields by availing the formal
instruction provided by petitioner. On the other hand, FISLAI is a thrift bank, which constituencies comprise
investors.
While petitioner and FISLAI exist ultimately to benefit their stockholders, their constituencies affect the means
by which they can maintain their existence. Their interests are congruent with sustaining their constituents’
needs because their existence depends on that. Petitioner can exist only if it continues to provide for the kind
and quality of instruction that is needed by its constituents. Its operations and existence are placed at risk
when resources are used on activities that are not geared toward the attainment of its purpose. Petitioner has
no business in securing FISLAI, DSLAI, or MSLAI’s loans. This activity is not compatible with its business of
providing quality instruction to its constituents.
Indeed, there are instances when we disregard the separate corporate personalities of the corporation and its
stockholders, directors, or officers. This is called piercing of the corporate veil.
Corporate veil is pierced when the separate personality of the corporation is being used to perpetrate fraud,
illegalities, and injustices.108 In Lanuza, Jr. v. BF Corporation:109
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." 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."110
These instances have not been shown in this case. There is no evidence pointing to the possibility that
petitioner used its separate personality to defraud third persons or commit illegal acts. Neither is there
evidence to show that petitioner was merely a farce of a corporation. What has been shown instead was that
petitioner, too, had been victimized by fraudulent and unauthorized acts of its own officers and directors.
In this case, instead of guarding against fraud, we perpetuate fraud if we accept respondent’s contentions.
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on its behalf. There
was no board resolution to that effect. Thus, the mortgages executed by Saturnino Petalcorin were
unenforceable.111
The mortgage contracts executed in favor of respondent do not bind petitioner. They were executed without
authority from petitioner.
Petitioner must exercise its powers and conduct its business through its Board of Trustees. Section 23 of the
Corporation Code provides:
SEC. 23. The board of directors or trustees.—Unless otherwise provided in this Code, the corporate powers of
all corporations formed under this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for
one (1) year and until their successors are elected and qualified.
Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any manner without
action from its Board of Trustees. The Board of Trustees must act as a body in order to exercise corporate
powers. Individual trustees are not clothed with corporate powers just by being a trustee. Hence, the
individual trustee cannot bind the corporation by himself or herself.
41 | P a g e
The corporation may, however, delegate through a board resolution its corporate powers or functions to a
representative, subject to limitations under the law and the corporation’s articles of incorporation.112
The relationship between a corporation and its representatives is governed by the general principles of
agency.113 Article 1317 of the Civil Code provides that there must be authority from the principal before
anyone can act in his or her name:
ART. 1317. No one may contract in the name of another without being authorized by the latter, or unless he
has by law a right to represent him.
Hence, without delegation by the board of directors or trustees, acts of a person—including those of the
corporation’s directors, trustees, shareholders, or officers—executed on behalf of the corporation are
generally not binding on the corporation.114
Contracts entered into in another’s name without authority or valid legal representation are generally
unenforceable. The Civil Code provides:
ART. 1317. . . .
A contract entered into in the name of another by one who has no authority or legal representation, or who
has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person
on whose behalf it has been executed, before it is revoked by the other contracting party.
....
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers[.]
The unenforceable status of contracts entered into by an unauthorized person on behalf of another is based
on the basic principle that contracts must be consented to by both parties.115 There is no contract without
meeting of the minds as to the subject matter and cause of the obligations created under the contract.116
Consent of a person cannot be presumed from representations of another, especially if obligations will be
incurred as a result. Thus, authority is required to make actions made on his or her behalf binding on a person.
Contracts entered into by persons without authority from the corporation shall generally be considered ultra
vires and unenforceable117 against the corporation.
Two trial courts118 found that the Secretary’s Certificate and the board resolution were either non-existent or
fictitious. The trial courts based their findings on the testimony of the Corporate Secretary, Aurora de Leon
herself. She signed the Secretary’s Certificate and the excerpt of the minutes of the alleged board meeting
purporting to authorize Saturnino Petalcorin to mortgage petitioner’s properties. There was no board meeting
to that effect. Guillermo B. Torres ordered the issuance of the Secretary’s Certificate. Aurora de Leon’s
testimony was corroborated by Saturnino Petalcorin.
Even the Court of Appeals, which reversed the trial courts’ decisions, recognized that "BSP failed to prove that
the UM Board of Trustees actually passed a Board Resolution authorizing Petalcorin to mortgage the subject
real properties[.]"119
Well-entrenched is the rule that this court, not being a trier of facts, is bound by the findings of fact of the trial
courts and the Court of Appeals when such findings are supported by evidence on record.120 Hence, not
having the proper board resolution to authorize Saturnino Petalcorin to execute the mortgage contracts for
petitioner, the contracts he executed are unenforceable against petitioner. They cannot bind petitioner.
42 | P a g e
However, personal liabilities may be incurred by directors who assented to such unauthorized act121 and by
the person who contracted in excess of the limits of his or her authority without the corporation’s
knowledge.122
Unauthorized acts that are merely beyond the powers of the corporation under its articles of incorporation
are not void ab initio.
In Pirovano, et al., this court explained that corporate acts may be ultra vires but not void.123 Corporate acts
may be capable of ratification:124
[A] distinction should be made between corporate acts or contracts which are illegal and those which are
merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public
order, or contravene some rules of public policy or public duty, and are, like similar transactions between
individuals, void. They cannot serve as basis of a court action, nor acquire validity by performance, ratification,
or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal and void ab initio, but are
not merely within the scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.125
Thus, even though a person did not give another person authority to act on his or her behalf, the action may
be enforced against him or her if it is shown that he or she ratified it or allowed the other person to act as if he
or she had full authority to do so. The Civil Code provides:
ART. 1910. The principal must comply with all the obligations which the agent may have contracted within the
scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he
ratifies it expressly or tacitly.
ART. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if
the former allowed the latter to act as though he had full powers. (Emphasis supplied)
Ratification is a voluntary and deliberate confirmation or adoption of a previous unauthorized act.126 It

converts the unauthorized act of an agent into an act of the principal.127 It cures the lack of consent at the
time of the execution of the contract entered into by the representative, making the contract valid and
enforceable.128 It is, in essence, consent belatedly given through express or implied acts that are deemed a
confirmation or waiver of the right to impugn the unauthorized act.129 Ratification has the effect of placing
the principal in a position as if he or she signed the original contract. In Board of Liquidators v. Heirs of M.
Kalaw, et al.:130
Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or
contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to
original authority;" and that "[t]he corporation and the other party to the transaction are in precisely the same
position as if the act or contract had been authorized at the time." The language of one case is expressive:
"The adoption or ratification of a contract by a corporation is nothing more nor less than the making of an
original contract. The theory of corporate ratification is predicated on the right of a corporation to contract,
and any ratification or adoption is equivalent to a grant of prior authority."131 (Citations omitted)
Implied ratification may take the form of silence, acquiescence, acts consistent with approval of the act, or
acceptance or retention of benefits.132 However, silence, acquiescence, retention of benefits, and acts that
may be interpreted as approval of the act do not by themselves constitute implied ratification. For an act to
constitute an implied ratification, there must be no acceptable explanation for the act other than that there is
an intention to adopt the act as his or her own.133 "[It] cannot be inferred from acts that a principal has a
right to do independently of the unauthorized act of the agent."134
43 | P a g e
No act by petitioner can be interpreted as anything close to ratification. It was not shown that it issued a
resolution ratifying the execution of the mortgage contracts. It was not shown that it received proceeds of the
loans secured by the mortgage contracts. There was also no showing that it received any consideration for the
execution of the mortgage contracts. It even appears that petitioner was unaware of the mortgage contracts
until respondent notified it of its desire to foreclose the mortgaged properties.
Ratification must be knowingly and voluntarily done.135 Petitioner’s lack of knowledge about the mortgage
executed in its name precludes an interpretation that there was any ratification on its part.
Respondent further argues that petitioner is presumed to have knowledge of its transactions with respondent
because its officers, the Spouses Guillermo and Dolores Torres, participated in obtaining the loan.136
Indeed, a corporation, being a person created by mere fiction of law, can act only through natural persons
such as its directors, officers, agents, and representatives. Hence, the general rule is that knowledge of an
officer is considered knowledge of the corporation.
However, even though the Spouses Guillermo and Dolores Torres were officers of both the thrift banks and
petitioner, their knowledge of the mortgage contracts cannot be considered as knowledge of the corporation.
The rule that knowledge of an officer is considered knowledge of the corporation applies only when the officer
is acting within the authority given to him or her by the corporation. In Francisco v. Government Service
Insurance System:137
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of his
employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether
he communicates such knowledge or not.138
The public should be able to rely on and be protected from the representations of a corporate representative
acting within the scope of his or her authority. This is why an authorized officer’s knowledge is considered
knowledge of corporation. However, just as the public should be able to rely on and be protected from
corporate representations, corporations should also be able to expect that they will not be bound by
unauthorized actions made on their account.
Thus, knowledge should be actually communicated to the corporation through its authorized representatives.
A corporation cannot be expected to act or not act on a knowledge that had not been communicated to it
through an authorized representative. There can be no implied ratification without actual communication.
Knowledge of the existence of contract must be brought to the corporation’s representative who has
authority to ratify it. Further, "the circumstances must be shown from which such knowledge may be
presumed."139
The Spouses Guillermo and Dolores Torres’ knowledge cannot be interpreted as knowledge of petitioner.
Their knowledge was not obtained as petitioner’s representatives. It was not shown that they were acting for
and within the authority given by petitioner when they acquired knowledge of the loan transactions and the
mortgages. The knowledge was obtained in the interest of and as representatives of the thrift banks.
VI
Respondent argues that Saturnino Petalcorin was clothed with the authority to transact on behalf of
petitioner, based on the board resolution dated March 30, 1982 and Aurora de Leon’s notarized Secretary’s
Certificate.140 According to respondent, petitioner is bound by the mortgage contracts executed by Saturnino
Petalcorin.141
This court has recognized presumed or apparent authority or capacity to bind corporate representatives in
instances when the corporation, through its silence or other acts of recognition, allowed others to believe that
persons, through their usual exercise of corporate powers, were conferred with authority to deal on the
corporation’s behalf.142
44 | P a g e
The doctrine of apparent authority does not go into the question of the corporation’s competence or power to
do a particular act. It involves the question of whether the officer has the power or is clothed with the
appearance of having the power to act for the corporation. A finding that there is apparent authority is not the
same as a finding that the corporate act in question is within the corporation’s limited powers.
The rule on apparent authority is based on the principle of estoppel. The Civil Code provides:
ART. 1431. 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.
....
ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action,
or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.
Agency may be oral, unless the law requires a specific form.
A corporation is estopped by its silence and acts of recognition because we recognize that there is information
asymmetry between third persons who have little to no information as to what happens during corporate
meetings, and the corporate officers, directors, and representatives who are insiders to corporate affairs.143
In People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals,144 this court held that the contract entered
into by the corporation’s officer without a board resolution was binding upon the corporation because it
previously allowed the officer to contract on its behalf despite the lack of board resolution.145
In Francisco, this court ruled that Francisco’s proposal for redemption of property was accepted by and
binding upon the Government Service Insurance System. This court did not appreciate the Government
Service Insurance System’s defense that since it was the Board Secretary and not the General Manager who
sent Francisco the acceptance telegram, it could not be made binding upon the Government Service Insurance
System. It did not authorize the Board Secretary to sign for the General Manager. This court appreciated the
Government Service Insurance System’s failure to disown the telegram sent by the Board Secretary and its
silence while it accepted all payments made by Francisco for the redemption of property.146
There can be no apparent authority and the corporation cannot be estopped from denying the binding affect
of an act when there is no evidence pointing to similar acts and other circumstances that can be interpreted as
the corporation holding out a representative as having authority to contract on its behalf. In Advance Paper
Corporation v. Arma Traders Corporation,147 this court had the occasion to say:
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.148
(Citation omitted)
Saturnino Petalcorin’s authority to transact on behalf of petitioner cannot be presumed based on a Secretary’s
Certificate and excerpt from the minutes of the alleged board meeting that were found to have been
simulated. These documents cannot be considered as the corporate acts that held out Saturnino Petalcorin as
petitioner’s authorized representative for mortgage transactions. They were not supported by an actual board
meeting.149
VII
Respondent argues that it may rely on the Secretary’s Certificate issued by Aurora de Leon because it was
notarized.
The Secretary’s Certificate was void whether or not it was notarized.
45 | P a g e
Notarization creates a presumption of regularity and authenticity on the document. This presumption may be
rebutted by "strong, complete and conclusive proof"150 to the contrary. While notarial acknowledgment
"attaches full faith and credit to the document concerned[,]"151 it does not give the document its validity or
binding effect. When there is evidence showing that the document is invalid, the presumption of regularity or
authenticity is not applicable.
In Basilio v. Court of Appeals,152 this court was convinced that the purported signatory on a deed of sale was
not as represented, despite testimony from the notary public that the signatory appeared before him and
signed the instrument.153 Apart from finding that there was forgery,154 this court noted:
The notary public, Atty. Ruben Silvestre, testified that he was the one who notarized the document and that
Dionisio Z. Basilio appeared personally before him and signed the instrument himself. However, he admitted
that he did not know Dionisio Z. Basilio personally to ascertain if the person who signed the document was
actually Dionisio Z. Basilio himself, or another person who stood in his place. He could not even recall whether
the document had been executed in his office or not.
Thus, considering the testimonies of various witnesses and a comparison of the signature in question with
admittedly genuine signatures, the Court is convinced that Dionisio Z. Basilio did not execute the questioned
deed of sale. Although the questioned deed of sale was a public document having in its favor the presumption
of regularity, such presumption was adequately refuted by competent witnesses showing its forgery and the
Court’s own visual analysis of the document.155 (Emphasis supplied, citations omitted)
In Suntay v. Court of Appeals,156 this court held that a notarized deed of sale was void because it was a mere
sham.157 It was not intended to have any effect between the parties.158 This court said:
[I]t is not the intention nor the function of the notary public to validate and make binding an instrument
never, in the first place, intended to have any binding legal effect upon the parties thereto.159
Since the notarized Secretary’s Certificate was found to have been issued without a supporting board
resolution, it produced no effect. It is not binding upon petitioner. It should not have been relied on by
respondent especially given its status as a bank.
VIII
The banking institution is "impressed with public interest"160 such that the public’s faith is "of paramount
importance."161 Thus, banks are required to exercise the highest degree of diligence in their transactions.162
In China Banking Corporation v. Lagon,163 this court found that the bank was not a mortgagee in good faith
for its failure to question the due execution of a Special Power of Attorney that was presented to it in relation
to a mortgage contract.164 This court said:
Though petitioner is not expected to conduct an exhaustive investigation on the history of the mortgagor’s
title, it cannot be excused from the duty of exercising the due diligence required of a banking institution.
Banks are expected to exercise more care and prudence than private individuals in their dealings, even those
that involve registered lands, for their business is affected with public interest.165 (Citations omitted)
For its failure to exercise the degree of diligence required of banks, respondent cannot claim good faith in the
execution of the mortgage contracts with Saturnino Petalcorin. Respondent’s witness, Daciano Paguio, Jr.,
testified that there was no board resolution authorizing Saturnino Petalcorin to act on behalf of petitioner.166
Respondent did not inquire further as to Saturnino Petalcorin’s authority.
Banks cannot rely on assumptions. This will be contrary to the high standard of diligence required of them.
VI
According to respondent, the annotations of respondent’s mortgage interests on the certificates of titles of
petitioner’s properties operated as constructive notice to petitioner of the existence of such interests.167
Hence, petitioners are now estopped from claiming that they did not know about the mortgage.
46 | P a g e
Annotations of adverse claims on certificates of title to properties operate as constructive notice only to third
parties—not to the court or the registered owner.1âwphi1 In Sajonas v. Court of Appeals:168
[A]nnotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real
property where the registration of such interest or right is not otherwise provided for by the Land Registration
Act or Act 496 (now [Presidential Decree No.] 1529 or the Property Registration Decree), and serves a warning
to third parties dealing with said property that someone is claiming an interest on the same or a better right
than that of the registered owner thereof.169 (Emphasis supplied)
Annotations are merely claims of interest or claims of the legal nature and incidents of relationship between
the person whose name appears on the document and the person who caused the annotation. It does not say
anything about the validity of the claim or convert a defective claim or document into a valid one. 170 These
claims may be proved or disproved during trial.
Thus, annotations are not conclusive upon courts or upon owners who may not have reason to doubt the
security of their claim as their properties' title holders.
WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December 17, 2009 is REVERSED
and SET ASIDE. The Regional Trial Courts' Decisions of November 23, 2001 and December 7, 2001 are
REINSTATED.
SO ORDERED
NISSAN CAR LEASE PHILS., INC., Petitioner,

vs.
LICA MANAGEMENT, INC. and PROTON PILIPINAS, INC., Respondents.
Facts:
LMI is the absolute owner of a property located at Makati City with a total area of approximately 2,860 square
meters.5 On June 24, 1994, it entered into a contract with NCLPI for the latter to lease the property for a term
of ten (10) years (or from July 1, 1994 to June 30, 2004) with a monthly rental of ₱308,000.00 and an annual
escalation rate of ten percent (10%).6 Sometime in September 1994, NCLPI, with LMI’s consent, allowed its
subsidiary Nissan Smartfix Corporation (NSC) to use the leased premises.7
Subsequently, NCLPI became delinquent in paying the monthly rent, such that its total rental arrearages8
amounted to ₱1,741,520.85.9 In May 1996, Nissan and LICA verbally agreed to convert the arrearages into a
debt to be covered by a promissory note and twelve (12) postdated checks, each amounting to ₱162,541.95 as
monthly payments starting June 1996 until May 1997.10
While NCLPI was able to deliver the postdated checks per its verbal agreement with LMI, it failed to sign the
promissory note and pay the checks for June to October 1996. Thus, in a letter by registered mail, LMI
informed NCLPI that it was terminating their Contract of Lease due to arrears in the payment of rentals. It also
demanded that NCLPI (1) pay the amount of unpaid rentals11 and (2) vacate the premises within five (5) days
from receipt of the notice.12
In the meantime, Proton sent NCLPI an undated request to use the premises as a temporary display center for
"Audi" brand cars for a period of ten (10) days. In the same letter, Proton undertook "not to disturb [NCLPI
and LMI’s] lease agreement and ensure that [NCLPI] will not breach the same [by] lending the premises x x x
without any consideration."13 NCLPI acceded to this request.14
47 | P a g e
On October 11, 1996, NCLPI entered into a Memorandum of Agreement with Proton whereby the former
agreed to allow Proton "to immediately commence renovation work even prior to the execution of the
Contract of Sublease x x x."15 In consideration, Proton agreed to transmit to NCLPI a check representing three
(3) months of rental payments, to be deposited only upon the due execution of their Contract of Sublease.16
In a letter NCLPI, through counsel, replied to LMI’s letter acknowledging the arrearages incurred by it under
their Contract of Lease. Claiming, however, that it has no intention of abandoning the lease and citing efforts
to negotiate a possible sublease of the property, NCLPI requested LMI to defer taking court action on the
matter.17
LMI entered into a Contract of Lease with Proton over the subject premises.18
LMI filed a Complaint19 for sum of money with damages seeking to recover from NCLPI the amount
equivalent to the balance of its unpaid rentals, with interest and penalties.20
NCLPI demanded Proton to vacate the leased premises.21 However, Proton replied that it was occupying the
property based on a lease contract with LMI.22 In a letter addressed to LMI, NCLPI asserted that its failure to
pay rent does not automatically result in the termination of the Contract of Lease nor does it give LMI the right
to terminate the same.23 NCLPI also informed LMI that since it was unlawfully ousted from the leased
premises and was not deriving any benefit therefrom, it decided to stop payment of the checks issued to pay
the rent.24
In its Answer25 and Third-Party Complaint26 against Proton, NCLPI alleged that LMI and Proton "schemed"
and "colluded" to unlawfully force NCLPI (and its subsidiary NSC) from the premises. Since it has not
abandoned its leasehold right, NCLPI asserts that the lease contract between LMI and Proton is void for lack of
a valid cause or consideration.
The trial court admitted29 the third-party complaint over LMI’s opposition.30
Subsequently, Proton filed its Answer with Compulsory Counterclaim against NCLPI.31 According to Proton,
the undated letter-request supposedly sent by Proton to NCLPI was actually prepared by the latter so as to
keep from LMI its intention to sublease the premises to Proton until NCLPI is able to secure LMI’s consent.32
Denying NCLPI’s allegation that its use of the lease premises was made without any consideration, Proton
claims that it "actually paid [NCLPI] rental of ₱200,000.00 for the use of subject property for 10 days x x x."33
Proton further asserted that NCLPI had vacated the premises as early as during the negotiations for the
sublease and, in fact, authorized the former to enter the property and commence renovations.34 When NCLPI
ultimately failed to obtain LMI’s consent to the proposed sublease and its lease contract was terminated,
Proton, having already incurred substantial expenses renovating the premises, was constrained to enter into a
Contract of Lease with LMI.
Ruling of the Trial Court
The RTC promulgated its Decision denying the third party complaint filed by defendant.
The trial court found that NCLPI purposely violated the terms of its contract with LMI when it failed to pay the
required rentals and contracted to sublease the premises without the latter’s consent.38 Under Article 1191
of the Civil Code, LMI was therefore entitled to rescind the contract between the parties and seek payment of
the unpaid rentals and damages.39 In addition, the trial court ruled that LMI’s act of notifying NCLPI of the
termination of their lease contract due to non-payment of rentals is expressly sanctioned under paragraphs
1640 and 1841 of their contract.42
Contrary to NCLPI’s claim that it was "fooled" into allowing Proton to occupy the premises for a limited period
after which the latter unilaterally usurped the premises for itself, the trial court found that it was NCLPI "which
misrepresented itself to [Proton] as being a lessee of good standing, so that it could induce the latter to
occupy and renovate the premises when at that time the negotiations were underway the lease between
[LMI] and [NCLPI] had already been terminated."43
48 | P a g e
Issue: Whether or not NCLPI’s petition must be denied outright on the ground that Banson, who caused the
preparation of the petition and signed the Verification and Certification against Forum Shopping, was not duly
authorized to do so.
Ruling:
According to LMI, NCLPI’s petition must be denied outright on the ground that Luis Manuel T. Banson
(Banson), who caused the preparation of the petition and signed the Verification and Certification against
Forum Shopping, was not duly authorized to do so. His apparent authority was based, not by virtue of any
NCLPI Board Resolution, but on a Special Power of Attorney (SPA) signed only by NCLPI’s Corporate Secretary
Robel C. Lomibao.53
As a rule, a corporation has a separate and distinct personality from its directors and officers and can only
exercise its corporate powers through its board of directors. Following this rule, a verification and certification
signed by an individual corporate officer is defective if done without authority from the corporation’s board of
directors.54
The requirement of verification being a condition affecting only the form of the pleading,55 this Court has, in a
number of cases, held that:
[T]he following officials or employees of the company can sign the verification and certification without
need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the President of a corporation,
(3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment Specialist
in a labor case.
x x x [T]he determination of the sufficiency of the authority was done on a case to case basis. The rationale
applied in the foregoing cases is to justify the authority of corporate officers or representatives of the
corporation to sign x x x, being "in a position to verify the truthfulness and correctness of the allegations in
the petition."
In this case, Banson was President of NCLPI at the time of the filing of the petition.57 Thus, and applying the
foregoing ruling, he can sign the verification and certification against forum shopping in the petition without
the need of a board resolution.58
49 | P a g e
[ GR No. 205061, Jun 08, 2016 ]
EMERTIA G. MALIXI v. MEXICALI PHILIPPINES +
Facts:
Petitioner filed an Amended Complaint for illegal dismissal and non-payment of service charges and exemplary
damages and attorney's fees against respondents Mexicali and its General Manager, Francesca Mabanta
before the Labor Arbiter.
Petitioner alleged that she was hired by respondents as a team leader assigned at the delivery service,
receiving a daily wage of Three Hundred Eighty Two Pesos (P382.00) sans employment contract and
identification card (ID). Mexicali's training officer, Jay Teves (Teves), informed her of the management's
intention to transfer and appoint her as store manager at a newly opened branch which is a joint venture
between Mexicali and Calexico Food Corporation (Calexico), due to her satisfactory performance. She was
apprised that her monthly salary as the new store manager would be Fifteen Thousand Pesos (P15,000,00)
with service charge, free meal and side tip. She then subsequently submitted a resignation letteras advised by
Teves. On October 17, 2008, she started working as the store manager of Mexicali’s no branch although,
again, no employment contract and ID were issued to her. However, in December 2008, she was compelled by
Teves to sign an end-of-contract letter by reason of a criminal complaint for sexual harassment she filed on
against Mexicali's operations manager, John Pontero (Pontero), for the sexual advances made against her
during Pontero's visits at Alabang branch.[8] When she refused to sign the end-of-contract letter, Mexicali's
administrative officer, Ding Luna (Luna), personally went to the branch and caused the signing of the same.
Upon her vehement refusal to sign, she was informed by Luna that it was her last day of work.
Respondents, however, denied responsibility over petitioner's alleged dismissal. They averred that petitioner
has resigned from Mexicali in October 2008 and hence, was no longer Mexicali's employee at the time of her
dismissal but rather an employee of Calexico, a franchisee of Mexicali located in Alabang Town Center which is
a separate and distinct corporation.
In her reply, petitioner admitted having resigned from Mexicali but averred that her resignation was a
condition for her promotion as store manager at Mexicali's Alabang Town Center branch. She asserted that
despite her resignation, she remained to be an employee of Mexicali because Mexicali was the one who
engaged her, dismissed her and controlled the performance of her work as store manager in the newly
opened branch.
The Labor Arbiter declared petitioner to have been illegally dismissed by respondents. By piercing the veil of
corporate fiction, the Labor Arbiter ruled that Mexicali and Calexico are one and the same with interlocking
board of directors. The Labor Arbiter sustained petitioner's claim that she is an employee of Mexicali as she
was hired at Calexico by Mexicali's corporate officers and also dismissed by them and hence, held Mexicali
responsible for petitioner's dismissal.
Proceedings before the National Labor Relations Commission
On October 26, 2009, respondents filed an Appeal Memorandum with Prayer for Injunction [11] with the NLRC,
averring that the Labor Arbiter erred in holding them liable for the acts of Calexico, which is a separate entity
created with a different purpose, principal office, directors/incorporators, properties, management and
business plans from Mexicali as evidenced by their respective Articles of Incorporation and By-Laws.
The NLRC ruled sustaining respondents' contention that Mexicali and Calexico are separate and distinct
entities, Calexico being the true employer of petitioner at the time of her dismissal.
Issue/s:
50 | P a g e
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE NATIONAL LABOR RELATIONS COMMISSION'S
DECISION REINSTATING THE RESPONDENTS' APPEAL DESPITE BEING FILED OUT OF TIME.
II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE NATIONAL LABOR RELATIONS COMMISSION'S
RESOLUTION (TO THE RESPONDENTS' MOTION FOR RECONSIDERATION) PARTLY GRANTING THE
RESPONDENTS' APPEAL (REGARDING THE ISSUE OF ILLEGAL DISMISSAL) DESPITE BEING A NON-ISSUE IN THEIR
MOTION FOR RECONSIDERATION.
III
WHETHER THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THERE WAS NO
ILLEGAL DISMISSAL.
IV
WHETHER THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE PETITIONER
RESIGNED FROM HER EMPLOYMENT WITH THE RESPONDENTS.
WHETHER THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN FAILING TO RULE ON THE ISSUE OF
WHETHER OR NOT THE PETITIONER IS ENTITLED TO THE AWARD OF MORAL AND EXEMPLARY DAMAGES
RENDERED BY THE LABOR ARBITER, DESPITE BEING RAISED IN THE PETITIONER'S PETITION FOR CERTIORARI.[21]
Petitioner maintains that the CA gravely erred in affirming the NLRC's reinstatement of respondents' appeal
despite being filed out of time and the NLRC's ruling that there was no illegal dismissal, arguing that it is a non-
issue in respondents' motion for reconsideration and there was absence of any valid cause for terminating her
employment with Mexicali.
Ruling:
The Petition has no merit.
Petitioner claims that Mexicali and Calexico are one and the same and that Mexicali was still her employer
upon her transfer to Calexico since she was hired and dismissed by Mexicali's officers and that Mexicali
exercised the power of control over her work performance.
We rule otherwise. The Labor Arbiter's finding that the two corporations are one and the same with
interlocking board of directors has no factual basis. It is basic 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."[32] Clear and convincing evidence is needed to warrant the application of the
doctrine of piercing the veil of corporate fiction,[33] In our view, the Labor Arbiter failed to provide a clear
justification for the application of the doctrine. The Articles of Incorporation and By-Laws of both corporations
show that they have distinct business locations and distinct business purposes. It can also be gleaned therein
that they have a different set of incorporators or directors since only two out of the five directors of Mexicali
are also directors of Calexico. At any rate, the Court has ruled that the existence of interlocking directors,
corporate officers and shareholders is not enough justification to disregard the separate corporate
personalities.[34] To pierce the veil of corporate fiction, there should be clear and convincing proof that fraud,
illegality or inequity has been committed against third persons.[35] For while respondents' act of not issuing
employment contract and ID may be an indication of the proof required, however, this, by itself, is not
sufficient evidence to pierce the corporate veil between Mexicali and Calexico.
More importantly, there was no existing employer-employee relationship between petitioner and Mexicali. To
prove petitioner's claim of an employer-employee relationship, the following should be established by
competent evidence: "(1) the selection and engagement of the employee; (2) the payment of wages; (3) the
51 | P a g e
power of dismissal; and (4) the power of control over the employee's conduct."[36] "Although no particular
form of evidence is required to prove the existence of the relationship, and any competent and relevant
evidence to prove the relationship may be admitted, a finding mat the relationship exists must nonetheless
rest on substantial evidence, which is that amount of relevant evidence that a reasonable mind might accept
as adequate to justify a conclusion."[37] We find that petitioner failed to establish her claim based on the
aforementioned criteria. As to petitioner's allegation that it was Teves who selected and hired her as store
manager of Calexico and likewise, together with Luna, initiated her dismissal, suffice it to state that bare
allegations, unsubstantiated by evidence, are not equivalent to proof.[38] Nevertheless, Teves merely informed
petitioner of the management's intention to transfer her and thereafter advised her to execute a resignation
letter, to which she complied. Nowhere was there any allegation or proof that Teves was the one who directly
hired her as store manager of Calexico. Also, Teves and Luna merely initiated petitioner's dismissal. The end-
of-contract purportedly signed by Luna to effectuate her termination was not presented. Again, mere
allegation is not synonymous with proof No substantial evidence was adduced to show that respondents had
the power to wield petitioner's termination from employment. Anent the element of control, petitioner failed
to cite a single instance to prove that she was subject to the control of respondents insofar as the manner in
which she should perform her work as store manager. The bare assertion that she was required to work from
Friday through Wednesday is not enough indication that the performance of her job was subject to the control
of respondents. On the other hand, the payslips[39] presented by petitioner reveal that she received her salary
from Calexico and no longer from Mexicali starting the month of October 2008.
52 | P a g e
[ GR No. 168134, Oct 05, 2016 ] *****
FERRO CHEMICALS v. ANTONIO M. GARCIA +
Facts:
Ferro Chemicals is a domestic corporation duly authorized by existing law to engage in business in the
Philippines. It is represented in this action by its President, Ramon M. Garcia.
Chemical Industries, on the other hand, is also a domestic corporation duly organized and existing by virtue of
Philippine laws. Antonio Garcia, one of the parties in the instant case, is the Chairman of the Board of
Directors (BOD) of Chemical Industries and a brother of Ferro Chemical's President, Ramon Garcia. Rolando
Navarro is the Corporate Secretary of Chemical Industries while Jaime Gonzales is a close financial advisor of
Antonio Garcia.
The Deed of Absolute Sale and Purchase of Shares of Stock
Antonio Garcia and Ferro Chemicals entered into a Deed of Absolute Sale and Purchase of Shares of Stock[5]
over 1,717,678 shares of capital stock of Chemical Industries registered under the name of Antonio Garcia for
a consideration of P-79,207,331.28 (subject shares). Included as subjects of the sale were Antonio Garcia's
371,697 shares of stocks in Vision Insurance Consultants, Inc., (VIC) and his proprietary membership in
Alabang Country Club and Manila Polo Club. Under the sale agreement, Antonio Garcia warranted the
following:
(1) That the subject shares are free from the liens and encumbrances except the ones under the Security Bank
and Trust Company (Security Bank) and the Insular Bank of Asia and America (Insular Bank);
(2) That the seller undertakes to defend the sale contract and defray the litigation cost should its validity be
assailed, and, to reimburse Ferro Chemicals the amount of the purchase price
(3) That in the event that the sale is invalidated, the seller will reimburse the buyer the amount of the
purchase price.
The parties also stipulated in the agreement that Ferro Chemicals will deliver a part of the purchase price to
Security Bank in satisfaction of Antonio Garcia's obligation as judgment obligor with Security Bank.
Pursuant to the sale contract, Ferro Chemicals remitted the amount of P-35,462,869.92 to Security Bank and
Trust Co. (SBTC) in the form of a check drawn against its account with Bank of America. On the ground that the
amount tendered was insufficient to satisfy Antonio Garcia's obligation, the payment was not accepted by
Security Bank, leaving the obligor with no recourse but to consign the check to the court which adjudicated his
liability. (Security Bank Case) On 19 June 1990, the CA approved the consignation effected by Antonio Garcia
and held that the amount tendered is sufficient to discharge his liability. In a Resolution dated 21 November
1990 the Court affirmed the final settlement of Antonio Garcia's liability with the bank. This settled the
Security Bank Case with finality.
The Compromise Agreement
On 17 January 1989, Antonio Garcia entered into a Compromise Agreement[6] with Philippine Investments
System Organization (PISO), Bank of the Philippine Islands (BPI), Philippine Commercial International Bank
(PCIB), Rizal Commercial Banking Corporation (RCBC) and Land Bank of the Philippines (LBP) (collectively
known as Consortium Banks). The settlement was entered in connection with the Surety Agreements
previously contracted by Antonio Garcia and Dynetics Corporation with the consortium Banks.
The First Consortium Case
53 | P a g e
The 17 January 1989 Compromise Agreement sprang from Civil Case No. 8527, filed by Antonio Garcia and
Dynetics,. Inc. before the RTC of Makati City, seeking to enjoin the Consortium Banks from collecting the
amount of P117,800,000.00, excluding interests, penalties and attorney's fees, purportedly representing their
liability under surety contracts.
The RTC, upon application therefor by the Consortium Banks, issued a Notice of Garnishment[7] dated 19 July
1985 over the 1,717,678 shares of stocks of Antonio Garcia in Chemical Industries to secure any contingent
claims that may be awarded in favor of the banks. On the ground that only absolute transfers of shares are
required to be on the corporation's stock and transfer books, the Corporate Secretary did not annotate the
banks' claims on Chemical Industries' books.
Subsequently, the RTC issued Orders dated 25 March 1988 and 20 May 1988 dismissing Civil Case No. 8527. In
effect, the causes of action of the plaintiffs and the counterclaims of the defendants were all denied. Insisting
on their right to enforce the surety contracts, the Consortium Banks assailed the dismissal of Civil Case No.
8527 before the appellate court. During the pendency of the appeal docketed as CA-G.R. No. 20467, the
parties agreed to amicably settle the case, and thus, the creditors accepted the offer of the debtors to
immediately pay the obligation in exchange for the waiver of interests, penalties and attorney's fees. The
compromise agreement, which required Antonio Garcia and Dynetics to pay the Consortium Banks the
amount of P145,000,000.00, was consequently approved by the CA in a Judgment dated 22 May 1989.
The Deed of Right to Repurchase
After the parties in the First Consortium Case forged a Compromise Agreement, Antonio Garcia and Ferro
Chemicals entered into a Deed of Right to Repurchase[8] dated 3 March 1989. Under the repurchase contract,
Ferro Chemicals stipulated to sell back the subject shares to Antonio Garcia within 180 days from its execution
or until 30 August 1989 subject to the foregoing terms:
(1) That the consideration for the repurchase shall either be equivalent to the amount actually paid by the
buyer for the sale or the sum of P79,207,331.28, whichever is lesser, plus interest charges, bank charges,
broker's commission, transfer taxes and documentary stamp tax;
(2) Should the tender of the repurchase price be effected 90 days after 3 March 1989, the seller, shall, in
addition to the payment of the above stated amount, shall pay a surcharge equivalent to 5% over and above
the actual cost of the buyer in holding the shares.
Desirous to reacquire the ownership of the subject shares, Antonio Garcia, on 12 July 1989, notified Ferro
Chemicals of his intention to exercise his right, under the repurchase deed. On 31 July 1989, Antonio Garcia
reiterated his intent to reacquire the subject shares by sending another notice to Ferro Chemicals and
tendering the amount of the agreed repurchase price. On the ground that the taxes and the interests due
were not included in the consideration for repurchase price tendered by Antonio Garcia, Ferro Chemicals
refused to sell back the shares to him. Instead, Ferro Chemicals opted to cede its rights over the subject shares
to Chemphil Export and Import Corporation (Chemphil Export) by virtue of an Agreement[9] dated 26 June
1989.
First and Second Repurchase Cases
The assignment. effected by Ferro Chemicals to a third party did not deter Antonio Garcia's efforts to recover
the subject shares. On 21 August 1989, he initiated an action for Specific Performance seeking for the
enforcement of the seller's right under the repurchase agreement and prayed that the buyer be ordered to
reconvey the subject shares to him. Finding that the issues raised involved an intra-corporate dispute
cognizable by the Securities and Exchange Commission (SEC), the RTC dismissed the civil case.
Undeterred, Antonio Garcia filed a Second Repurchase Case before the SEC. In his Complaint, the seller cited
the unjustified refusal of the buyer to comply with the terms of the agreement and reiterated his prayer in the
First Repurchase Case that the buyer be enjoined to observe its obligation under the repurchase agreement.
54 | P a g e
Enforcement o[the First Consortium Case
With Antonio Garcia and Dynetics' failure to comply with the compromise agreement, the Consortium Banks
filed a Motion for Execution.[10] Thus, the RTC, issued a Writ of Execution to enforce the court-approved
compromise against Antonio Garcia and Dynetics.
Pursuant to the writ of execution, the sheriff levied the 1,717,678 shares of capital stocks in Chemical
Industries that were previously attached on the strength of the 19 July 1985 RTC Order [12] in the First
Consortium Case. After the notice and the publication requirements were complied with, a public auction was
conducted whereby the Consortium Banks were declared as the highest bidders as shown in the Certificate of
Sale.[13]
The RTC, upon application of the Consortium Banks, issued an Order directing the Corporate Secretary of
Chemical Industries to enter the sheriffs certificate of sale in the company's stock and transfer books. In effect,
the corporate secretary was enjoined to cancel the certificates of shares of stocks under the name of Antonio
Garcia and all those claiming rights under him and issue new ones in favor of the Consortium Banks.
The Second Consortium Case
Before the corporate secretary could carry out the foregoing directive, Chemphil Export filed an Urgent
Motion[15] opposing the RTC Order. Tracing back its ownership to Ferro Chemicals, the intervenor propounded
that it has superior right as against the Consortium Banks.
On 27 September 1989, the RTC issued an Order,[16] allowing the intervention. On the belief that there is a
necessity of resolving first the question of which between Chemphil Export on the one hand, and the
Consortium Banks on the other, is rightfully entitled to the ownership of the disputed shares, the RTC recalled
its 4 September 1989 Order. For Chemphil Export, the garnishment effected by the Sheriff on 19 July 1985 is
not binding on third persons because it was not recorded on the stock and transfer book of the corporation.
The Second Consortium Case was litigated all the way up to this Court. In a Decision dated 12 December 1995,
the Court ruled in favor of the Consortium Banks and declared that the attachment lien they previously
acquired is valid and effective even though it was not annotated in the corporation's stock and transfer books.
The chief purpose of the remedy of attachment is to secure a contingent lien on the defendant's property until
plaintiff can, by appropriate proceedings, obtain a judgment and have such property applied to its
satisfaction.[17] For this reason, the Court adjudged the Consortium Banks as the rightful owners of the
disputed shares. This decision settled with finality the Second Consortium Case. [18]
The Ferro Chemicals Case
After losing the disputed shares to the Consortium Banks, Chemphil Export proceeded to demand from Ferro
Chemicals the value of the lost shares in the amount of P100,000,000.00. In payment thereof, Ferro Chemicals
ceded its fights over its chrome plant in Misamis Oriental in favor of the former.[19]
In the interregnum, Consortium Banks also assigned their rights over the disputed shares to Jaime Gonzales by
executing a Deed of Assignment of Credit Without Recourse[20] on 7 July 1993.
On the belief that it is aggrieved by the tum of events, Ferro Chemicals initiated several civil and criminal cases
against Chemical Industries, Antonio Garcia, Rolando Navarro, Jaime Gonzales and a certain Atty. Virgilio
Gesmundo before different courts and judicial bodies.
On 3 December 1996, Ferro Chemicals filed an action for damages before the RTC of Makati, seeking for the
recovery of the amount of the shares that was lost by Chemphil Export to the Consortium Banks in the Second
Consortium Case.
In its Complaint, Ferro Chemicals claimed that defendants conspired and abetted to fraudulently induce the
buyer to purchase Antonio Garcia's shares by falsely warranting that these shares are free from liens and
encumbrances. These representations were made despite their knowledge that the subject shares were
55 | P a g e
previously garnished by Consortium Banks. Relying on defendants' warranty, Ferro Chemicals parted with the
amount of P35,462,868.69 as payment for those shares only to lose the said shares to prior lienholders after a
protracted legal battle which reached all the way up to this Court. It was alleged that the fraudulent scheme
was perpetuated by Antonio Garcia, together with his co-defendants, Jaime Gonzales and Rolando Navarro,
who conspired with him in enticing Ferro Chemicals to purchase the subject shares.
In refuting liability, defendants Chemical Industries and Antonio Garcia averred that there is no truth to the
claim of Ferro Chemicals that it was not made aware of the prior attachment of the Consortium Banks. They
insisted that, all the outstanding claims against the subject shares, were fully disclosed to Ferro Chemicals'
President, Ramon Garcia, during the negotiation of the sale which took almost a year before the parties finally
decided to sign the transfer deed. While the subject lien was not mentioned in the purchase agreement,
Ramon Garcia, however, was wholly apprised of the status of the encumbrance who went to the extent of
inserting the "reimbursement clause" and "the obligation to defend the sale clause" in the agreement in order
to protect Ferro Chemicals' rights in the event that prior lienholders will exercise their right over the subject
properties. The reason why the said lien was not expressly stated, defendants argued, was because at the time
the contract was perfected, the First Consortium Case was ordered dismissed by the RTC.[22]
To expose the frailty of the case, defendants Chemical Industries and Antonio Garcia punctuated Ferro
Chemical's unjustified refusal to sell back the shares to Antonio Garcia and the latter's unrelenting efforts to
reacquire the shares at the price stipulated in the Deed of Right to Repurchase. It was postulated that had it
been the intention of the defendants to deprive plaintiff of the subject shares, an offer to repurchase made in
good faith, coupled with the tender of the agreed consideration, would not have been made. [23]
By its obstinate refusal to divest its ownership over the shares, it was argued that plaintiff obviously chose to
profit from the shares even at the risk of losing it to third person·s. After it was finally divested of its right to
receive dividends, defendants pointed out, Ferro Chemicals turned to Antonio Garcia for the value of the lost
shares trumpeting all sorts of specious claims against him and other defendants.[24]
For his part, defendant Jaime Gonzales claimed that he is not a party to the agreement which was merely
between the brothers Ramon Garcia and Antonio Garcia and their respective corporations, Ferro Chemicals
and Chemical Industries.[25] Contrary to the claim of Ferro Chemicals, Jaime Gonzales maintained that Ramon
Garcia was well aware of the levy of Consortium Banks against the shares of Antonio Garcia as this issue was
fully discussed to him in the presence of Jaime Gonzales during the negotiation of the agreement. He invited
the attention of the trial court to the peculiar provisions in the transfer deed which stipulates "the seller
undertook to defend the validity of the sale and defray the cost of litigation and reimburse the buyer of the
payments made should the sale be invalidated' that were inserted for the precise reason that the parties
wanted to protect the interest of Ferro Chemicals from the claims of the Consortium Banks. In any case, Jaime
Gonzales claimed that there is no proof that he conspired with his co-defendants to carry out the sinister
design alleged by the plaintiff.[26]
Defendant Rolando Navarro also denied liability by pointing out that he was neither a party nor a privy to the
contract in question and his participation in the transaction was limited to his signing of the deed as an
instrumental witness thereof. It was Atty. Virgilio Gesmundo who was consulted by Antonio Garcia during the
negotiation of the agreement and was the one who also prepared the draft of the contract in accordance with
the terms agreed upon by parties. Not being a party nor a privy, Rolando Navarro posited that he was not in a
position to make any representation or warranty with respect to the subject shares.
The RTC Decision
On 4 September 2000, the RTC rendered a Decision[27] in favor of Ferro Chemicals and found Chemical
Industries, Antonio Garcia, Jaime Gonzales and Rolando Navarro solidarily liable for the total amount of
P269,355,537.41, representing the value ofthe lost shares, costs of litigation, attorney's fees and exemplary
damages.
In finding Antonio Garcia liable, the RTC harbored the belief that no reasonable businessman would assume
the risk of buying the shares for P-79,207,331.28 and then end up answering liabilities to its prior lienholders
in the amount of P145,000,000.00. To find flawed Antonio Garcia's defense, the court a quo went on to
56 | P a g e
declare that it would be an unwise business decision for Ferro Chemicals to purchase shares of stocks that
were already attached to answer for contingent claims, viz:
"Verily, Antonio Garcia has more reason not to disclose the lien/claim of the consortium since the
consummation of the sale is more to his benefit. Ramon Garcia's testimony that Antonio Garcia's [Chemical
Industries] shares which have been garnished by [Security Bank] have been the subject of attempts by the
latter to ell the same at public auction which will result in its disposal at much lower price as is always the case
in such sales, and acquisition thereof by the bank itself, an adverse party is undisputed. xxx.
xxxx
In fine, Antonio Garcia entered into an agreement with [Ferro Chemicals] for the sale and purchase of his
[Chemical Industries] shares, among others, covered by Deed of Absolute Sale and Purchase of Shares of
Stock. He falsely represented and warranted that the same is free from all liens and encumbrances except that
of [Security Bank] and [Insular Bank], despite his knowledge of the lien of the consortium. He, therefore,
concealed [the] said lien from [Ferro Chemicals]. The [Chemical Industries] shares were subsequently lost
when said shares were executed and sold at public auction to satisfy Antonio Garcia's liability with the
consortium, the ownership of the latter having been declared by the Supreme Court." [28]
After having found that Antonio Garcia violated the terms of the purchase agreement by falsely representing
to Ferro Chemicals that the subject shares were free from liens and encumbrances other than the ones
mentioned in the agreement, the trial court found him liable under Article 1170 of the New Civil Code which
states that "those who in the performance of their obligations are guilty of fraud, negligence or delay, and
those who in any manner contravene the tenor thereof, are liable for damages."
With respect to acts imputed against Jaime Gonzales and Rolando Navarro, the RTC found that their conduct
prior to, during and subsequent to the execution of the contract reflected a common design to aide Antonio
Garcia to evade his contractual obligations with Ferro Chemicals. In effect, the lower court found Jaime
Gonzales and Rolando Navarro liable for tortious interference for having perpetrated acts which are akin to
the scenario wherein third persons induce a party to renege on or violate his undertaking under the contract
warranting relief therefrom. The RTC decreed that these acts of Jaime Gonzales and Rolando Navarro are
indicative of their scheme to aide Antonio Garcia unjustly deprive Ferro Chemicals of its purchased shares, to
wit:
"Defendant Navarro is now estopped from disclaiming his active participation in the transaction involving the
sale of Antonio Garcia's shares to [Ferro Chemicals]. The Court believes that he showed the stock and transfer
book of [Chemical Industries] to Ramon Garcia confident that the garnishment of the corporation will not be
revealed because as corporate secretary who had the duty to annotate the garnishment he did not respond to
the call obviously because he was protecting the interest of Antonio Garcia whom he had been assisting
regarding the former's shares and/or disposition thereof. Worse, defendant Navarro even cancelled the
certificate of shares in the name of Antonio Garcia and issued new ones to [Ferro Chemicals]. This was
followed by the issuance of new certificates of shares to [Chemphil Export]. What cannot be explained is the
fact that he continuously did not record the consortium's garnishment despite being aware that the interests
of Antonio Garcia over his [Chemical Industries] shares was already being transferred to third parties, whose
interests are definitely affected.
Likewise, defendant Gonzales is also estopped from denying his participation in the transaction involving the
sale of Antonio Garcia's [Chemical Industries] shares to [Ferro Chemicals] after previously admitting
unconditionally his participation in his Affidavit of 30 May 1990. His subsequent qualification of such
participation is unavailing. In fact, defendant Gonzales' interest being intertwined with that of Antonio Garcia
personally, in business and in matters regarding the subject [Chemical Industries] shares of the latter is an
understatement- he is a financial officer and [a] business associate of Antonio Garcia; he was also [an]
attorney-in-fact of Antonio Garcia in negotiating and entering into a compromise agreement with the
consortium; and the subject [Chemical Industries] shares of Antonio Garcia were ultimately assigned [']to his
name['] by the said consortium."[29]
As to defendant Chemical Industries, the RTC made the corporation accountable for the acts of its Corporate
57 | P a g e
Secretary, Rolando Navarro, which were carried out to the damage and prejudice of Ferro Chemicals.
Having laid the individual participation of each defendant to defraud the plaintiff, the RTC then found them
jointly and severally liable for the purchase price of the subject shares, cost of litigation, attorney's fees and
exemplary damages, viz:
"WHEREFORE, premises above considered, and [Ferro Chemicals] having duly established its claim, judgement
is hereby rendered in favor of [Ferro Chemicals] and as against [Chemical Industries, Antonio Garcia, Jaime
Gonzales and Rolando Navarro], who are hereby ordered to pay [Ferro Chemicals], jointly and severally, as
follows:
(1) P256,255,537.41, which is the value of the lost shares minus the balance of the purchase price;
(2) P12,000,000.00, which is the cost of suit and expenses of litigation in the case against the consortium and
the instant case;
(3) P100,000.000 as exemplary damages[;]
(4) P1,000,000.00 plus additional 10% of the value of the shares as attorney's fees.
SO ORDERED."[30]
The Court of Appeals Decision
On 3 March 2004, the CA rendered a Decision affirming with modification the RTC Decision. Finding no
sufficient evidence on record that Rolando Navarro actively participated in the fraud perpetrated by Antonio
Garcia against Ferro Chemicals, the CA discharged him from liability. Underlying the ruling was the finding that
Rolando Navarro's participation was limited to his failure to disclose the existence of lien in favor of
Consortium Banks without any showing that he subsequently "abetted, actively participated or connived" with
Antonio Garcia in breaching the latter's obligation under the agreement. Being a corporation with a
personality separate and distinct from its officers and members, the CA held that Chemical Industries could
not be held liable for the acts of the latter. Finally, the CA struck down the grant of "attorney's fees in the sum
of P1,000,000.00 plus 10% of the value of the shares" for being reasonable and excessive and deleted the
grant for reimbursement of litigation expenses for lack of proof.
In a Resolution dated 17 May 2005, the CA denied the Motions for Partial Reconsideration separately filed by
Ferro Chemicals, Antonio Garcia and Jaime Gonzales for lack of merit.
The Petitions Before This Court
From the foregoing CA Decision and Resolution arose three separate Petitions for Review n Certiorari: (1) G.R.
No. 168134. Ferro Chemicals, Inc., v. Antonio M. Garcia, Rolando P. Navarro, Jaime Y. Gonzales and Chemical
Industries of the Philippines, Inc.; (2) G.R. No. 168183, Jaime Y. Gonzales v. Hon. Court of Appeals and Ferro
Chemicals, Inc.; and (3) G.R. No. 168196, Antonio M. Garcia v. Ferro Chemicals, Inc. For identity of the parties
and similarity of the issues involved, the Court directed the consolidation of G.R. Nos. 168196, 168134 and
168183.
G.R. No. 168134
This is a petition filed by Ferro Chemicals assailing the CA ruling which discharged Rolando Navarro and
Chemical Industries from liability. Ferro Chemicals likewise questioned in this petition the deletion of the
reimbursement for the. litigation costs expended by Chemphil Export in the Second Consortium Case in the
amount of P12,000,000.00, and, the attorney's fees in the sum of P1,000,000.00 with the additional 10% of
the value of the shares which were previously awarded by the RTC.
G.R. No. 168183
In G.R. No. 168183, Jaime Gonzales controverts the CA's finding which adjudged him liable for tortious
58 | P a g e
interference under Article 1314 of the New Civil Code on account of participation in the negotiation of sale of
the shares and his eventual acquisition of the same shares from the Consortium Banks.
G.R. No. 168196
For his part, Antonio Garcia initiated G.R. No. 168196 seeking the nullity of the CA Decision and Resolution
finding him guilty of fraud in the performance of his obligations and in failing to comply with his obligation to
defend the sale. He questions the failure of the CA to deduct the dividends earned by the subject shares in its
computation of the value of the shares lost including the value of Alabang Country Club, Inc. and Manila Polo
Club, Inc. shares which were both transferred by Antonio Garcia to Ferro Chemicals thereby allowing Ferro
Chemicals to unjustly enrich itself at his expense.
The Issues
I.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN EXONERATING RESPONDENT
ROLANDO NAVARRO FROM LIABILITY DESPITE HIS PARtiCIPATION IN THE SINISTER PLAN TO DECEIVE [FERRO
CHEMICALS]. HIS FAILURE TO COMPLY WITH HIS DUTIES AS CORPORATE SECRETARY AND INTERFERING AND
OBSTRUCTING THE FAITHFUL FULFILLMENT OF [ANTONIO GARCIA'S] OBLIGATION UNDER THE CONTRACT
BETWEEN [FERRO CHEMICALS] AND [ANTONIO GARCIA];
II.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN EXONERATING [CHEMICAL
INDUSTRIES] FROM LIABILITY DESPITE THE TORTIOUS ACTS OF ITS RESPONSIBLE OFFICERS;
III.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN RULING THAT THERE IS NO EVIDENCE
THAT [FERRO CHEMICALS] ASSUMED THE EXPENSES OF LITIGATION IN A CASE AGAINST THE CONSORTIUM
BANKS IN THE AMOUNT OF P12,000,000.00;
IV.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN DISREGARDING THE
UNCONTROVERTED EVIDENCE AND LEGAL JUSTIFICATION FOR THE AWARD OF P1,000,000.00 PLUS THE
ADDITIONAL 10% OF THE VALUE OF THE SHARES AS ATTORNEY'S FEES IN FAVOR OF THE PETITIONERS.
V.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN FINDING JAIME GONZALES LIABLE
FOR TORTIOUS INTERFERENCE FOR HIS PARTICIPATION IN THE NEGOTIATION OF THE PURCHASE AGREEMENT
AND IN EVENTUALLY ACQUIRING THE SUBJECT SHARES FROM THE CONSORTIUM BANKS;
VI.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN FINDING ANTONIO GARCIA GUILTY
OF FRAUD IN THE PERFORMANCE OF HIS OBLIGATION UNDER THE PURCHASE AGREEMENT IN FAILING TO
COMPLY WITH HIS OBLIGATION TO DEFEND THE SALE UNDER THE SAID CONTRACT;
VII.
THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN FAILING TO DEDUCT THE DIVIDENDS
EARNED BY THE SUBJECT SHARES INCLUDING THE VALUE OF THE ALABANG GOLF CLUB AND MANILA POLO
CLUB SHARES IN ITS COMPUTATION OF THE VALUE OF FERRO CHEMICAL'S LOSS.
The Court's Ruling

59 | P a g e
On the liability of
Antonio Garcia for fraud and
breach of obligation
Resonating the RTC, the CA arrived at the conclusion that Antonio Garcia is guilty of fraud in the performance
of his obligation, but the CA made its independent judgment pinning Antonio Garcia on the basis of the
following assumptions:
1. That Ferro Chemicals would not have entered into the sale had it known that the subject shares were
subject of the Consortium Banks' lien as to do so would be tantamount to "committing financial
suicide;"
2. That if it were true that Ferro Chemicals was apprised of the pendency of the claims in question, that
fact would have been embodied in the provisions of the contract. Under the Best Evidence Rule,
defendants cannot be permitted to present evidence aliunde;
3. That defendants cannot impute negligence to Ramon Garcia for failing to uncover the subject
attachment prior to the execution of the sale as it is the obligation of Antonio Garcia to fully disclose in
good faith all existing claims against the disputed shares.
The CA endeavored to tie all the loose ends by declaring that Antonio Garcia's liability was hinged primarily
not on his misrepresentations with respect to the sale contract, but on alleged fraudulent acts he perpetrated
in connection with the First Consortium Case. For the CA, his acts subsequent to the consummation of the sale
were not at arm's length and jeopardized the position of Ferro Chemicals in relation to Chemical Industries'
shares. All these circumstances, taken together, led the CA to its conclusion that Antonio Garcia breached his
obligation under the circumstances, to wit:
1. By recognizing his liability with the banks in the Compromise Agreement, Antonio Garcia placed the
subject shares within the reach of his obligors knowing that these shares were previously attached to
answer his obligation with them;
2. By failing to move for the lifting of the attachment effected by the Consortium Banks over the subject
shares and to offer his other properties as substitutes after he sold these shares to Ferro Chemicals;
3. By allowing the execution on sale to proceed without opposition on his part and by refusing to
reimburse Ferro Chemicals of the amount of litigation expenses it incurred in its effort to defend its
ownership of the subject shares;
The appellate court, in other words, saw that Antonio Garcia, all throughout the First Consortium Case,
maintained a lackadaisical stance which paved the way for the Consortium Banks' enforcement of
garnishment and the consequent sale of the attached shares at the public auction to the damage and
prejudice of Ferro Chemicals.
We are not convinced.
TheCA's lament, in every tum, that Antonio Garcia was guilty of bad faith from the inception of the sale
contract until his compromise with the Consortium Banks is inexorably rebuked by the following chronology of
factual incidents that governs the relationship of Antonio Garcia and Ferro Chemicals:
(1) On 15 July 1988, Antonio Garcia and Ferro Chemicals entered into a Deed of Absolute Sale and Purchase of
Shares of Stock;[31]
(2) On 17 January 1989, Antonio Garcia and Consortium Banks entered into a Compromise Agreement[32] with
respect to the First Consortium Case;
60 | P a g e
(3) On 3 March 1989, Antonio Garcia and Ferro Chemicals entered into a Deed of Right to Repurchase;[33]
(4) On 12 July 1989, Antonio Garcia notified Ferro Chemicals of his intention to exercise his right to buy back
the sold shares under the repurchase deed;
(5) On 31 July 1989, Antonio Garcia reiterated his intent to reacquire the subject shares by sending another
notice to Ferro Chemicals coupled with the tender of the amount of the agreed repurchase price;
(6) On 11 August 1989, the RTC of Makati, Branch 145, issued a Writ of Execution[34] to enforce the Judgment
by Compromise in the First Consortium Case;
(7) On 22 August 1989, the Consortium Banks were declared as the highest bidders of the levied shares at the
public auction;[35]
(8) On 26 September 1989, Ferro Chemicals (thru Chemphil Export) successor-in-interest, opposed the
consolidation of ownership of the subject shares in the names of the Consortium Banks; [36]
(9) From 26 September 1989 up to 12 December 1995, the Second Consortium Case was under litigation;
(10) On 1 April 1996, Ferro Chemicals lost the Second Consortium Case with finality;[37]
(11) On 3 December 1996, Ferro Chemicals initiated the Ferro Chemicals Case for the payment of damages
based on fraud.[38] (Emphasis supplied)
While the factual milieu of this case is seemingly mazy because of the number of cases and legal issues that
stemmed from a simple transfer of shares contract, there are two clearly crucial evidentiary matters that were
without warrant overlooked by the lower tribunals: (I) the execution by Ferro Chemicals and Antonio Garcia of
the Deed of Right to Repurchase on 3 March 1989; and (2) that on two separate occasions, Antonio Garcia
conveyed in writing his intent to buy back the shares in accordance with the terms of the repurchase deed.
These pieces of evidence, if appreciated in light of the allegation of fraud, would overthrow the very
foundation upon which the Ferro Chemicals rested its case.
Notably, Antonio Garcia's right to repurchase the subject shares, his attempts to exercise that right and Ferro
Chemicals' refusal to honor it, as well as the legal actions taken by Antonio Garcia against Ferro Chemicals,
were duly pleaded as affirmative allegations in Antonio Garcia's Answer, [39] in Civil Case No. 96-1964 to wit:
"3.7 On 3 March 1989, [Antonio Garcia] and [Ferro Chemicals] entered into a Deed of Right to Repurchase (the
"Repurchase Deed", hereafter) covering the shares subject matter of the Deed of Sale, including the CIP
Shares, confirming earlier verbal agreement between the brothers, Ramon M. Garcia and [Antonio Garcia],
that the latter could repurchase the said shares from [Ferro Chemicals]. Under the Repurchase Deed,
defendant Garcia had until 30 August 1989 to exercise his right to repurchase the shares.
3.7.1 On July 1989, or long before the expiration of his right to repurchase the shares, Antonio Garcia
informed [Ferro Chemicals] that it was going to exercise said right. This notice was reiterated on 31 July 1989
with a tender of the repurchase price as stipulated in the Repurchase Deed;
3.7.2 [Ferro Chemicals] refused to honor [Antonio Garcia's] right under the Repurchase Deed alleging that the
amount tendered was insufficient in that interest for one day and the broker's commission were not included
in said amount. [Antonio Garcia] offered to pay the interest for one day but refused to pay the broker's
commission because the sale of the shares was not coursed through the stock exchange. [Ferro Chemicals] still
refused to honor [Antonio Garcia's] right under the Repurchase Agreement. Worse, [Ferro Chemicals] assigned
its rights over the [Chemical Industries] Shares to [Chemphil Export] supposedly on 26 June 1989;
3.7.3 Accordingly, on 21 August 1989; Antonio Garcia filed a complaint for specific performance and
annulment of transfer of shares against [Ferro Chemicals] and [Chemphil Export] entitled [']Antonio M. Garcia
v. Ferro Chemicals,,Inc., et al.,['] docketed as Civil Case No. 89-4837, with the Regional Trial Court of Makati,
which was raffled to Branch 145 (the "First Repurchase Case", hereafter). [Antonio Garcia] sought, among
61 | P a g e
other reliefs, the reconveyance of the shares, including the [Chemical Industries] Shares from [Ferro
Chemicals] and [Chemphil Export]. This case was, however, ordered dismissed by the Court of Appeals based
on its finding that the Repurchase Case involved an intra-corporate dispute over which the Securities and
Exchange Commission ("SEC") has exclusive jurisdiction;
3.7.4 Pursuant to the Court of Appeals decision, [Antonio Garcia], on 26 August 1992, filed with the SEC a
complaint for specific performance and/or rescission, with damages against Ramon M. Garcia, [Chemphil
Export] and [Ferro Chemicals]', docketed as SEC Case No. 04303 (the "Second Repurchase Case", hereafter). In
the Second Repurchase Case, [Antonio Garcia] again sought, among other relief, the reconveyance of the
[Chemical Industries] shares. As in the First Reconveyance Case, Ramon M. Garcia, [Chemphil Export] and
[Ferro Chemicals] again vigorously opposed [Antonio Garcia's] action to recover the shares subject matter of
the Deed of Sale, including the [Chemical Industries] Shares. The Second Repurchase Case is still pending with
the SEC."[40]
Antonio Garcia attached a copy of the Deed of Right to Repurchase as Annex 1 of his Answer and argued, as
one of his affirmative defenses, that Ferro Chemicals does not have a cause of action against him because:
"4.1.3 Despite its full knowledge of the Bank Consortium's claim on the [Chemical Industries] shares, Ferro
Chemicals refused and opposed all offers and efforts of Antonio Garcia to repurchase the [Chemical Industries]
shares."[41]
Harping on the infallibility of the lower tribunals' factual findings, Ferro Chemicals impresses upon this Court
that Antonio Garcia, driven by the desire to profit from the disposal of his shares and to satisfy his obligations
with his creditors at the same time, employed deceptive schemes to lure Ramon Garcia to purchase the
subject shares by concealing the lien of the Consortium Banks. The non-disclosure of the subject lien, Ferro
Chemicals claimed and the RTC and CA believed, is constitutive of an actionable fraud warranting the award of
damages. In no uncertain terms both tribunals pronounced that the non-mention of the lien in the transfer
contract was intentionally and deceptively done by Antonio Garcia in bad faith and with intent to defraud. For
the lower courts, the testimonial evidence sought to be introduced by Antonio Garcia, which modifies the
express terms of the purchase agreement to suggest that the subject lien was purportedly contemplated by
the parties in the contract, is not permissible under the Parole Evidence Rule.
We do not agree.
Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions,
and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in
the damage to another, or by which an undue and unconscionable advantage is taken of another. It is a
question of fact and the circumstances constituting it must be alleged and proved in the court below.[42]
In the case of Tankeh v. DBP, et al.,[43] this Court reviewed the doctrines of fraud in relation to contractual
relations and the quantum of proof necessary to prove fraud and establish liability therefor:
"Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (n)
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are
not in themselves fraudulent. (n)
Art. 1341. . A mere expression of an opm10n does not signify fraud, unless made by an expert and the other
party has relied on the former's special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
62 | P a g e
created substantial mistake and the same is mutual. '(n)
Art. 1343. Misrepresentation made in good faith 1s not fraudulent but may constitute error. (n)
"The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and should not have been employed by
both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)
"There are two types of fraud contemplated in the performance of contracts: dolo incidente or incidental
fraud and dolo causante or fraud serious enough to render a contract voidable.
In Geraldez v. Court of Appeals, this Court held that:

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may either be
dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are those deceptions or
misrepresentations of a serious character employed by one party and without which the other party would
not have entered into the contract. Dolo incidente, or incidental fraud which is referred to in Article 1344, are
those which are not serious in character and without which the other party would still have entered into the
contract. Dolo causante determines or is the essential cause of the consent, while dolo incidente refers only to
some particular or accident of the obligation. The effects of dolo causante are the nullity of the contract and
the indemnification of damages, and dolo incidente also obliges the person employing it to pay damages..
"In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al., this Court elaborated on the distinction
between dolo causante and dolo incidente:
Fraud refers to all kinds of deception -- whether through insidious machination, manipulation, concealment or
misrepresentation -- that would lead an ordinarily prudent person into error after taking the circumstances
into account. In contracts, a fraud known as dolo causante or causal fraud is basically a deception used by one
party prior to or simultaneous with the contract, in order to secure the consent of the other. Needless to say,
the deceit employed must be serious. In contradistinction, only some particular or accident of the obligation is
referred to by incidental fraud or dolo incidente, or that which is not serious in character and without which
the other party would have entered into the contract anyway.
"Under Article 1344, the fraud must be serious to annul or avoid a contract and render it voidable. This fraud
or deception must be so material that had it not been present, the defrauded party would not have entered
into the contract. In the recent case of Spouses Carmen S. Tongson and Jose C. Tongson, et al., v. Emergency
Pawnshop Bula, Inc., this Court provided some examples of what constituted dolo causante or causal fraud:
Some of the instances where this Court found the existence of causal fraud include: (1) when the seller, who
had no intention to part with her property, was "tricked into believing" that what she signed were papers
pertinent to her application for the reconstitution of her burned certificate of title, not a deed of sale; (2)
when the signature of the authorized corporate officer was forged; or (3) when the seller was seriously ill, and
died a week after signing the deed of sale raising doubts on whether the seller could have read, or fully
understood, the contents of the documents he signed or of the consequences of his act. (Citations omitted)
"However, Article 1344 also provides that if fraud is incidental, it follows that this type of fraud is not serious
enough so as to render the original contract voidable.
"A classic example of dolo incidente is Woodhouse v. Halili. In this case, the plaintiff Charles Woodhouse
entered into a written agreement with the defendant Fortunato Halili to organize a partnership for the
bottling and distribution of soft drinks. However, the partnership did not come into fruition, and the plaintiff
filed a Complaint in order to execute the partnership. The defendant filed a Counterclaim, alleging that the
plaintiff had defrauded him because the latter was not actually the owner of the franchise of a soft drink
63 | P a g e
bottling operation. Thus, defendant sought the nullification of the contract to enter into the partnership. This
Court concluded that:
x x x from all the foregoing x x x plaintiff did actually represent to defendant that he was the holder of the
exclusive franchise. The defendant was made to believe, and he actually believed, that plaintiff had the
exclusive franchise. x x x The record abounds with circumstances indicative that the fact that the principal
consideration, the main cause that induced defendant to enter into the partnership. agreement with plaintiff,
was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the
partnership. x x x The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but
that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the exclusive
franchise, or the option thereto, at the time the contract was perfected. But while he had already lost his
option thereto (when the contract was entered into), the principal obligation that he assumed or undertook
was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation.
We declare, therefore, that if he was guilty of a false representation, this was not the causal consideration, or
the principal inducement, that led plaintiff to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or
price plaintiff gave in exchange for the share of 30 percent granted him in the net profits of the partnership
business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring
his exclusive franchise to the partnership. x x x.
Plaintiff had never been a bottler or a chemist; he never had experience in the production or distribution of
beverages. As a matter of fact, when the bottling plant being built, all that he suggested was about the toilet
facilities for the laborers.
We conclude from the above that while the representation that plaintiff had the exclusive franchise' did not
vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of 30 per
cent of the net profits; in other words, by pretending that he had the exclusive franchise and promising to
transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net
profits. This is the dolo incidente defined in article 1270 of the Spanish Civil Code, because it was used to get
the other party's consent to a big share in the profits, an incidental matter in the agreement.
"Thus, this Court held that the original agreement may not be declared null and void. This Court also said that
the plaintiff had been entitled to damages because of the refusal of the defendant to enter into the
partnership. However, the plaintiff was also held liable for damages to the defendant for the
misrepresentation that the former had the exclusive franchise to soft drink bottling operations.
To summarize, if there is fraud in the performance of the contract, then this fraud will give rise to damages. If
the fraud did not compel the imputing party to give his or her consent, it may not serve as the basis to annul
the contract; which exhibits dolo causante. However, the party alleging the existence of fraud may prove the
existence of dolo incidente. This may make the party against whom fraud is alleged liable for damages."[44]
Applying the foregoing precepts in this case, we find it hard to believe that Antonio Garcia, in view of his
impassioned efforts to buy back the disputed shares way before the Second Consortium Case commenced and
even after the shares were assigned already to Chemphil Export, could be motivated by his fraudulent desire
to extract money and then ease out Ferro Chemicals from its ownership of the subject shares. The flagrancy of
the Deed of the Right to Repurchase ought to have caused the lower courts to delve into the repurchase issue
since this could have very well dispelled the fraud alleged to have attended the acts of Antonio Garcia. By
disregarding the repurchase contract and Antonio Garcia's intent in good faith to buy back the shares, the
lower tribunals fell prey into the skewed representations of Ferro Chemicals of the factual incidents of this
case. Indeed, both the contractual agreement on Antonio Garcia's right to repurchase and Antonio Garcia's
actual earnest attempts at repurchase were central to the cause of Antonio Garcia in the proceedings below.
Though it fashioned itself as the vulnerable party, who was lured into buying shares of stocks that later turned
out to be overburdened by liens, the fact is that Ramon· Garcia is the President of Ferro Chemicals and the
brother of Antonio Garcia of Chemical Industries which, like Ferro Chemicals, is into initiated business
ventures. The transactions that Ramon and Antonio Garcia had with each other were between brothers about
64 | P a g e
their businesses. Ramon Garcia, both in buying the subject shares from Antonio Garcia, and later on, in
refusing to sell back the shares to Antonio Garcia did so in furtherance of his interests. It would be rash
judgment to say it was not so and hold that business dealings in multimillions were done without conducting
due diligence on the subject of the contract.
Indeed, the allegation that Antonio Garcia employed fraudulent machinations to hide the subject lien to
facilitate the disposal of his shares and to lure Ferro Chemicals to part with its money is diametrically opposed
to Antonio Garcia's subsequent offers to repurchase the shares and tender of the repurchase price. On the
other hand, Ferro Chemicals' explanation that the reason why it did not agree to the reacquisition was
because the repurchase price tendered did not include the amount of taxes and interest due, [45] is flimsy and
unacceptable under the circumstances. It must be pointed out that no negotiation in good faith between. the
parties as to the correct amount of taxes and interests should be paid took place since Ferro Chemicals at the
outset flatly refused the offer to buy. As a matter of fact, Antonio Garcia was constrained to initiate two
repurchase cases in his effort to reacquire the property.
The succession of events shows that Ferro Chemical's refusal to sell back the shares to Antonio Garcia was a
calculated move by Ramon Garcia who measured the risk of losing the subject shares to the Consortium Banks
against the visible returns on the shares during the pendency of the Consortium Bank Case. Between the time
of the initial offer of Antonio Garcia to buy back the shares on 31 July 1989' up to the finality of the Court's
decision in the Second Consortium Case on 12 December 1995, Ferro Chemicals thru Chemphil Export, profited
from the Chemical Industries' shares. It was only after it had lost the shares to the Consortium Banks by the
decision of the Court that Ferro Chemicals went back to Antonio Garcia and his co-defendants for the
enforcement of the sale contract asking for the reimbursement of the amount of the shares that was lost. The
buying and selling of stocks and the subsequent agreement on reversed activities were in the exercise of
business judgment.
Fraud has been defined to include an inducement through insidious machination. Insidious machination refers
to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where the party, with intent to
deceive, conceals or omits to state material facts and, by reason of such omission or concealment, the other
party was induced to give consent that would not otherwise have been given. These are allegations of fact
that demand clear and convincing proof. They are serious accusations that can be so conveniently and casually
invoked, and that is why they are never presumed.[46] Applying the doctrines to the case at bar, a judgment on
fraud requires allegation and proof of facts and circumstances by which undue and unconscionable advantage
is taken by Antonio Garcia. Ramon Garcia failed in this regard. In contrast, the succession of transaction
between Antonio and Ramon Garcia indicated that Ramon Garcia wanted to have a way out of his failed
business decision of holding on to his shares instead of selling it back to Antonio Garcia when he had the
opportunity to do so. He saw that it was better to hold on to the shares he bought from Antonio Garcia. The
Court cannot save him from the fall that came from his own choice.
On the liability of Rolando Navarro

and Jaime Gonzales for tortious
interference
In imputing liability to Rolando Navarro, Ferro Chemicals harps on the following acts found by the trial court to
be demonstrative of his malicious intention to interfere with the contract between Antonio Garcia and Ferro
Chemicals:
(1) He facilitated in the execution of the Deed by showing the Stock and Transfer Book of [Chemical Industries]
to [Ferro Chemicals] thru [Ramon Garcia] to assure the latter that the disputed shares had no lien other than
those in the Stock and Transfer Book and in order to conceal the [Consortium Bank's] lien;
(2) He, together with Atty. Virgilio Gesmundo, also drafted in the boardroom of the [Chemical Industries] the
Deed which embodied the basic terms and conditions of the sale as agreed upon by the parties;
(3) He also signed as instrumental witness in the Deed;
(4) Upon examination of the Deed and despite knowledge of the irregularity of the sale, he, acting as
65 | P a g e
corporate secretary of [Chemical Industries], transferred the disputed shares in the name of [Ferro Chemicals]
and issued the corresponding certificates of stock;
(5) He drafted the Deed of Right to Repurchase under which [Antonio Garcia] was given the right to redeem
the shares sold to [Ferro Chemicals] within 180 days from signing of the said deed and subject to other
conditions stated therein;
(6) He, as the corporate secretary of [Chemical Industries], again made the transfer of the said shares in the
Stock and Transfer Book of [Chemical Industries] this time with respect to the 4,119,614 shares (which
included the disputed shares) assigned by [Ferro Chemicals] to [Chemphil Export].
In essence, Ferro Chemicals contends that while Rolando Navaro is not privy to the contract, his individual acts
form part of the bigger scheme to defraud the corporation.
In his Comment,[47] Rolando Navarro denies liability by arguing that not being a party to the contract, he
cannot be held liable for breach thereof under Article 1311 of the New Civil Code. He underscores that Ferro
Chemical's complaint was for ·breach of contract, i.e. for failure to deliver the clean title of the subject shares,
which obligation befalls on the buyer alone. As an instrumental witness to the deed, it is absurd to hold him
liable for failure of the buyer to make good his warranty under the agreement. Invoking that only absolute
transfers of shares of stocks are required to be recorded in the corporation's stock and transfer book, Rolando
Navarro insists that he cannot be held liable for failing to record the claim of the Consortium Banks since it is
merely an attachment. Finally, he asserts that none of the conduct imputed against him constitute tortious
interference under Article 1314 of the New Civil Code because these acts, i.e., transfer the certificate of title of
the said shares and preparing a draft of contracts, were mainly part of his primary duty as the Corporate
Secretary of the Chemical Industries.
We affirm the ruling of the Court of Appeals in favor of Rolando Navarro.
The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it, and
cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge
thereof.[48] Where there is no privity of contract, there is likewise no obligation or liability to speak about.[49]
Article 1311 of the New Civil Code provides:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the
rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he received from the decedent.
The obligation of contracts is limited to the parties making them and, ordinarily, only those who are parties to
contracts are liable for their breach. Parties to a contract cannot thereby impose any liability on one who,
under its terms, is a stranger to the contract, and, in any event, in order to bind a third person contractually,
an expression of assent by such person is necessary.[50]
Under Article 1314 of the New Civil Code, however, any third person who induces another to violate .his
contract shall be liable for damages to the other contracting party. The tort recognized in that provision is
known as interference with contractual relations. The interference is penalized because it violates the
property right of a party in a contract to reap the benefits that should result therefrom. [51]
The Court, in the case of So Ping Bun v. Court of Appeals, et al.,[52] laid down the elements of tortious
interference with contractual relations: (1) existence of a valid contract; (2) knowledge on the part of the third
person of the existence of the contract and (3) interference on the part of the third person without legal
justification or excuse.[53]
A duty which the law of torts is concerned with is respect for property of others, and cause of action ex delicto
may be predicated by an unlawful interference by any person of the enjoyment of the other of his private
property. This may pertain to a situation where a third person induces a person to renege on or violate his
undertaking under a contract.[54]
66 | P a g e
A perusal of the. allegations proffered against Rolando Navarro would show that none of his conduct prior or
even subsequent to the execution of the subject deed, which was primarily done in furtherance of his duties
as corporate secretary, constitutes tortious interference. To imply that by preparing a draft of a contract,
signing as instrumental witness of the deed and recording of transfer of shares on the corporate books,
Rolando Navarro can now be held liable for tortious interference, is incredulous. Nothing from his acts as
found by the trial court, which were clearly carried out within the bounds of his office devoid of malice and
bad faith, would suggest involvement in the sinister design to deprive Ferro Chemicals of its property right
over the disputed shares. As the Corporate Secretary of Chemical Industries, Rolando Navarro is under
obligation to record in the stock and transfer book any and all alienation involving the shares of stocks of the
corporation as mandated by Section 74 of the Corporation Code which states:
Sec. 74. Books to he kept; stock transfer agent. x x x
xxxx
Stock corporations must also keep a book to be known as the "stock and transfer book," in which must be kept
a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and
unpaid on all stock for which subscription has been made, and the date of payment of any installment; a
statement of every alienation, sale or transfer of stock made the date thereof, and by and to whom made; and
such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal
office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any
director or stockholder of the corporation at reasonable hours on business days.
Clearly, the transfer of the certificates of stocks covering the subject shares in favor of Ferro Chemicals
effected on the strength of a valid deed of sale cannot be taken as an actionable tortious conduct, whether
such action is viewed in isolation or in connection with conduct of his co-defendants. The Court, in So Ping Bun
v. Court of Appeals, et al.,[55] defined what constitutes an unlawful interference with contract:
"The foregoing issues involve, essentially, the correct interpretation of the applicable law on tortuous conduct,
particularly unlawful interference with contract. We have to begin, obviously, with certain fundamental
principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the recompense or
compensation awarded for the damage suffered. One becomes liable in an action for damages for a
nontrespassory invasion of another's interest in the private use and enjoyment of asset if (a) the other has
property rights and privileges with respect to the use or enjoyment interfered with, (b) the invasion is
substantial, (c) the defendant's conduct is a legal cause of the invasion, and (d) the invasion is either
intentional and unreasonable or unintentional and actionable under general negligence rules."
For sure, Rolando Navarro has transgressed no right of Ferro Chemicals while performing his obligation as an
officer of Chemical Industries. There is absolutely no proof other than the weak indicia which, the plaintiff
contends, show the existence thereof.. Even if we lend credence to the graver allegation that Rolando Navarro
showed the stock and transfer books of the corporation to Ramon Garcia which bore no record of the
Consortium Banks' lien, still he could not be faulted in the absence of showing that he acted in bad faith with
the intention to lure the buyer to believe that the subject shares were lien-free. As the Corporate Secretary of
Chemical Industries, he is under no obligation to record the attachment of the Consortium Banks, not being a
transfer of ownership but merely a burden on the title of the owner. Only absolute transfers of shares of
stock are required to be recorded in the corporation's stock and transfer book in order to have "force and
effect as a ainst third persons."[56] In Chemphil Export and Import Corporation v. Court of Appeals, et al.,[57] the
Court enunciated the rule that attachments of shares are not considered "transfer" and need not be recorded
in the corporations' stock and transfer book, viz:
"'Are attachments of shares of stock included in the term "transfer" as provided in Sec. 63 of the
Corporation Code? We rule in the negative. As succinctly declared in the case of Monserrat v. Ceron, chattel
mortgage over shares of stock need not be registered in the corporation's stock and transfer book inasmuch
as chattel mortgage over shares of stock does not involve a "transfer of shares," and that only absolute
transfers of shares of stock are required to be recorded in the corporation's stock and transfer book in order
67 | P a g e
to have "force and effect as against third persons."
xxxx
"A 'transfer' is the act by which the owner of a thing delivers it to another with the intent of passing the rights
which he has in it to the latter, and a chattel mortgage is not within the meaning of such term.
xxxx
Although the Monserrat case refers to a chattel mortgage over shares of stock, the same may be applied to
the attachment of the disputed shares of stock in the present controversy since an attachment does not
constitute an absolute conveyance of property but is primarily used as a means "to seize the debtor's
property in order to secure the debt or claim of the creditor in the event that a judgment is rendered."
Known commentators on the Corporation Code expound, thus:
xxxx
Shares of stock being personal property, may be the subject matter of pledge and chattel mortgage. Such
collateral transfers are however not covered by the registration requirement of Section 63, since our Supreme
Court has held that such provision applies only to absolute transfers thus, the registration in the corporate
books of pledges and chattel mortgages of share cannot have any legal effect.
xxxx
The requirement that the transfer shall be recorded in the books of the corporation to be valid as against
third persons has reference only to absolute transfers or absolute conveyance of the ownership or title to a
share."[58] [Emphasis supplied]
Veritably, the facts, statutes and jurisprudence do not support Ferro Chemical's imputation of fraud to
Rolando Navarro. The accusations of fraud directed to him upon which Ferro Chemicals rests its case are
unsubstantiated, no direct evidence of it exists; it was clutching at straws pointing out to a remote
participation of the defendant who carried out the imputed acts within the bounds of his office. Fraud cannot
be presumed but must be proved by clear and convincing evidence.[59] Whoever alleges fraud affecting a
transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his
concerns, and private transactions are similarly presumed to have been fair and regular. [60] To be remembered
is that mere allegation is definitely not evidence; hence, it must be proved by sufficient evidence. [61]
Be that as it may, undisputed is the fact that Rolando Navarro derived no financial gains from the breach of
Antonio Garcias obligation to Ferro Chemicals watering down the allusion that his acts were impelled by
economic motive.
Even if Jaime ,Gonzales, on other hand, eventually became the assignee of the subject shares, he cannot, for
that reason alone, be held liable for tortious interference as the elements of this act are clearly wanting in this
case. Jaime Gonzales did nothing more than act as instrumental witness of the deed of sale and give Antonio
Garcia financial advice on the matter. None of these acts is actionable tort.
In any case, the allegations against Rolando Navarro and Jaime Gonzales have no more leg to stand on as we
have ruled that fraud never attended the transaction and that Ferro Chen1icals entered the contract subject
of this case with the full knowledge and discretion of the existence of any and all liens.
On the liability of Chemical Industries

for the acts of its responsible officers
On the premise that Chemical Industries afforded plenary powers to its officers to make certain
representations to third persons, Ferro Chemicals faults the ruling of the appellate court absolving Chemical
Industries from liability by arguing that the corporation is liable for the tortious and wrongful acts of its
68 | P a g e
corporate officers, Antonio Garcia and Rolando Navarro, under the principle of agency.
Chemical Industries, however, argues otherwise. It submits that Ferro Chemical's reliance on the doctrine of
apparent authority is misplaced. Citing the findings of the appellate court, it posits that the sale of Antonio
Garcia's shares was a purely personal transaction between him and Ferro Chemicals which requires no
"express direction or authority" from Chemical Industries.
Having settled that Rolando Navarro committed no tortious acts generative of liability, we now limit our
discussion on whether Chemical Industries can be held liable supposedly for the fraud and breach of contract
perpetrated by Antonio Garcia.
We rule in the negative.
A corporation, upon coming to existence, is invested by law with a personality separate and distinct from
those of the persons composing it. Ownership by a single or a small group of stockholders of nearly all of the
capital stock of the corporation is not, without more, sufficient to disregard the fiction of separate corporate
personality. Thus, obligations incurred by corporate officers, acting as corporate agents, are not theirs, but
direct accountabilities of the corporation they represent. Solidary liability on the part of corporate officers
may at times attach, but only under exceptional circumstances, such as when they act with malice or in bad
faith. Also, in appropriate cases, the veil of corporate fiction shall be disregarded when the separate juridical
personality of a corporation is abused or used to commit fraud and perpetrate a social injustice, or used as a
vehicle to evade obligations.[62]
It must be stressed at the onset that the sale contract was entered by Antonio Garcia in his personal capacity
and not as the President of Chemical Industries. As aptly found by the CA:
"xxx. As can be gleaned from the Deed of Sale, [Antonio Garcia] sold the disputed shares in his private capacity
as owner thereof and not as responsible officer or representative of [Chemical Industries]. Moreover, the
disputed shares constitute merely 20% of [Chemical Industries'] outstanding capital stocks. As such, the
corporation's consent in the disposition is not required. Neither does its conveyance require any action on the
part of the corporation, except the ministerial duty of recording the same in its stock and transfer book.
Considering the nature of the transaction involved, whatever obligation [Antonio Garcia] incurred, it was
incurred in his personal capacity. xxx"[63]
Even if Antonio Garcia was selling his shares of stocks in the Chemical Industries, the corporation was neither
made a party to the contract nor did the sale redound to its benefit. As a matter of fact, the subject of the
purchase agreement was not limited to Antonio Garcia's shares in Chemical Industries, but likewise included
his shares in Vision Insurance Consultants, Inc., Alabang Country Club, Inc. and Manila Polo Club, Inc. [64] His
shares of capital stocks with Chemical Industries became the subject of controversy because of the allegation
that he intentionally withheld the information from Ferro Chemicals that these shares were subject of the
Consortium Banks' claim. Notably, the purported misrepresentation was: not alleged to have been authorized
or abetted by the corporation. It was a purely personal act of the seller desirous to dispose conveniently his
shares in the corporation. It bears underscoring that a corporation has a personality separate and distinct from
that of each stockholder. It has the right ,of continuity or perpetual succession,[65] that is, its existence is not
extinguished by the transfer of ownership of its shares of capital stock from one shareholder to another.
Needless to say, the imputation of liability Chemical Industries for the acts of its corporate officer and the
consequent shedding of corporate shroud cannot rest on flimsy grounds. The application of the doctrine of
piercing the veil of corporate fiction is frowned upon.[66] 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.[67] As explained by the Court in Philippine National Bank v. Andrada Electric &
Engineering Company:[68]
"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
69 | P a g e
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."
In the case at bar, Ferro Chemicals failed to adduce satisfactory evidence to prove that Chemical Industries'
separate corporate personality was being used by Antonio Garcia to protect fraud or perpetrate deception
warranting the shedding of its veil and the consequent imposition of solidary liability upon it.
On Ferro Chemical's claim for

reimbursement of litigation expenses
in the amount of P12,000,000.00, as
payment of attorney's fees
The award of litigation expenses in the amount of P12,000,000.00 is not proper because Ferro Chemicals
failed to justify satisfactorily its claim, and the trial court failed to state explicitly in its decision the rationale
for the award. Likewise, We agree with the CA's finding that the award of attorney's fees in the sum of
P1,000,000.00 plus additional 10% ofthe value of the shares is unreasonable and excessive. Article 2208 of the
New Civil Code enumerates the instances where such may be awarded and, in any event, it must be
reasonable, just and equitable.[69] Attorney's fees as part of damages are not meant to enrich the winning
party at the expense of the losing litigant.[70] They are not awarded every time a party prevails in a suit
because of the policy that no premium should be placed on the right to litigate. The award of attorney's fees is
the exception rather than the rule.[71]
As such, it is necessary for the court to make findings of fact and law that would bring the -case within the
exception and justifY the grant of such award.[72]
For lack of factual basis, we cannot likewise lend credence to Antonio Garcia's claim that the dividends earned
from Alabang Country Club, Inc. and Manila Polo Club, Inc. shares should be deducted from the cost of the lost
shares.
WHEREFORE, premises considered, the petition of Ferro Chemicals, Inc. in G.R. No. 168134 is hereby DENIED
while the petitions of Jaime Y. Gonzales in G.R. No. 168183 and Antonio M. Garcia in G.R. No. 168196 are
hereby GRANTED. Consequently, the Decision of the Court of Appeals is modified to read:
1) Chemical Industries of the Philippines, Inc. and Rolando Navarro are hereby exonerated from liabilities;
2) Antonio M. Garcia and Jaime Y. Gonzales are likewise discharged from liabilities;
3) The award of P12,000,000.00, representing the cost of the suit and expenses of litigation in the Consortium
Case is deleted.
SO ORDERED
70 | P a g e
[ GR No. 204261, Oct 05, 2016 ]
EDWARD C. DE CASTRO v. COURT OF APPEALS
DECISION
MENDOZA, J.:
This is a Petition for Certiorari under Rule 65 of the Rules of Court assailing the June 1, 2012 Decision[1] and the
September 21, 2012 Resolution[2] of the Court of Appeals (CA) in CA-G.R. SP No. 122415, for having been
issued with grave abuse of discretion, when it affirmed the July 29, 2011 Decision [3] and the September 22,
2011 Resolution[4] of the National Labor Relations Commission (NLRC) in NLRC -NCR Case Nos. 11-16356-09
and 12-17308-09, consolidated cases for illegal dismissal filed against respondent corporations, Nuvoland
Phils., Inc. (Nuvoland) and Silvericon, Inc. (Silvericon).
The July 29, 2011 NLRC Decision, in turn, reversed the March 15 2011 Decision[5] of the Labor Arbiter (LA),
finding that the petitioners were illegally dismissed.
The Antecedents
Nuvoland, a corporation formed primarily "to own, use, improve, develop, subdivide, sell, exchange, lease and
hold for investment or otherwise, real estate of all kinds, including buildings, houses, apartments and other
structures," was registered with the Securities and Exchange Commission (SEC) on August 9, 2006.[6]
Respondent Ramon Bienvenida (Bienvenida) was the principal stockholder and member of the Board of
Directors while Raul Martinez (Martinez) was its President.
Silvericon, on the other hand, was registered with the SEC on December 19, 2006. Its Articles: of Incorporation
described it as a "corporation organized 'to own, use, improve, develop, subdivide, sell, exchange, lease and
hold for investment or otherwise, real estate of all kinds, including buildings, houses, apartments and other
structures.'"[7]
Sometime in 2007, Martinez recruited petitioner Edward de Castro (De Castro), a sales and marketing
professional in the field of real estate, to handle its sales and marketing operations, including the hiring and
supervision of the sales and marketing personnel. To formalize this undertaking, De Castro was made to sign a
Memorandum of Agreement (MOA), denominated as Shareholders Agreement,[8] wherein Martinez proposed
to create a new corporation, through which the latter's compensation, benefits and commissions, including
those of other sales personnel, would be coursed. It was stipulated in the said MOA that the new
corporation[9] would have an authorized capital stock of P4,000,000.00, of which P1,000,000.00 was
subscribed and paid equally by the Martinez Group and the De Castro Group. [10]
As it turned out, the supposedly new corporation contemplated was Silvericon. De Castro was appointed the
President and majority stockholder of Silvericon while Bienvenida and Martinez were named as stockholders
and incorporators thereof, each owning one (1) share of subscribed capital stock.
In the same MOA, Martinez was designated as Chairman of the new corporation to whom De Castro, as
President and Chief Operating Officer, would directly report. De Castro was tasked to manage the day to day
operations of the new corporation based on policies, procedures and strategies set by Martinez. For their
respective roles, Martinez was to receive a monthly allowance of P125,000.00, while De Castro's monthly
salary was P400,000.00, with car plan and project income bonus, among other perks. Both Martinez and De
Castro were stipulated to receive override commissions at 1% each, based on the net contract price of each
71 | P a g e
condominium unit sold.
During De Castro's tenure as Chief Operating Officer of the newly created Silvericon, he recruited forty (40)
sales and marketing personnel. One of them was petitioner Ma. Girlie F. Platon (Platon) who occupied the
position of Executive Property Consultant. De Castro and his team of sales personnel were responsible for the
sale of 100% of the projects owned and developed by Nuvoland.[11]
Thereafter, the Sales and Marketing Agreement[12] (SMA), dated February 26, 2008, was purportedly executed
by Nuvoland and Silvericon, stipulating that all payments made for the condominium projects of Nuvoland
were to be given directly to it. Clients secured by the sales and marketing personnel would issue checks
payable to Nuvoland while the cash payments, as the case may be, were deposited to Nuvoland's account.
Meanwhile, the corresponding sales commission of the sales personnel were issued to them by Nuvoland,
with Martinez signing on behalf of the said company.
In a Letter,[13] dated December 12, 2008 and signed by Bienvenida, Nuvoland terminated the SMA on the
ground that Silvericon personnel committed an unauthorized walkout and abandonment of the Nuvo City
Showroom for two (2) days. In the same letter, Nuvoland demanded that Silvericon make a full accounting of
all its uses of the marketing advances from Nuvoland. It, however, assured that all sales commissions earned
by Silvericon personnel would be released as per existing policy.
After the issuance of the said termination letter, De Castro and all the sales and marketing personnel of
Silvericon were barred from entering the office premises. Nuvoland, eventually, was able to secure the
settlement of all sales and marketing personnel's commissions and wages with the exception of those of De
Castro and Platon. The claims of one of Silvericon's senior manager were settled during the pendency of a
complaint with the LA.[14]
Aggrieved, De Castro and Platon filed a complaint for illegal dismissal before the LA, demanding the payment
of their unpaid wages, commissions and other benefits with prayer for the payment of moral and exemplary
damages and attorney's fees against Silvericon, Nuvoland, Martinez, Bienvenida, and the Board of Directors of
Nuvoland.
Nuvoland and its directors and officers denied a direct contractual relationship with De Castro and Platon, and
contended that if there was any dispute at all, it was merely between the complainants and Silvericon.
For its part, Silvericon admitted that it had employed De Castro as President and COO. It, however, asserted
the application of Presidential Decree (P.D.) No. 902-A to the case, arguing that the claims come within the
purview of corporate affairs and management, thus, falling within the jurisdiction of the regular courts. [15]
The Ruling of the Labor Arbiter
On March 15, 2011, after the filing of the parties' respective position papers, the LA handed down his decision
in favor of De Castro and Platon. He concluded that Silvericon was a mere labor-only contractor and,
therefore, a mere agent of Nuvoland. Thus:
It should be noted that in the Sales and Marketing Agreement between Silvericon and Nuvoland, the latter
committed to advance all the necessary amount of money up to the extent of P30 million per building to fund
the marketing expenses for the project. This alone disqualifies respondent Silvericon as an independent
contractor as it could not undertake the contracted sales and marketing work under its own account and
under its own responsibility. Not only that, that respondent Nuvoland has to bankroll the marketing expenses
of respondent Silvericon up to the extent of P30 million per building means that the latter does not have
substantial capital to undertake the contract work on its own account and under its own responsibility. Thus,
the argument by the respondents that the paid-up capital of respondent Silvericon in the amount of P1 million
as shown by its Articles of Incorporation to be substantial capital is simply puerile. If it were true that said
amount of Pi million would be substantial enough for Silvericon to carry out its undertaking under Sales and
Marketing Agreement, then there was no need for respondent Nuvoland to advance the amount of
P30,000,000.00 for the marketing expenses of Silvericon. Moreover, as argued by complainants, how can
P1,000,000.00 be deemed as substantial capitalization if complainant De Castro's salary per month alone is
72 | P a g e
already about almost half of Silver/icon's paid-up capitalization. This is not to mention the salaries of the more
than forty sales and marketing staff. This means that after only one (1) month in operation, Silvericon's
capitalization would not have been enough to pay even the salaries of its employees.
To be added to the foregoing findings is the admitted fact that it was respondent Nuvoland which paid the
sales commissions of the sales personnel of respondent Silvericon. Even the power to dismiss the
complainants and the other sales personnel of Silvericon was exercised by respondent Nuvoland. If indeed
there was an unauthorized walkout and abandonment by the sales personnel of the Nuvo City showroom for a
period of two (2) days, then what Nuvoland could have done was to notify Silvericon to institute appropriate
disciplinary action against the erring personnel, and not to take the cudgels for Silvericon in abruptly
terminating the entire sales force including the complainants herein. [16]
Nuvoland was adjudged as the direct employer of De Castro and Platon and, thus, liable to pay their money
claims as a consequence of their illegal dismissal. According to the LA, the ground relied upon for the
termination of the employment of De Castro and Platon - abandonment of the Nuvo City Showroom - was not
at all proven. Mere suspicion that De Castro instigated the walkout did not discharge the burden of proof
which heavily rested on the employer. Without an unequivocal showing that an employee deliberately and
unjustifiably refused his employment sans any intention to return to work, abandonment as a cause for
dismissal could not stand. Worse, procedural due process could not be said to have been observed through
the expediency of a letter in contravention to Article 277, paragraph 2 of the Labor Code. [17] Hence, the LA
disposed:
WHEREFORE, all the foregoing premises being considered, judgment is hereby rendered ordering respondent
Nuvoland Phils. Inc. and/or Raul Martinez and Ramon Bienvenida to pay jointly and solidarity the awarded
claims in favor of the complainants, as follows:
EDWARD DE CASTRO
Backwages................................ P10,800,000.00
Separation pay.............................. 1,600,000.00
Unpaid Salaries................................ 146,667.00
13th Month Pay............................... 380,000.00
Unpaid Override Commissions ........26,454.839.88
TOTAL........................P39,381,506.88
MA. GIRLIE PLATON
Backwages................................ P405,000.00
Separation pay.............................. 60,000.00
Unpaid Salaries................................ 5,500.00
13th Month Pay.............................. 14,250.00
Unpaid Override Commissions ........530.231.93
TOTAL........................P1,014,981.93
Not in conformity, Nuvoland, Bienvenida and Martinez interposed an appeal before the NLRC, arguing that the
LA gravely abused his discretion in ruling that: 1) Silvericon was a labor-only contractor; 2) the case did not
involve an intra-corporate dispute; and 3) Martinez and Bienvenida were solidarity liable for illegal dismissal.
The Ruling of the NLRC
In its July 29, 2011 Decision, the NLRC reversed the LA decision, finding that Silvericon was an independent
contractor, thus, the direct employer of De Castro and Platon. In its view, in the SMA, Silvericon had full
discretion on how to perform and conduct its marketing and sales tasks; and there was no showing that
73 | P a g e
Nuvoland had exercised control over the method of sales and marketing strategies used by Silvericon. The
NLRC further concluded that Silvericon had substantial capital. It pointed out that in several cases decided by
the Court, even an amount less than One Million Pesos was sufficient to constitute : substantial capital; and so
to require Silvericon to prove that it had investments in the form of tools, equipment, machinery, and work
premises would be going beyond what the law and jurisprudence required. Hence, it could not consider
Silvericon as a dummy corporation of Nuvoland organized to effectively evade the latter's obligation of
providing employment benefits to its sales and marketing agents. This being the case, the NLRC ruled that no
employer-employee relationship existed between Nuvoland, on one hand, and De Castro and Platon, on the
other. There was no evidence showing that Nuvoland hired, paid wages, dismissed or controlled De Castro and
Platon, or anyone of Silvericon's employees. Resultantly, Martinez and Bienvenida could not be held liable for
they merely acted as officers of Nuvoland.
Unfazed, De Castro and Platon assailed the decision of the NLRC via a petition for certiorari under Rule 65 with
the CA.
The Ruling of the CA
In its June 1, 2012 Decision, the CA affirmed the findings of the NLRC, pointing out that what was terminated
was the SMA. As such, the employment of the forty (40) personnel hired by Silvericon, as well as the
petitioners' employment, was not affected. Considering that there was no employer-employee relationship
between the petitioners and Nuvoland, the CA deemed that the latter could not be held liable for the claim of
illegal dismissal. Even assuming that De Castro was illegally dismissed, the CA opined that the NLRC was
correct in refraining from taking cognizance of the complaint because De Castro's employment with Silvericon
put him within the ambit of Section 5.2 of Republic Act (R.A.) No. 8799, otherwise known as The Securities
Regulation Code. As such, his claim should have been brought before the Regional Trial Court (RTC) instead.
Upon the denial of their motion for reconsideration, the petitioners filed this petition on the following
GROUNDS
THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION WHEN IT AGREED WITH THE NLRC
THAT SILVERICON IS NOT A LABOR-ONLY CONTRACTOR
II
THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION WHEN IT AGREED WITH THE NLRC
THAT THE INSTANT CASE INVOLVES AN INTRA-CORPORATE DISPUTE
III
THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION WHEN IT HELD THAT NO BAD FAITH
WAS ESTABLISHED ON THE PART OF RESPONDENTS RAUL MARTINEZ AND RAMON BIENVENIDA. [18]
Essentially, petitioners De Castro and Platon argue that Silvericon, far from being an independent contractor,
was engaged in labor-only contracting as shown by: 1) its lack of a substantial capital necessary in the conduct
of its business; 2) its lack of investment on tools, equipment, machineries, work premises, and other materials;
and 3) its failure to secure a certificate of authority to act as an independent contractor issued by the
Department of Labor and Employment (DOLE); and 4) its services to Nuvoland being exclusive in nature.
According to De Castro and Platon, the evaluation of the authorized capital stock of Silvericon against the
marketing and sales activities of its sales personnel would readily show that it needed a huge amount of funds
74 | P a g e
for salaries and operating expenses, not to mention the funds for promotions and advertisements for the
Aspire Condominium Project and Infinity Office and Residential Condominium Prpject. Suffice it to say,
Silvericon's authorized or paid up capital was deficient to cover its operations. This is the reason why Nuvoland
made advancements amounting to P30 Million per building.
The petitioners contend that the CA gravely erred when it relied on the eventual deduction of the said
advances from the earned marketing fee of Silvericon pursuant to the SMA. The advancements, whether or
not at cost on the part of Silvericon, only proved that the latter had no substantial capital necessary for its
business. Although jurisprudence was replete with rulings considering an amount less than the paid-up capital
of Silvericon as substantial, the industry in which the respondent corporations were engaged, that is, the sale
and marketing of enormous condominium projects, should be taken into account. In other words, the test of a
substantial paid-up capital for purposes of identifying an entity; as an independent contractor should be
evaluated in light of the business it is undertaking. In the case of Silvericon, the paid-up capital of P1 Million
Pesos could hardly be considered substantial.
Further, Silvericon had no investment in the form of tools and equipment necessary in the conduct of its
business, the sales and marketing activities of which were conducted in the premises of Nuvoland. The latter
itself designed and constructed the model units used for the sales and marketing of the condominium
projects.
More significantly, the petitioners explained that Nuvoland created Silvericon to serve, not any other clientele,
but its creator. If Nuvoland really wanted to engage a truly independent contractor to undertake its sales and
marketing needs, it should have engaged a more experienced one, not a two-year old untested company. But
then, they are one and the same. The services of Silvericon were exclusively for Nuvoland. Hence, there was
no need for Nuvoland to require Silvericon to secure a certificate of authority from the DOLE. Undeniably, De
Castro was merely engaged to facilitate the recruitment of sales and marketing personnel, who then
performed functions which were directly related to the main business of the principal, Nuvoland.
Position of the Respondents
In their Comment,[19] respondents Nuvoland, Martinez and Bienvenida argued that the subject petition should
be dismissed outright for having been filed under a wrong mode of appeal. In other words, instead of being
captioned as a petition under Rule 45, the petitioners availed of the special civil action under Rule 65, setting
forth grave abuse of discretion on the part of the CA as a main ground. The respondents pointed out that the
petitioners may not utilize a petition for certiorari as a pretext for a belated filing of a petition for review.
Respondent Silvericon for its part, submitted its Manifestation,[20] dated December 12, 2013, praying that it be
excused from filing a comment as it did not see any need to be part of the appeal.
Reply of Petitioners
In their Reply,[21] the petitioners asserted that their petition was strongly grounded on grave abuse of
discretion due to the CA's deliberate failure to consider material and undisputed facts showing that Silvericon
was indeed a labor-only contractor. They hinged their choice of remedy on their view that the NLRC, as
affirmed by the CA, acted in total disregard of the evidence decisive of the present controversy.
The Court's Ruling
Initially, because of the divergence in the conclusions of the LA and the NLRC, it appears that the issues
surrounding the legal arrangements between and among the parties are complicated. After a perusal of the
records, however, the Court comes to view the case as a simple question of whether Silvericon was engaged in
independent contracting or a labor-only scheme. The answer to this issue would necessarily shape the
conclusions as to respondents' other contentions like jurisdiction. Before delving into these matters, though,
there is a need to first resolve the procedural issues.
Procedural Issues
75 | P a g e
After a careful review of the records, the Court decides to apply a tempered relaxation of the procedural rules
in accord with substantial justice.
It is elementary that parties seeking the review of NLRC decisions should file a Rule 65 petition for certiorari in
the CA on the ground of grave abuse of discretion amounting to lack or excess of jurisdiction. Thereafter, the
remedy of the aggrieved party from the CA decision is an appeal via a Rule 45 petition for review on
certiorari.[22] It is equally true, however, that the Court, on several occasions, has relaxed the procedural
application in accordance with the liberal spirit and in the interest of substantial justice. Where the exigencies
of the case are such that the ordinary methods of appeal may not prove adequate - either in point of
promptness or completeness, so that a partial if not a total failure of justice could result - a writ of certiorari
may still be issued.[23]
In the broader interest of justice, the Court deems it proper to suspend the rules and allow due course to the
petition as one for certiorari under Rule 65. As will be discussed hereafter, the Court has determined points of
contention that were disregarded by the authorities a quo, the outright conclusion of which stripped off the
petitioners of a remedy to demand their claims which were founded on a legal obligation. The propriety of the
mode of appeal used by the petitioners pales in comparison with the alleged grave errors of judgment
committed by the CA. For said reason, matters deserving clear resolution by the Court of last resort cannot be
ignored lest a miscarriage of justice come to pass.
Substantive Issues
As to the substantive issues, the Court is faced with divergent views in the arguments raised. On one hand, the
petitioners strongly urge the Court to consider numerous factors that would justify the piercing of the
corporate veil showing that Silvericon was just a business conduit of Nuvoland. On the other, the respondents
vehemently deny the existence of an employer-employee relationship between Nuvoland and the petitioners.
This absence of a juridical tie, according to Nuvoland, necessarily directs the claims of the petitioners to
Silvericon as their employer, being an independent contractor.
Pertinently, Article 106 of the Labor Code provides:
Article 106. Contractor or subcontractor. - Whenever an employer enters into a contract with another person
for the performance of the former's work, the employees of the contractor and of the latter's subcontractor, if
any, shall be paid in accordance with the provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with
this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such
employees to the extent of the work performed under the contract, in the same manner and extent that he is
liable to employees directly employed by him.
The Secretary of Labor and Employment may, by appropriate regulations, restrict or prohibit the contracting-
out of labor to protect the rights of workers established under this Code. In so prohibiting or restricting, he
may make appropriate distinctions between labor-only contracting and jobcontracting as well as
differentiations within these types of contracting and determine who among the parties involved shall be
considered the employer for purposes of this Code, to prevent any violation or circumvention of any provision
of this Code.
There is "labor-only" contracting where the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment, machineries, work premises, among others,
and the workers recruited and placed by such person are performing activities which are directly related to
the principal business of such employer. In such cases, the person or intermediary shall be considered merely
as an agent of the emplover who shall be responsible to the workers in the same manner and extent as if
the latter were directly employed by him. [Emphasis and underscoring supplied]
76 | P a g e
Corollary thereto, DOLE Department Order No. 18-02, Series of 2002 (D.O. 18-02), implements the above
provision of law:
Section 5. Prohibition against labor-only contracting. -Labor-only contracting is hereby declared prohibited x x
x labor-only contracting shall refer to an arrangement where the contractor or subcontractor merely recruits,
supplies or places workers to perform a job, work or service for a principal, and any of the following elements
are present:
i) The contractor or subcontractor does not have substantial capital or investment which relates to the job,
work or service to be performed and the employees recruited, supplied or placed by such contractor or
subcontractor are performing activities which are directly related to the main business of the principal; or
ii) The contractor does not exercise the right to control over the performance of the work of the contractual-
employee.
xxxx
"Substantial capital or investment" refers to capital stocks and subscribed capitalization in the case of
corporations, tools or equipment, implements, machineries and work premises, actually and directly used
by the contractor or subcontractor in the performance or completion of the job, work or service contracted
out.
The "right to control" shall refer to the right reserved to the person for whom the services of the contractual
parties are performed to determine, not only the end to be achieved, but also the manner and means to be
used in reaching that end. [Emphasis and underscoring supplied]
At the outset it should be rioted that a real estate company like Nuvoland may opt to advertise and; sell its
real estate assets on its own, or allow an independent contractor to market these developments in a manner
that does not violate aforesaid regulations. Basically, a legitimate job contractor complies with the
requirements on sufficient capitalization and equipment to undertake the needs of its client. Although this is
not the sole determining factor of legitimate contracting, independent contractors are likewise required to
register with the DOLE. This is required by D.O. 18-02. Thus:
Section 11. Registration of Contractors or Subcontractors. - Consistent with the authority of the Secretary of
Labor and Employment to restrict or prohibit the contracting out of labor through appropriate regulations, a
registration system to govern contracting arrangements and to be implemented by the Regional Offices is
hereby established.
The registration of contractors and subcontractors shall be necessary for purposes of establishing an effective
labor market information and monitoring.
Failure to register shall give rise to the presumption that the contractor is engaged in labor-only contracting.
[Emphasis and underscorings supplied]
In the present case, the Court is hounded by nagging doubts in its review of the assailed decision. Several
factors showing that Silvericon was not an independent contractor were, conveniently brushed aside resulting
in an unjust outcome. For clarity, the Court lists down these factors, most of which were left unexplained by
the respondents.
First. As earlier pointed out, D.O. 18-02 expressly provides for a registration requirement. Remarkably, the
respondents do not deny the apparent non-compliance with the rules governing independent contractors.
This failure on the part of Silvericon reinforces the Court's view that it was engaged in labor-only contracting.
Nuvoland did not even bother to make Silvericon comply with this vital requirement had it really entered into
77 | P a g e
a legitimate contracting arrangement with a truly independent outfit. The efforts which the two corporations
have put into the drafting of the SMA belie mere inadvertence and heedlessness on this matter.
That the NLRC and the CA failed to consider this fact of non-compliance confounds the Court. The tribunals
below should have looked into the cited provision, as non-compliance thereto gives rise to a presumption
completely opposite to their claim. The presumption finds more significance especially when the respondents
have nothing but silence to rebut the same.
All they could say was that what Nuvoland terminated was the SMA, the termination of which produced no
effect whatsoever on the personnel of Silvericon. The sweeping conclusion might have been the simplest and
easiest way to dismiss the case but this certainly failed to rebut the fact that Silvericon was a labor-only
contracting entity. To the Court's mind, this is a clear attribute of grave abuse of discretion on the part of the
CA.
Second. D.O. No. 18-A, series of 2011, defines substantial capital as the paid-up capital stocks/shares of at
least P3,000,000.00 in the case of corporations, partnerships and cooperatives. This amount was set with
speciflty to avoid the subterfuge resorted to by entities with the intention to circumvent the law. As things
now stand, even the subscribed capital of Silvericon was a far cry from the amount set by the rules. It is
important to note that at the time Nuvoland engaged the services of Silvericon, the latter's authorized stock
capital was P4,000,000.00, out of which only P1,000,000.00 was subscribed.
In Vinoya v. National Labor Relations Commission,[24] the Court tackled the insufficiency of paid-in
capitalization taking into account the "current economic atmosphere in the country." [25] In other words, the
determination of sufficient capital stock for independent contractors must be assessed in a broad and
extensive manner with consideration of the industry involved.
In this case, the sufficiency of a subscribed capital of P1,000,000.00 for independent contracting must be
assessed taking into consideration the extent of the undertaking relative to the nature of the industry in which
Nuvoland was engaged.
Nuvoland was one of the prominent corporations in the real estate industry. It is safe to assume then that the
marketing of its condominium projects would entail a substantially high amount in what was typically a capital
intensive industry. The undertaking covered not just one but two considerably huge condominium projects
located in prime spots in the metropolis.
For the sale and marketing of two condominium buildings, it would require massive funds for promotions,
advertisements, shows, salaries, and operating expenses of its more or less 40 personnel. In light of this vast
business undertaking, it is obvious that the P1 million subscribed capital of Silvericon would hardly suffice to
satisfy this huge engagement. Nuvoland was apparently aware of this that it had to fund the marketing
expenses of the project in an amount not exceeding P30 million per building. This was even provided in
paragraph 6 of the SMA.
This being the case, the paid-in capitalization of Silvericon amounting to P1 million was woefully inadequate to
be considered as substantial capital. Thus, Silvericon could not qualify as an independent contractor.
The CA finding that Silvericon's capital was sufficient for independent contracting due to the agreement that
Nuvoland would advance the amount of P30,000,000.00 for marketing expenses, though deductible from
Silvericon's earned marketing fees at a later time, was a strained reasoning. The Court agrees with the
observation of the LA that this set-up would not have been resorted to if Silvericon's capital was substantial
enough from the start of the business venture. It is logical to presume that an established corporation like
Nuvoland would select an independent contractor, which had the financial resources to adequately undertake
its marketing and advertising requirements, and not an under capitalized company like Silvericon. It perplexes
the Court that the CA disregarded this set-up as it certainly shows that Silvericon, from the beginning, did not
have substantial capital to service the needs of Nuvoland.
Third. Silvericon had no substantial equipment in the form of tools, equipment, machinery, and work
premises. Records reveal that Nuvoland itself designed and constructed the model units used in the sales and
78 | P a g e
marketing of its condominium units. This indisputably proves that at the time of its engagement, Silvericon
had no such investment necessary for the conduct of its business.
Fourth. Although it is true that the respondents had explicitly assailed the authenticity of the MO A attached
with the petition, their faint denial fails to explain the exclusivity which had characterized the relationship
between Nuvoland and Silvericon. If Silvericon was an independent contractor, it is only but logical that it
should have also offered its services to the public.
The respondents claim that they had presented a contract tending to show that Silvericon had catered its
services to one LNC (SPV-AMC) Corporation in 2007. In their own words, the respondents assert that the
relationship of Nuvoland with Silvericon, particularly as to its contractual rights and obligations, was exactly
the same as the transaction of Silvericon with LNC (SPV-AMC) Corporation. Unfortunately for the respondents,
this allegation alone could not override the other tell-tale indicators of labor-only contracting present in this
case.
Fifth. The respondents do not deny that Nuvoland and Silvericon shared the same officers and employees:
respondents Bienvenida and Martinez were stockholders and incorporators thereof while De Castro was the
President and majority stockholder of Silvericon. At the same time, Bienvenida was a principal stockholder and
member of the Board of Directors of Nuvoland while Martinez was Nuvoland's President. Admittedly, this fact
alone does not give rise to an inference that Nuvoland and Silvericon are one and the same. It effectively sows
doubt, however, when taken together with the other indicators of labor-only contracting, as previously
discussed.
If Nuvoland and Silvericon were indeed separate entities, out of all other Nuvoland officers, why did
Bienvenida, as an incorporator of both corporations, choose to authorize the purported termination of the
SMA without at least calling for an investigation of the incident? As a stockholder of Silvericon, he possessed
an interest in the said corporation. Curiously though, Nuvoland's decision to part with Silvericon as expressed
in Bienvenida's letter was reached without consultation or, at the least, a preliminary notice. Had there really
been a breach of contract, Nuvoland would have demanded an explanation from Silvericon before barring the
personnel's entry in their work premises to think that the latter was engaged in an important aspect of its
business.
Further, with Nuvoland having advanced a huge amount of money for Silvericon, it could have at least
exercised caution before terminating the SMA with a meager request for an accounting of funds. A closer
scrutiny of the events that transpired would show that the termination of the SMA was one and the same with
the termination of all Silvericon personnel. This conclusion proceeded from the irrefutable fact that Silvericon
was actually a creation of Nuvoland. As a labor-only contractor, for all intents and purposes, Silvericon was a
mere mock-up.
In truth, the termination of the SMA was actually a ruse to make it appear that Silvericon was an independent
entity. It was simply a way to terminate the employment of several employees altogether and escape liability
as an employer. True enough, Nuvoland insisted that the petitioners direct their claims to Silvericon.
The conclusion that Silvericon was a mere labor-only contractor and a business conduit of Nuvoland warrants
the piercing of its corporate veil. At this point, it is apt to restate the Court's ruling in Sarona v. National Labor
Relations Commission:[26]
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 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.
As ruled in Prince Transport, Inc. v. Garcia,[27] it is the act of hiding behind the separate and distinct
79 | P a g e
personalities of juridical entities to perpetuate fraud, commit illegal acts and evade one's obligations, that the
equitable piercing doctrine was formulated to address and prevent: Thus:
x x x A settled formulation of the doctrine of piercing the corporate veil 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 these two entities are distinct and treat them as
identical or as one and the same, xxx However, petitioners' attempt to isolate themselves from and hide
behind the supposed separate and distinct personality of Lubas so as to evade their liabilities is precisely what
the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. [28]
Consequently, the piercing of the corporate veil disregards the seemingly separate and distinct personalities of
Nuvoland and Silvericon with the aim of preventing the anomalous situation abhorred by prevailing labor laws.
That Silvericon was independent from Nuvoland's personality could not be given legal imprimatur as the same
would pave the way for Nuvoland's complete exoneration from liability after a circumvention of the law.
Besides, a contrary proposition would leave the petitioners without any recourse notwithstanding the
unquestioned fact that Nuvoland eventually assented to the settlement of all the sales and marketing
personnel's commissions and wages before the LA, except the petitioners. The respondents in their comment
were strikingly silent on this point.
In the interest of justice and equity, that veil of corporate fiction must be pierced, and Nuvoland and Silvericon
be regarded as one and the same entity to prevent a denial of what the petitioners are entitled to. In a
situation like this, an employer-employee relationship between the principal and the dismissed employees
arises by operation of law. Silvericon being merely an agent, its employees were in fact those of Nuvoland.
Stated differently, Nuvoland was the principal employer of the petitioners.
Sixth. As additional basis of this outcome, the Court highlights the presence of the elements of an employer-
employee relationship between the parties. In determining the presence or absence of an employer-employee
relationship, the Court has consistently looked for the following incidents, to wit; (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer's
power to control the employee on the means and methods by which the work is accomplished. The last
element, the so-called control test, is the most important element.[29] Jurisprudentially speaking, there is no
hard and fast rule designed to establish the aforesaid elements. It depends on the peculiar facts of each
case.[30] Here, the Court acknowledges the findings of the LA since the inception of this legal controversy -
To be added to the foregoing findings is the admitted fact that it was respondent Nuvoland which paid the
sales commissions of the sales personnel of respondent Silvericon. Even the power to dismiss the
complainants and the other sales personnel of Silvericon was exercised by respondent Nuvoland. If indeed
there was an unauthorized walkout and abandonment by the sales personnel of the Nuvo City showroom for a
period of two (2) days, then what Nuvoland could have done was to notify Silvericon to institute appropriate
disciplinary action against the erring personnel, and not to take the cudgels for Silvericon in abruptly
terminating the entire sales force including the complainants herein.[31]
Not to be excluded from this pronouncement is the observation that the subject termination letter itself
mentioned the release of all the commissions earned by Silvericon personnel after the impetuous decision of
Nuvoland to physically bar the personnel from entry to their workplace. If these are not indicators of the
power of engagement, payment of wages and power of dismissal, the Court is at a loss as to what to call this
authority. Astonishingly, Nuvoland did not refute its conformity to the payment of commissions, as if it was
oblivious to an admission that all commissions were taken directly from Nuvoland, and not from Silvericon.
Verily, this reflects Nuvoland's exercise of the power to compensate Silvericon personnel. The power to
terminate employees had also been exercised by Nuvoland when it clearly dispensed with the cancellation
clause in the SMA providing a 30-day period for grievance resolution. Instead, Nuvoland utilized the alleged
abandonment of the showroom as a ground for unilateral termination of the simulated agreement.
As regards the power of control, the only argument raised by the respondents was the inclusion of a provision
in the SMA which stated that Silvericon, as its agent, "shall be responsible for all advertisements, promotions,
80 | P a g e
public relations, special events, marketing collaterals, road shows, open houses, etc. as part of its marketing
efforts."[32] For Nuvoland, this provision in the SMA showed that Silvericon exercised full and exclusive control
over all levels of work, especially as to the means thereof.[33] Regrettably, the existence of the subject
provision would not cause an automatic proposition that Silvericon exercised control over the work of its
personnel. A clear showing of Silvericon's control over its day-to-day operations and ultimate work
performance would have dispelled any doubt, but Nuvoland fell short on this score. Worse, it again opted for
silence when the petitioners alleged that Nuvoland provided the work premises of the sales and marketing;
personnel of Silvericon; that Nuvoland dictated the end result of the undertaking, that is, to sell at least eighty
percent of the condominium project within a period of twenty-four months; that Nuvoland decided on the
models, designs and prices of the units; that Nuvoland was the ultimate recipient of all amounts collected by
the sales and marketing team; and lastly, Nuvoland determined the maximum amount of marketing expenses
for the accomplishment of the goal.
On Jurisdiction
Anent the issue on jurisdiction, Article 217 of the Labor Code, as amended by Section 9 of R.A. No. 6715 is
instructive:
ART. 217. Jurisdiction of the Labor Arbiters and the Commission-- (a) Except as otherwise provided under this
Code, the Labor Arbiter shall have original and exclusive jurisdiction to hear and decide, within thirty (30)
calendar days after the submission of the case by the parties for decision without extension, even in the
absence of stenographic notes, the following cases involving all workers, whether agricultural or
nonagricultural:
1. Unfair labor practice cases;
2. Termination disputes;
3. If accompanied with a claim for reinstatement, those cases that workers may file involving wages, rates
of pay, hours of work and other terms and conditions of employment;
4. Claims for actual, moral, exemplary and other forms of damages arising from the employer-employee
relations;
5. Cases arising from any violation of Article 264 of this Code, including questions involving the legality of
strikes and lockouts; and
6. Except claims for Employees Compensation, Social Security, Medicare and maternity benefits, all other
claims arising from employer-employee relations, including those of persons in domestic or
household service, involving an amount exceeding five thousand pesos (P5,000.00) regardless of
whether accompanied with a claim for reinstatement. [Emphases and underscoring supplied]
Taking the foregoing into consideration, the Court finds that the LA properly took cognizance of the existence
of an employer-employee relationship between the parties. The NLRC's position that the case belonged to the
RTC as an "intra-corporate dispute" could not be applied to Platon as she was merely a rank-and-file personnel
81 | P a g e
raising illegal dismissal as her main cause of action.
With respect to De Castro, the Court recalls the pronouncement in Viray v. Court of Appeals,[34] which
provided for the policy in determining jurisdiction in similar cases. In order to determine whether a dispute
constitutes an intra-corporate controversy or not, the Court considers two elements instead, namely: (a) the
status or relationship of the parties; and (b) the nature of their controversy. Concurrence of these two renders
a case as an intra-corporate dispute.
Under the nature-of-the-controversy test, the dispute must not only be rooted in the existence of an intra-
corporate relationship, but must also refer to the enforcement of the parties' correlative rights and obligations
under the Corporation Code, as well as the internal and intra-corporate regulatory rules of the corporation.[35]
The combined application of the relationship test and the nature-of-the-controversy test has, consequently,
become the norm in determining whether a case is an intra-corporate controversy or purely civil in
character.[36] In the absence of any one of these factors, the case cannot be considered an intra-corporate
dispute and the RTC acting as a special commercial court cannot acquire any jurisdiction. The criteria for
distinguishing between corporate officers who may be ousted from office at will, on one hand, and ordinary
corporate employees, who may only be terminated for just cause, on the other hand, do not depend on the
nature of the services performed, but on the manner of creation of the office.
As it had been determined that Silvericon was a mere subterfuge for Nuvoland's sales and marketing activities,
the circumstances surrounding the nature of De Castro's hiring and the very nature of his claims must be fully
considered to determine jurisdiction. It must be remembered that De Castro was hired by Martinez and
Bienvenida to be the President and COO of Silvericon. This appears in the SMA, which the Court has
interpreted as a ruse to conceal Nuvoland's labor-contracting activities. As previously discussed, the contrived
cancellation of the SMA was, in effect, a termination of its personnel assigned to Silvericon.
Equally important for contemplation is the nature of the petitioners' claims and arguments which not only
demonstrates a firm avowal of labor-only contracting on the part of Nuvoland and Silvericon but also shows
that the ultimate issue to be resolved is not rooted in a corporate issue governed by the Corporation Code and
its implementing rules, but a labor problem, the resolution of which is covered by labor laws and DOLE
issuances.
The Court reiterates the odd silence that pervaded Nuvoland despite the allegation that it was able to settle
the payment of all the sales and marketing personnel's commissions and wages with the exception of the
petitioners and one Amy Rose Palileo, whose claims were settled during the pendency of her complaint with
LA Fe Cellan.[37] This information raised serious doubts as to Nuvoland's refutation of the jurisdiction of the LA
over the case. The Court, in fact, expected a denial or, at the least, an explanation of this matter on the part of
Nuvoland but all it got was silence. Certainly, this distinctive treatment of the petitioners influences the Court
to take a position against any attempt to sidestep legal obligations under a pretense of a jurisdictional
challenge.
In view of the foregoing, the complete resolution of this case now boils down to the determination of the: 1)
corporate liability of Nuvoland as the principal employer of the petitioners; and 2) individual liabilities of the
respondents, as officers thereof, if any.
Solidary liability is imposed by law on the principal who is deemed as the direct employer of the employees as
provided in Section 19 of D.O. No. 18-02—
Section 19. Solidary liability. - The principal shall be deemed as the direct employer of the contractual
employees and therefore, solidarity liable with the contractor or subcontractor for whatever monetary claims
the contractual employees may have against the former in the case of violations as provided for in Sections 5
(Labor-Only contracting), 6 (Prohibitions), 8 (Rights of Contractual Employees) and 16 (Delisting) of these
Rules. In addition, the principal shall also be solidarity liable in case the contract between the principal and
contractor or subcontractor is preterminated for reasons not attributable to the fault of the contractor or
subcontractor.
82 | P a g e
Based on the said provision, Nuvoland is solidarity liable with Silvericon for the monetary claims of the
petitioners who were clearly their employees. Further, the application of law and jurisprudence on illegal
dismissal becomes relevant. In Skippers United Pacific, Inc. v. Doza[38] the Court held that for a worker's
dismissal to be considered valid, it must comply with both procedural and substantive due process, viz.:
For a worker's dismissal to be considered valid, it must comply with both procedural and substantive due
process. The legality of the manner of dismissal constitutes procedural due process, while the legality of the
act of dismissal constitutes substantive due process.[39] [Emphasis and underscoring supplied]
Procedural due process in dismissal cases consists of the twin requirements of notice and hearing. The
employer must furnish the employee with two written notices before the termination of employment can be
effected: (1) the first notice apprises the employee of the particular acts or omissions for which his dismissal is
sought; and (2) the second notice informs the employee of the employer's decision to dismiss him. Before the
issuance of the second notice, the requirement of a hearing must be complied with by giving the worker an
opportunity to be heard. It is not necessary though that an actual hearing be conducted. [40] Substantive due
process, on the other hand, requires that the dismissal by the employer be made for a just or authorized cause
under Articles 282 to 284 of the Labor Code.[41]
As correctly observed by the LA, the respondents failed to show any valid or just cause under the Labor Code
on which it may justify the termination of services of the petitioners. There was no iota of evidence to
substantiate their story of staged walkout and abandonment which caused them to terminate the
employment of the petitioners. After the issuance of the termination letter, De Castro and all the sales and
marketing personnel of Nuvoland were barred from entering the premises of their office and payment of
wages, commissions and all other benefits were withheld. The respondents also failed to comply with the
rudimentary requirement of notifying the petitioners why they were being dismissed, as well as giving them
ample opportunity to contest the legality of their dismissal. Failing to show compliance with the requirements
of termination of employment under the Labor Code, the respondents were found liable for illegal dismissal. A
contrary ruling would serve as a wallop on the very principles of labor - justice and equity for a man to be
made to work and thereafter be denied of his due as to the fruits of his labor.
Corporate Directors and Officers,

Not Liable
A corporation, being a juridical entity, may act only through its directors, officers and employees. Obligations
incurred by them, acting as such corporate agents, are not theirs but the direct accountabilities of the
corporation they represent.[42] Pursuant to this principle, a director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the corporation; it is only in exceptional
circumstances that solidary liability will attach to them.[43] Thus, in labor cases, the Court has held that
corporate directors and officers are solidarity liable with the corporation for the employee's termination only
when the same is done with malice or in bad faith.[44]
"Xxx. Bad faith is never presumed. Bad faith does not simply connote bad judgment or negligence - it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty
through some motive or interest or ill will that partakes of the nature of fraud."[45]
The records are bereft of any evidence at all that respondents Martinez and Bienvenida acted with malice, ill
will or bad faith when the SMA was terminated. Hence, the said individual officers cannot be held solidarity
liable for the money claims due the petitioners.
WHEREFORE, the petition is GRANTED. The June 1, 2012 Decision and the September 21, 2012 Resolution of
the Court of Appeals in CA-G.R. SP No. 122415 are REVERSED and SET ASIDE.
The March 15, 2011 Decision of the Labor Arbiter declaring Nuvoland as a labor-only contractor is
REINSTATED, but the pronouncement on the solidary liability of Ramon Bienvenida and Raul Martinez is
ordered DELETED.
83 | P a g e
The case is hereby REMANDED to the Labor Arbiter for the computation of the separation pay, back wages
and other monetary awards that the petitioners deserve to receive.
No pronouncement as to costs.
SO ORDERED
84 | P a g e

Corporation Law Cases

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Corporation Law Cases

Загружено:

Авторское право:

Доступные форматы

A.

G.R. No. 195580 April 21, 2014

VELASCO, JR., J.:

We find the petition to be without merit.

This case not moot and academic

1.) There is a grave violation of the Constitution;

4.) The case is capable of repetition yet evading review.34

Conversion of MPSA applications to FTAA applications

SECTION 3. Definitions. - As used in this Act:

Art. XII, Sec. 2 of the Constitution provides:

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

MR. VILLEGAS: That is right.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

McArthur Mining, Inc.

Madridejos Mining Corporation

Name Nationality Number of Amount Amount Paid

Tesoro Mining and Development, Inc.

Name Nationality Number of Amount Amount Paid

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

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

Manuel A. 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 PhP 2,708,174.60

Sara Marie Mining, Inc.

Name Nationality Number of Amount Amount Paid

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. 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 PhP 2,809,900.00

Narra Nickel Mining and Development Corporation

Name Nationality Number of Amount Amount Paid

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

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

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,800,000.00

Patricia Louise Mining & Development Corporation

Name Nationality Number of Amount Amount Paid

(a) Olympic Group

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

(b) Alpha Group