CORPO CASES

FIRST DIVISION

PETRON CORPORATION, G.R. No. 155683

Petitioner,
Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.
NATIONAL COLLEGE OF
BUSINESS AND ARTS,
Respondent. Promulgated:

February 16, 2007

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

DECISION

CORONA, J.:

The sole question raised in this petition for review on certiorari [1] is whether

petitioner Petron Corporation (Petron) should be held liable to pay attorneys fees and

exemplary damages to respondent National College of Business and Arts (NCBA).

This case, however, is but part of a larger controversy over the lawful

ownership of seven parcels of land[2] in the V. Mapa area of Sta. Mesa, Manila (the

V. Mapaproperties) that arose out of a series of events that began in 1969. [3]

Sometime in 1969, the V. Mapa properties, then owned by Felipe and

Enrique Monserrat, Jr., were mortgaged to the Development Bank of the Philippines

(DBP) as part of the security for the P5.2 million loan of Manila Yellow Taxicab Co., Inc.

(MYTC) and Monserrat Enterprises Co. MYTC, for its part, mortgaged four parcels of

land located in Quiapo, Manila.

On March 31, 1975, however, Felipes undivided interest in the

V. Mapa properties was levied upon in execution of a money judgment rendered by

the Regional Trial Court (RTC) of Manila in Filoil Marketing Corporation v. MYTC,

Felipe Monserrat, and Rosario Vda. De Monserrat (the Manila case).[4] DBP challenged

the levy through a third-party claim asserting that the V. Mapa properties were

mortgaged to it and were, for that reason, exempt from levy or attachment. The RTC

quashed it.

On June 18, 1981, MYTC and the Monserrats got DBP to accept

a dacion en pago arrangement whereby MYTC conveyed to the bank the four

mortgaged Quiapoproperties as full settlement of their loan obligation. But despite

this agreement, DBP did not release the V. Mapa properties from the mortgage.

On May 21, 1982, Felipe, acting for himself and as Enriques attorney-in-fact,

sold the V. Mapa properties to respondent NCBA. Part of the agreement was that

Felipe and Enrique would secure the release of the titles to the properties free of all

liens and encumbrances including DBPs mortgage lien and Filoils levy on or before

July 31, 1982. But the Monserrats failed to comply with this undertaking. Thus, on

February 3, 1983, NCBA caused the annotation of an affidavit of adverse claim on

the TCTs covering the V. Mapaproperties.

Shortly thereafter, NCBA filed a complaint against Felipe and Enrique for

specific performance with an alternative prayer for rescission and damages in the

RTC of Manila.The case was raffled to Branch 30 and docketed as Civil Case No. 83-

16617. On March 30, 1983, NCBA had a notice of lis pendens inscribed on the TCTs of

the V. Mapaproperties. A little over two years later, NCBA impleaded DBP as an

additional defendant in order to compel it to release the V. Mapa properties from

mortgage.

On February 28, 1985, during the pendency of Civil Case No. 83-16617,

Enriques undivided interest in the V. Mapa properties was levied on in execution of a

judgment of the RTC of Makati (the Makati case)[5] holding him liable to Petron (then

known as Petrophil Corporation) on a 1972 promissory note. On April 29, 1985, the

V. Mapa properties were sold at public auction to satisfy the judgments in the Manila

and Makati cases. Petron, the highest bidder, acquired both Felipes and Enriques

undivided interests in the property. The final deeds of sale of Enriques and Felipes

shares in the V. Mapa properties were awarded to Petron in 1986. Sometime later,

the Monserrats TCTs were cancelled and new ones were issued to Petron. Thus it was

that, towards the end of 1987, Petron intervened in NCBAs suit against Felipe,

Enrique and DBP (Civil Case No. 83-16617) to assert its right to the

V. Mapa properties.

The RTC rendered judgment on March 11, 1996. [6] It ruled, among other things,

that Petron never acquired valid title to the V. Mapa properties as the levy and sale

thereof were void and that NCBA was now the lawful owner of the properties.

Moreover, the RTC held Petron, DBP, Felipe and Enrique jointly and severally liable to

NCBA for exemplary damages and attorneys fees for the following reasons:

FELIPE and ENRIQUE had no reason to renege on their undertaking in

the Deed of Absolute Sale to secure the release of the titles to the
properties xxx free from all the liens and encumbrances, and to cause
the lifting of the levy on execution of Commercial Credit Corporation,
Industrial Finance Corporation[,] and Filoil over the V. Mapa [p]roperty.
Moreover, ENRIQUE had no reason to repudiate FELIPE and disavow
authority he had [given] the latter to sell his share in the
V. Mapa property.

On the other hand, the mortgage in favor of DBP had been fully
extinguished thru dacion en pago as early as 18 June 1981 but it
unjustifiably and whimsically refused to release the mortgage and to
surrender to the buyer (NCBA) the owners duplicate copies of Transfer
Certificates of Title No[s]. 83621 to 83627, thereby preventing NCBA
from registering the sale in its favor.

Similarly, [Petron] has absolutely no reason to claim the

V. Mapa property. For, as shown above, the levy in execution and sale
of the shares of FELIPE and ENRIQUE in the V. Mapa property were null
and void.

Finally, in their Memorandum of Agreement dated 25 September 1992

 with Technical Institute of the Philippines, [Petron] and DBP attempted
to pre-empt this Courts power to adjudicate on the claim of ownership
stipulating that to facilitate their defenses and cause of action in Civil
Case No. 83-16617, they agreed on the disposition of the
V. Mapa property among themselves. For obvious reasons, this Court
refused to give its imprimatur and denied their prayer for dismissal of
the complaint against DBP.

These acts of defendants and intervenor demonstrate their wanton,

fraudulent, reckless, oppressive and malevolent conduct in their
dealings with NCBA. Furthermore, they acted with gross and evident
bad faith in refusing to satisfy NCBAs plainly valid and demandable
claims. Assessment of exemplary damages and attorneys fees in the
amounts of P100,000.00 and P150,000.00, respectively, is therefore in
order (Arts. 2208 and 2232, Civil Code).[7]

Enrique, DBP and Petron appealed to the Court of Appeals (CA). The appeal was

docketed as CAG.R. CV No. 53466. In a decision dated June 21, 2002, [8] the CA

affirmed the RTC decision in toto. On motion for reconsideration, Petron and DBP tried

to have the award of exemplary damages and attorneys fees deleted for lack of legal

and factual basis. The Philippine National Oil Company (PNOC), which had been

allowed to intervene in the appeal as transferee pendente lite of Petrons right to the

V. Mapa properties, moved for reconsideration of the ruling on ownership. In a

resolution dated October 16, 2002, [9] the CA denied these motions for lack of

merit. Thereupon, Petron and PNOC took separate appeals to this Court.

In this appeal, the only issue is Petrons liability for exemplary damages and

attorneys fees. And on this matter, we reverse the rulings of the trial and appellate

courts.

Article 2208 lays down the rule that in the absence of stipulation, attorneys

fees cannot be recovered except in the following instances:

(1) When exemplary damages are awarded;

(2) When the defendants act or omission has compelled the plaintiff to
litigate with third persons or to incur expense to protect his
interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the
plaintiff;
 (5) Where the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiffs plainly valid, just and
demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers
and skilled workers;
(8) In actions for indemnity under workmens compensation and
employers liability laws;
(9) In a separate civil action to recover civil liability arising from a
crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that
attorneys fees and expenses of litigation should be recovered.
[10]

Here, the RTC held Petron liable to NCBA for attorneys fees under Article

2208(5), which allows such an award where the defendant acted in gross and evident

bad faith in refusing to satisfy the plaintiffs plainly valid, just, and demandable claim.

However, the only justification given for this verdict was that Petron had no reason to

claim the V. Mapaproperties because, in the RTCs opinion, the levy and sale thereof

were void.[11] This was sorely inadequate and it was erroneous for the CA to have

upheld that ruling built on such a flimsy foundation.

Article 2208(5) contemplates a situation where one refuses unjustifiably and

in evident bad faith to satisfy anothers plainly valid, just and demandable claim,

compelling the latter needlessly to seek redress from the courts. [12] In such a case,

the law allows recovery of money the plaintiff had to spend for a lawyers assistance

in suing the defendant expenses the plaintiff would not have incurred if not for the

defendants refusal to comply with the most basic rules of fair dealing. It does not

mean, however, that the losing party should be made to pay attorneys fees merely

because the court finds his legal position to be erroneous and upholds that of the

other party, for that would be an intolerable transgression of the policy that no one

should be penalized for exercising the right to have contending claims settled by a

court of law.[13] In fact, even a clearly untenable defense does not justify an award of
attorneys fees unless it amounts to gross and evident bad faith.[14]

Petrons claim to the V. Mapa properties, founded as it was on final deeds of

sale on execution, was far from untenable. No gross and evident bad faith could be

imputed to Petron merely for intervening in NCBAs suit against DBP and

the Monserrats in order to assert what it believed (and had good reason to believe)

were its rights and to have the disputed ownership of the V. Mapa properties settled

decisively in a single lawsuit.

With respect to the award of exemplary damages, the rule in this jurisdiction

is that the plaintiff must show that he is entitled to moral, temperate or

compensatory damages before the court may even consider the question of whether

exemplary damages should be awarded. [15] In other words, no exemplary damages

may be awarded without the plaintiffs right to moral, temperate, liquidated or

compensatory damages having first been established. Therefore, in view of our ruling

that Petron cannot be made liable to NCBA for compensatory damages (i.e.,

attorneys fees), Petron cannot be held liable for exemplary damages either.

WHEREFORE, the petition is hereby GRANTED. The imposition of liability

on Petron Corporation for exemplary damages and attorneys fees is REVOKED. The

June 21, 2002 decision and October 16, 2002 resolution of the Court of Appeals in

CAG.R. CV No. 53466 and the March 11, 1996 decision of the Regional Trial Court of

Manila in Civil Case No. 83-16617 are hereby MODIFIED accordingly.

SO ORDERED.

[G.R. No. 121171. December 29, 1998:

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

DECISION
KAPUNAN, J.:

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

Ironically, the staggering amount of damages was imposed on the Government

for exercising its legitimate right of foreclosure as creditor against the debtor MMIC as
a consequence of the latters failure to pay its overdue and unpaid obligation of P22
billion to the Philippine National Bank (PNB) and the Development Bank of the
Philippines (DBP).

The antecedent facts of the case

The development, exploration and utilization of the mineral deposits in the

Surigao Mineral Reservation have been authorized by Republic Act No. 1828, as
amended by Republic Acts No. 2077 and 4167, by virtue of which laws, a
Memorandum of Agreement was drawn on July 3, 1968, whereby the Republic of the
Philippines thru the Surigao Mineral Reservation Board, granted MMIC the exclusive
right to explore, develop and exploit nickel, cobalt and other minerals in the Surigao
mineral reservation.[1] MMIC is a domestic corporation engaged in mining with
respondents Jesus S. Cabarrus, Sr. as President and among its original stockholders.

The Philippine Government undertook to support the financing of MMIC by

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

DBP approved guarantees in favor of MMIC and subsequent requests for

guarantees were based on the unutilized portion of the Government
commitment. Thereafter, the Government extended accommodations to MMIC in
various amounts.

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

Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to

the enumerated events of defaults, circumstances by which the mortgagor may be
declared in default, the procedure therefor, waiver of period to foreclose, authority of
Trustee before, during and after foreclosure, including taking possession of the
mortgaged properties.[5]

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

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

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

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

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

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

In the course of the trial, private respondents and petitioner APT, as successor of
the DBP and PNBs interest in MMIC, mutually agreed to submit the case to arbitration
by entering into a Compromise and Arbitration Agreement, stipulating, inter alia:
NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual
covenants contain herein, the parties agreed as follows:

1. Withdrawal and Compromise. The parties have agreed to withdraw their respective
claims from the Trial Court and to resolve their dispute through arbitration by praying
to the Trial Court to issue a Compromise Judgment based on this Compromise and
Arbitration Agreement.

In withdrawing their dispute form the court and in choosing to resolve it through
arbitration, the parties have agreed that:

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

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

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

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

5. Issues. The issues to be submitted for the Committees resolution shall be: (a)
Whether PLAINTIFFS have the capacity or the personality to institute this derivative
suit in behalf of the MMIC or its directors; (b) Whether or not the actions leading to,
and including, the PNB-DBP foreclosure of the MMIC assets were proper, valid and in
good faith.[14]

This agreement was presented for approval to the trial court. On October 14,
1992, the Makati RTC, Branch 62, issued an order, to wit:

WHEREFORE, this Court orders:

1. Substituting PNB and DBP with the Asset Privatization Trust as party
defendant.

2. Approving the Compromise and Arbitration Agreement dated October 6,

1992, attached as Annex C of the Omnibus Motion.

3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in
this case into pure money claims; and

4. The Complaint is hereby DISMISSED.[15]

The Arbitration Committee was composed of retired Supreme Court Justice

Abraham Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals
Justice Magdangal Elma as Members. On November 24, 1993, after conducting
several hearings, the Arbitration Committee rendered a majority decision in favor of
MMIC, the pertinent portions of which read as follows:

Since, as this Committee finds, there is no foreclosure at all was not legally and
validly done, the Committee holds and so declares that the loans of PNB and DBP to
MMIC, for the payment and recovery of which the void foreclosure sales were
undertaken, continue to remain outstanding and unpaid. Defendant APT as the
successor-in-interest of PNB and DBP to the said loans is therefore entitled and
retains the right, to collect the same from MMIC pursuant to and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that the latter
may duly and seasonably interpose. Such loans shall, however, be reduced by the
amount which APT may have realized from the sale of the seized assets of MMIC
which by agreement should no longer be returned even if the foreclosure were found
to be null and void.

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

Therefore, defendant APT can, and is still entitled to, collect the outstanding
obligations of MMIC to PNB and DBP amounting to P22,668.537,770.05, more or less,
with interest thereon as stipulated in the loan documents from the date of foreclosure
up to the time they are fully paid less the proportionate liability of DBP as owner of
87% of the total capitalization of MMIC under the FRP. Simply put, DBP shall share in
the award of damages to, and in obligations of MMIC in proportion to its 87% equity
in the total capital stock of MMIC.

x x x.

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

DISPOSITION

WHEREFORE, premises considered, judgment is hereby rendered:

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

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

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

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

3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent
escrow agreement that would supercede it, pursuant to paragraph (9) of the
Compromise and Arbitration Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.

IT IS SO ORDERED.[16]

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

On October 17, 1994, private respondents filed in the same Civil Case No. 9900
an Application/Motion for Confirmation of Arbitration Award. Petitioner countered with
an Opposition and Motion to Vacate Judgment raising the following grounds:

1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the
proceedings in Civil Case No. 9900 which was dismissed upon motion of the
parties. In fact, the defendants in the said Civil Case No. 9900 were the Development
Bank of the Philippines and the Philippine National Bank (PNB);

2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission

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

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

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

Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984,
arguing that a dismissal of Civil case No. 9900 was merely a qualified dismissal to
pave the way for the submission of the controversy to arbitration, and operated
simply as a mere suspension of the proceedings. They denied that the Arbitration
Committee had exceeded its powers.
 In an Order dated November 28, 1994, the trial court confirmed the award of the
Arbitration Committee. The dispositive portion of said order reads:

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

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

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

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

(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum
of P1,705,410.22 as arbitration costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2

of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committees decision, and with this Courts Confirmation, the issuance of the
Arbitration Committees Award shall henceforth be final and executory.

SO ORDERED.[18]

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

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

On February 7, 1995, petitioner received private respondents motion for

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

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION MUCH LESS,
HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL AWARD CONSIDERING THAT
THE ORIGINAL CASE, CIVIL CASE NO. 9900, HAD PREVIOUSLY BEEN DISMISSED.

II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND ACTED

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

III

THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED WITHOUT
OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE COUNTING OF THE
PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM THE DATE OF SERVICE
OF THE COURTS COPY CONFIRMING THE AWARD, BUT FROM RECEIPT OF A XEROX
COPY OF WHAT PRESUMABLY IS THE OPPOSING COUNSELS COPY THEREOF.[20]

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

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

ASSIGNMENT OF ERRORS

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

II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER WAS

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

III
 THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT TRIAL
COURT SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE RESPONDENTS
MOTION/PETITION FOR CONFIRMATION OF ARBITRATION AWARD AND/OR
SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL
AWARD.

IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS PETITION

FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER CONFIRMING THE
AWARD

THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF WHEN
TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION.[21]

The petition is impressed with merit.

l.

The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award

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

4. The Complaint is hereby DISMISSED.[22]

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

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

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

Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.

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

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

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

III

Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.

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

We do not agree.

Section 29 of Republic Act No. 876,[28] provides that:

x x x An appeal may be taken from an order made in a proceeding under this Act,
or from a judgment entered upon an award through certiorari proceedings, but
such appeals shall be limited to question of law. x x x.

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

Thus, Section 1 of Rule 65 provides:

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

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

IV

The nature and limits of the Arbitrators powers.

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

Nonetheless, the arbitrators awards is not absolute and without exceptions. The
arbitrators cannot resolve issues beyond the scope of the submission agreement.
[34]
The parties to such an agreement are bound by the arbitrators award only to the
extent and in the manner prescribed by the contract and only if the award is
rendered in conformity thereto.[35] Thus, Sections 24 and 25 of the Arbitration Law
provide grounds for vacating, rescinding or modifying an arbitration award. Where
the conditions described in Articles 2038, [36] 2039[37] and 2040[38] of the Civil Code
applicable to compromises and arbitration are attendant, the arbitration award may
also be annulled.

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

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

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

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

xxx

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

xxx.

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

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

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

(b) That there was evident partiality or corruption in arbitrators or any of them; or

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

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that
a mutual, final and definite award upon the subject matter submitted to them was
not made. (Underscoring ours).

xxx.

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

SEC. 25. Grounds for modifying or correcting award In anyone of the following cases,
the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or

(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or

(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioners report, the defect could have been
amended or disregarded by the court.

x x x.

Finally, it should be stressed that while a court is precluded from overturning an

award for errors in determination of factual issues, nevertheless, if an examination of
the record reveals no support whatever for the arbitrators determinations, their
award must be vacated.[40] In the same manner, an award must be vacated if it was
made in manifest disregard of the law.[41]

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

There was no financial structuring program; foreclosure of mortgage was fully justified.

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

As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee

who wrote a separate opinion:

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

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

3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the
FRP or proceeding with the foreclosure. Cabarrus, who filed this case supposedly in
behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself opposed the
FRP;
4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith
but with honest and sincere belief that foreclosure was the only alternative; a
decision further explained by Dr. Placido Mapa who testified that foreclosure was, in
the judgment of PNB, the best move to save MMIC itself.

Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as
Exh. 37-A for the respondent, may I know from you, Dr. Mapa what you meant
by that the decision to foreclose was neither precipitate nor arbitrary?

A : Well, it is not a whimsical decision but rather decision arrived at after weighty
considerations of the information that we have received, and listening to the
prospects which reported to us that we had assumed would be the premises
of the financial rehabilitation plan was not materialized nor expected to
materialized.

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

A : Because the revenue that they were counting on to make the rehabilitation
plan possible, was not anymore expected to be forthcoming because it will
result in a short fall compared to the prices that were actually taking place in
the market.

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

A : Yes.

xxx

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

In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of
this. When MMIC adopted a restructuring program for its loan, it only meant that
these loans were already due and unpaid. If these loans were restructurable because
they were already due and unpaid, they are likewise forecloseable. The option is with
the PNB-DBP on what steps to take.

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

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by

P.D. No. 385, which took effect on January 31, 1974. The decree requires government
financial institutions to foreclose collaterals for loans where the arrearages amount to
20% of the total outstanding obligations. The pertinent provisions of said decree read
as follows:

SEC. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree to foreclose the collaterals and/or
securities for any loan, credit, accommodations, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institutions concerned. This shall be
without prejudice to the exercise by the government financial institutions of such
rights and/or remedies available to them under their respective contracts with their
debtor, including the right to foreclosure on loans, credits, accommodations and/or
guarantees on which the arrearages are less than twenty percent (20%).

SEC. 2. No restraining order, temporary or permanent injunction shall be issued by

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

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

VI

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

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

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

2. Directing the defendants DBP and PNB to honor and perform their commitments
under the financial reorganization plan which was approved at the annual
stockholders meeting of MMIC on 30 April 1984;
3. Condemning the defendants DBP and PNB, jointly and severally to pay the
plaintiffs actual damages consisting of the loss of value of their investment
amounting to not less than P80,000,000.00, the damnum emerges and lucrum
cessans in such amount as may be establish during the trial, moral damages in such
amount as this Honorable Court may deem just and equitable in the premises,
exemplary damages in such amount as this Honorable Court may consider
appropriate for the purpose of setting an example for the public good, attorneys fees
and litigation expenses in such amounts as may be proven during the trial, and the
costs legally taxable in this litigation.

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

Upon submission for arbitration, the Compromise and Arbitration Agreement of

the parties clearly and explicitly defined and limited the issues to the following:

(a) whether PLAINTIFFS have the capacity or the personality to institute this
derivative suit in behalf of the MMIC or its directors;

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

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

8. Decision. The committee shall issue a decision on the controversy not

later than six (6) months from the date of its constitution.

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

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

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

The Arbitration Committee went beyond its mandate and thus acted in excess of
its powers when it ruled on the validity of, and gave effect to, the proposed FRP.

In submitting the case to arbitration, the parties had mutually agreed to limit the
issue to the validity of the foreclosure and to transform the reliefs prayed for therein
into pure money claims.

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

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

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

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

Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs
equity (at that time) and as MMICs creditor-the DBP can not validly renege on its
commitments simply because at the same time, it held interest against the MMIC.

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

The FRP, of course, did not itself promise a resounding success, although it raised
DBPs equity in MMIC to 87%. It is not excuse, however, for the government to deny
its commitments.[52]

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

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

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

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

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

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

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

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

An individual stockholder is permitted to institute a derivative suit on behalf of the

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

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

because-

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

The reasons given for not allowing direct individual suit are:

(1) x x x the universally recognized doctrine that a stockholder in a corporation has

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

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

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

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

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

individual on the damages recoverable by the corporation for the same act. [58]

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

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

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

WHEREFORE, premises considered, judgment is hereby rendered:

xxx.

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow
pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent
escrow agreement that would supersede it, pursuant to paragraph (9), Compromise
and Arbitration Agreement, as and for moral damages; x x x[60]

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

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

It is a basic postulate that s corporation has a personality separate and distinct

from its stockholders.[63] The properties foreclosed belonged to MMIC, not to its
stockholders. Hence, if wrong was committed in the foreclosure, it was done against
the corporation. Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim
those damages for himself that would result in the appropriation by, and the
distribution to, him part of the corporations assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. The Arbitration Committee,
therefore, passed upon matters not submitted to it. Moreover, said cause of action
had already been decided in a separate case. It is thus quite patent that the
arbitration committee exceeded the authority granted to it by the parties
Compromise and Arbitration Agreement by awarding moral damages to Jesus S.
Cabarrus, Sr.

Atty. Sison, in his separate opinion, likewise expressed befuddlement to the

award of moral damages to Jesus S. Cabarrus, Sr.:

It is clear and it cannot be disputed therefore that based on these stipulated issues,
the parties themselves have agreed that the basic ingredient of the causes of action
in this case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of MMIC.

Perforce this has to be so because it is the basic rule in Corporation Law that the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.
Register of Deeds, 6 SCRA 373, the rule has been reiterated that a stockholder is not
the co-owner of corporate property. Since the property or assets foreclosed belongs
[sic] to MMIC, the wrong committed, if any, is done against the corporation. There is
therefore no direct injury or direct violation of the rights of Cabarrus et al. There is no
way, legal or equitable, by which Cabarrus et al. could recover damages in their
personal capacities even assuming or just because the foreclosure is improper or
invalid. The Compromise and Arbitration Agreement itself and the elementary
principles of Corporation Law say so.Therefore, I am constrained to dissent from the
award of moral damages to Cabarrus.[64]

From the foregoing discussions, it is evident that, not only did the arbitration
committee exceed its powers or so imperfectly execute them, but also, its findings
and conclusions are palpably devoid of any factual basis and in manifest disregard of
the law.

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

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

SO ORDERED

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

MAMBULAO LUMBER COMPANY, plaintiff-appellant,

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

Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.

Tomas Besa and Jose B. Galang for defendants-appellees.

ANGELES, J.:

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

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

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

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

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

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

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

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the
Naga Branch of defendant PNB and the former offered real estate, machinery,
logging and transportation equipments as collaterals. The application,
however, was approved for a loan of P100,000 only. To secure the payment of
the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together
with the buildings and improvements existing thereon, situated in the
poblacion of Jose Panganiban (formerly Mambulao), province of Camarines
Norte, and covered by Transfer Certificate of Title No. 381 of the land records
of said province, as well as various sawmill equipment, rolling unit and other
fixed assets of the plaintiff, all situated in its compound in the aforementioned
municipality.

On August 2, 1956, the PNB released from the approved loan the sum of
P27,500, for which the plaintiff signed a promissory note wherein it promised
to pay to the PNB the said sum in five equal yearly installments at the rate of
P6,528.40 beginning July 31, 1957, and every year thereafter, the last of
which would be on July 31, 1961.

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

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

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

On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of

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

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

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

On November 19, 1961, the plaintiff sent separate letters, posted as

registered air mail matter, one to the Naga Branch of the PNB and another to
the Provincial Sheriff of Camarines Norte, protesting against the foreclosure of
the real estate and chattel mortgages on the grounds that they could not be
effected unless a Court's order was issued against it (plaintiff) for said purpose
and that the foreclosure proceedings, according to the terms of the mortgage
contracts, should be made in Manila. In said letter to the Naga Branch of the
PNB, it was intimated that if the public auction sale would be suspended and
the plaintiff would be given an extension of ninety (90) days, its obligation
would be settled satisfactorily because an important negotiation was then
going on for the sale of its "whole interest" for an amount more than sufficient
to liquidate said obligation.

The letter of the plaintiff to the Naga Branch of the PNB was construed by the
latter as a request for extension of the foreclosure sale of the mortgaged
chattels and so it advised the Sheriff of Camarines Norte to defer it to
December 21, 1961, at the same time and place. A copy of said advice was
sent to the plaintiff for its information and guidance.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby

appoints the Mortgagee his attorney-in-fact to sell the property mortgaged
under Act 3135, as amended, to sign all documents and to perform all acts
requisite and necessary to accomplish said purpose and to appoint its
substitute as such attorney-in-fact with the same powers as above specified.
In case of judicial foreclosure, the Mortgagor hereby consents to the
appointment of the Mortgagee or any of its employees as receiver, without
any bond, to take charge of the mortgaged property at once, and to hold
possession of the same and the rents, benefits and profits derived from the
mortgaged property before the sale, less the costs and expenses of the
receivership; the Mortgagor hereby agrees further that in all cases, attorney's
fees hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid
which in no case shall be less than P100.00 exclusive of all fees allowed by
law, and the expenses of collection shall be the obligation of the Mortgagor
and shall with priority, be paid to the Mortgagee out of any sums realized as
rents and profits derived from the mortgaged property or from the proceeds
realized from the sale of the said property and this mortgage shall likewise
stand as security therefor. . . .

We find the above stipulation to pay attorney's fees clear enough to cover both cases
of foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the
phrase "in all cases" appears to be part of the second sentence, a reading of the
whole context of the stipulation would readily show that it logically refers to extra-
judicial foreclosure found in the first sentence and to judicial foreclosure mentioned in
the next sentence. And the ambiguity in the stipulation suggested and pointed out by
the appellant by reason of the faulty sentence construction should not be made to
defeat the otherwise clear intention of the parties in the agreement.

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

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

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

Contracts for attorney's services in this jurisdiction stands upon an entirely

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

Since then this Court has invariably fixed counsel fees on a quantum meruit basis
whenever the fees stipulated appear excessive, unconscionable, or unreasonable,
because a lawyer is primarily a court officer charged with the duty of assisting the
court in administering impartial justice between the parties, and hence, the fees
should be subject to judicial control. Nor should it be ignored that sound public policy
demands that courts disregard stipulations for counsel fees, whenever they appear to
be a source of speculative profit at the expense of the debtor or mortgagor. 5 And it is
not material that the present action is between the debtor and the creditor, and not
between attorney and client. As court have power to fix the fee as between attorney
and client, it must necessarily have the right to say whether a stipulation like this,
inserted in a mortgage contract, is valid. 6
 In determining the compensation of an attorney, the following circumstances should
be considered: the amount and character of the services rendered; the responsibility
imposed; the amount of money or the value of the property affected by the
controversy, or involved in the employment; the skill and experience called for in the
performance of the service; the professional standing of the attorney; the results
secured; and whether or not the fee is contingent or absolute, it being a recognized
rule that an attorney may properly charge a much larger fee when it is to be
contingent than when it is not. 7 From the stipulation in the mortgage contract earlier
quoted, it appears that the agreed fee is 10% of the total indebtedness, irrespective
of the manner the foreclosure of the mortgage is to be effected. The agreement is
perhaps fair enough in case the foreclosure proceedings is prosecuted judicially but,
surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-
judicially, and all that the attorney did was to file a petition for foreclosure with the
sheriff concerned. It is to be assumed though, that the said branch attorney of the
PNB made a study of the case before deciding to file the petition for foreclosure; but
even with this in mind, we believe the amount of P5,821.35 is far too excessive a fee
for such services. Considering the above circumstances mentioned, it is our
considered opinion that the amount of P1,000.00 would be more than sufficient to
compensate the work aforementioned.

The next issue raised deals with the claim that the proceeds of the sale of the real
properties alone together with the amount it remitted to the PNB later was more than
sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit
in this claim. From the foregoing discussion of the first two errors assigned, and for
purposes of determining the total obligation of herein appellant to the PNB as of
November 21, 1961 when the real estate mortgage was foreclosed, we have the
following illustration in support of this conclusion:1äwphï1.ñët
A. -
I. Principal Loan
(a) Promissory note dated August 2, 1956 P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
(b) Promissory note dated October 19, 1956 P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00
III. Attorney's fee 1,000.00

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

B. -
Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21,
I. P56,908.00
1961
II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

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

Deduct: Total obligation to the PNB P57,495.86

P 150.73
Excess Payment to the PNB
=======
=
From the foregoing illustration or computation, it is clear that there was no further
necessity to foreclose the mortgage of herein appellant's chattels on December 21,
1961; and on this ground alone, we may declare the sale of appellant's chattels on
the said date, illegal and void. But we take into consideration the fact that the PNB
must have been led to believe that the stipulated 10% of the unpaid loan for
attorney's fees in the real estate mortgage was legally maintainable, and in
accordance with such belief, herein appellee bank insisted that the proceeds of the
sale of appellant's real property was deficient to liquidate the latter's total
indebtedness. Be that as it may, however, we still find the subsequent sale of herein
appellant's chattels illegal and objectionable on other grounds.

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

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

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and

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

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

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

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

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

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

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

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

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

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

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

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

[G.R. No. 113176. July 30, 2001] HANIL DEVELOPMENT CO.,

LTD., petitioner, vs. COURT OF APPEALS AND M.R. ESCOBAR EXPLOSIVE
ENGINEERS, INC., respondents.

[G.R. No. 113342. July 30, 2001]

M.R. ESCOBAR EXPLOSIVE ENGINEERS, INC., petitioner vs. COURT OF

APPEALS AND HANIL DEVELOPMENT CO., LTD., respondents.

D E C I S I O N**

PUNO, J.:

Before us are Petitions for Review on Certiorari under Rule 45 of the Decision
rendered on August 23, 1993 and the Resolution promulgated on January 5,
1994, both by the Court of Appeals.[1]

In the early seventies, the Ministry of Public Works and Highways (MPWH for
brevity) awarded petitioner Hanil Development Co., Ltd. (Hanil for brevity) the
contract to construct the 200-kilometer Iligan-Cagayan de Oro-Butuan Highway
Project. On November 14, 1976, Hanil sub-let the rock-blasting work portion of the
contract to private respondent M.R. Escobar Explosive Engineers, Inc. (Escobar for
brevity). By express stipulation of the parties, Escobar will be compensated thus:

xxxxxxxxx

9. For the services performed by Sub-Contractor (Escobar) in accordance with the

terms and conditions herein described, Hanil will pay twenty pesos (P20.00) per cubic
meter on the following basis:

a. If the rocks are solid in nature, quantity will be assessed as shown on the cross-
section.

b. If the nature of the rock is soft and can be removed by using ripper, quantity may
be assessed on the actual blasted amount surveyed by both Company and Sub-
Contractors engineers.[2]

On January 3, 1977, Escobar commenced its blasting works. It continued its

services until terminated by Hanil on December 15, 1978. For the duration of the
contract, it worked on the segments of the construction undertaking designated in
the agreement as A-2, B-2, B-3, B-4, and C-1. It was fully paid for the areas A-2 and B-
4. It claimed, however, that Hanil still partially owes it one million three hundred forty
one thousand seven hundred twenty-seven and 40/100 (P1,341,727.40) pesos for
blastings done in the B-2, B-3 and C-1 areas. The claim was predicated on the theory
that the rocks it caused to explode in the contested areas were solid in nature, and
therefore the volume should be computed using the cross-section approach pursuant
to the above-quoted paragraph 9(a). It appears that all the payments it received
were fixed based on the joint survey method under paragraph 9(b). Escobar stressed
that Hanil was always paid by the MPWH using the cross-section system. This was
pursuant to the awarded 200-km. highway project contract between the MPWH and
Hanil, where the volumes of rocks to be blasted in specific areas were already pre-
estimated based on the cross-section approach. In fine, Escobars line of reasoning is
that Hanil should pay it the same amount of money Hanil received from the MPWH for
the blastings it did in the contested areas (B-2, B-3 and C-1). The
figure P1,341,727.40 represents the difference between the two.

Consequently, Escobar instituted Civil Case No. 35966 for recovery of a sum of
money with damages against Hanil before the then Court of First Instance of Rizal
(CFI for brevity). Hanil filed its answer with counterclaim for damages. Trial thereafter
ensued. On April 16, 1982, the CFI handed down a Decision ordering Hanil to
pay P1,341,727.40 for the value of rocks blasted by Escobar; 10% of the amount due
for attorneys fees; and the costs of suit.

On May 24, 1982, upon Escobars motion, the CFI garnished the bank accounts of
Hanil and levied its equipments. On June 29, 1982, it also granted Escobars Ex-parte
Motion to Deposit Cash praying that the Finance Manager of the National Power
Corporation (NAPOCOR) be directed to withdraw Hanils funds from the NAPOCOR and
deposit the same with the Clerk of Court. Hanil challenged the issuance of the May 24
and June 29 Orders before the Court of Appeals in a Petition for Certiorari with prayer
for Injunction and Preliminary Restraining Order, docketed as CA-G.R. No. SP-14512.
The appellate court, in a decision rendered on February 3, 1983, voided the
challenged Orders.

While the above-mentioned petition was pending before the Court of Appeals and
despite the writ of injunction issued by it, other developments continued to unfold in
the CFI. In an Order dated August 23, 1982, it disapproved Hanils Amended Record
on Appeal and dismissed its appeal. On October 19, 1982, it denied Hanils Motion for
Reconsideration of the August 23 Order and at the same time granted Escobars
Motion for Execution of Judgment. These two Orders were again contested by Hanil
before the appellate court in a Petition for Certiorari and Mandamus with prayer for
Prohibition. The said Orders were again annulled and set aside. Hanils appeal was
reinstated and the CFI was ordered to elevate the entire records of the case to the
Court of Appeals.

After transmittal of the records, the Court of Appeals notified Hanil on February
11, 1985 to file Appellants Brief within forty-five days. On March 13, 1985, and within
the reglementary period to submit its brief, Hanil filed an Application for Judgment
against Attachment Bond and Motion to Defer Filing of Appellants Brief, praying for a
hearing before the Court of Appeals so it could prove the damages it sustained as a
result of the illegal writ of attachment issued by the CFI. It wanted a judgment
against the attachment bond posted by Escobar and its insurer Sanpiro Insurance
Corporation (Sanpiro for brevity) to be included in the appealed decision in the main
case, Civil Case No. 35966, then pending before the Court of Appeals. Escobar filed
its Comment with a Motion to Dismiss Appeal allegedly for Hanils failure to file its
brief.
 On April 30, 1985, the appellate court issued a Resolution denying Hanils
Application for Judgment Against the Attachment Bond together with its Motion to
Defer Filing of Appellants Brief. It also dismissed Hanils appeal. Hanils Motion for
Reconsideration was denied on June 20, 1985. Hanil promptly sought relief from said
April 30 and June 20 Resolutions by filing with this Court a Petition for Certiorari,
Mandamus and Prohibition with Mandatory Injunction. In a decision rendered on
September 30, 1986, we reversed and set aside the assailed Resolutions. We also
directed the Court of Appeals to conduct hearings on the application for damages
against the bond filed by Hanil and to reinstate the appeal.

Upon reinstatement of the appeal, the appellate court conducted hearings on the
application for judgment against the attachment bond. On August 23, 1993, it
promulgated the herein contested Decision, [3] the decretal portion of which reads as
follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. REVERSING and SETTING ASIDE the appealed decision in Civil Case No. 35966;

2. DISMISSING the complaint in Civil Case No. 35966;

3. ORDERING the plaintiff-appellee (Escobar) to pay defendant-appellant under the

counterclaim in Civil Case No. 35966 the following sums of money:

a. FIFTY THOUSAND (P50,000.00) PESOS, for and as attorneys fees;

b. TWENTY THOUSAND (P20,000.00) PESOS in the concept of nominal damages;

4. ORDERING plaintiff-appellee and bondsman Sanpiro to jointly and severally pay

defendant-appellant under the attachment bond the total sum of FIFTY-SEVEN
THOUSAND FIVE HUNDRED SEVEN AND 90/100 (P57,507.90) PESOS as and for
attorneys fees and litigation expenses; and

5. ORDERING plaintiff-appellee to pay bondsman Sanpiro by way of reimbursement

under their Indemnity Agreement the sum of FIFTY-SEVEN THOUSAND FIVE HUNDRED
SEVEN AND 90/100 (P57,507.90) PESOS.

Costs against plaintiff-appellee.[4]

Hanil and Escobar filed their own respective Motions for Reconsideration, which were
both denied in a Resolution[5] dated January 5, 1994.

On February 15, 1994, Hanil filed before this court a Petition for Review on
Certiorari under Rule 45 assailing the amount of damages awarded to it. This was
docketed as G.R. No. 113176, entitled Hanil Development Co., Ltd., Petitioner,
vs. Court of Appeals and M.R. Escobar Explosive Engineers,
Respondents. On February 24, 1994, Escobar likewise filed its own Petition for
Review on Certiorari under Rule 45, docketed as G.R. No. 113342, entitled M.R.
Escobar Explosive Engineers, Inc., Petitioner, vs. Court of Appeals and Hanil
Development Co., Ltd., Respondents.

In G.R. No. 113176, petitioner Hanil raises the following grounds:

I. THE U.S.$3,000.00 INCURRED AND SPENT BY PETITIONER IN TAKING THE

 DEPOSITION OF ONE OF ITS WITNESSES SHOULD HAVE BEEN ADJUDGED TO BE
PAID BY THE PRIVATE RESPONDENT.

II. THE PETITIONER SHOULD HAVE BEEN AWARDED WITH TEMPERATE DAMAGES
OF P5,000,000.00 IN LIEU OF ACTUAL DAMAGES, INSTEAD OF THE SMALLER SUM
OF P20,000.00 IN NOMINAL DAMAGES.

III. THE PETITIONER SHOULD HAVE BEEN AWARDED MORAL DAMAGES IN THE
AMOUNT OF P1,000,000.00.

IV. THE PRIVATE RESPONDENT SHOULD BE MADE TO PAY THE PETITIONER

EXEMPLARY DAMAGES IN THE AMOUNT OF P5,000,000.00 IN ORDER TO BE AN
EFFECTIVE DETERRENT TO MALEVOLENT, FRAUDULENT AND MALICIOUS SUIT
AND APPLICATION FOR ATTACHMENT AND OTHER SIMILAR ACTS;

V. THE AWARDED ATTORNEYS FEES FOR THE PRINCIPAL ACTION SHOULD HAVE
BEEN INCREASED FROM P50,000.00 TO P500,000.00.[6]

In G. R. No. 113342, petitioner Escobar makes the following assignment of errors:

I.

THE COURT OF APPEALS ERRED GRAVELY IN NOT AFFIRMING THE TRIAL COURTS
16 APRIL 1982 DECISION IN PETITIONERS FAVOR.

II.

THE COURT OF APPEALS FURTHER ERRED GRAVELY IN AWARDING DAMAGES AND

ATTORNEYS FEES TO PRIVATE RESPONDENT, AS WELL AS IN AWARDING
ADDITIONAL ATTORNEYS FEES AND INJUNCTION BOND PREMIUM ON PRIVATE
RESPONDENTS APPLICATION FOR DAMAGES ON ATTACHMENT.

III.

THEREFORE THE COURT OF APPEALS ERRED IN NOT DISMISSING THE PETITION IN

CA-G.R. NO. 05055 OUTRIGHT FOR BEING UTTERLY DEVOID OF MERIT. [7]

We will jointly discuss the related issues forwarded by the parties, first, in respect
of the appeal from the Decision of the CFI in Civil Case No. 35966, before ruling on
the issues advanced anent the application for judgment on the attachment bond.

Re: Appeal from the Decision of the CFI

in Civil Case No. 35966

In its petition in G.R. No. 113342, Escobar claims that the Court of Appeals
erroneously relied on sub-paragraph (b) of paragraph 9 of the Sub-Contract
Agreement. It maintains that all the blasting works it performed in areas B-2, B-3 and
C-1 were for and on solid rock areas. It emphasizes that since Hanil was paid by the
MPWH based on the cross-section system in these areas, it should likewise be paid in
the same manner.
 The contention fails to impress. Just because the MPWH paid Hanil using the
cross-section approach for the blastings in the contested areas does not necessarily
mean that Hanil should in turn compensate Escobar based on the same technique of
computation. Apropos is the observation made by Mr. N.A. Vaitialingam, the Project
Manager of the engineering consultants Sauti, Certeza & F.F. Cruz for the 200-
kilometer Iligan-Butuan highway construction project. In a letter [8] dated December
10, 1979 addressed to the Honorable Minister of the MPWH, he declared the
following:

These payments are made subject to the specification under Clause 105-3-2 Rock
Material of the General Specifications, copy attached. Therefore it is not possible
to ascertain the exact volume of rock or boulders blasted by the sub-
contractor from the volume paid to the contractor because the rock blasted
may be, for example, 60% or 65 % of the volume paid in the cross-section. Also very
often boulders are pushed by the bull-dozers without blasting.

Thus it is desired that the main contractor (Hanil) and the sub-contractor should
come to a mutual agreement on the subject. (emphasis supplied.)

The import of this observation was correctly interpreted by the Court of Appeals,
thus:

What Mr. N.A. Vaitialingam simply means is that the cross-section computation for
payment by the MPWH to appellant (Hanil), as contractor, could not be in turn used
as an accurate basis for payment by appellant to appellee (Escobar), as sub-
contractor, not only because the rock blasted in each cross-section might have been
(sic) consisted only of 60% or 65% solid rock but also because very often blasting
was no longer necessary since boulders were just removed by bulldozers. The truth of
Mr. Vaitialingams statement is confirmed by appellees own documentary evidence
which show that rock blasting and boulders comprised a major portion of the work
done in segment B-2 (Exh. B-3) and segment B-3 (Exh. B-2) and that the work in
segment C-1 (Exh. B-1) consisted entirely of blasting and dozing. Moreover, appellees
Exhibits B-1, B-2 and B-3 clearly evince that In all cases there were overburden of
earth of varying depths on top of rock and boulders. In other words, payment to
appellee as shown by cross-section under Sub-paragraph (a) of Paragraph 9 of the
questioned document was obviously inapplicable for not being based on an actual
and accurate method of measurement.[9]

This letter (Exhibit H) is part of the evidence of Escobar. It cannot impugn its own
evidence.[10]

To be sure, what governs the contractual relation between Escobar and Hanil are
the stipulations contained in their Sub-contract Agreement. A contract is the law
between the parties and where there is nothing in it which is contrary to law, morals,
good customs, public policy or public good, its validity must be sustained.

The express terms of the agreement are clear as day to necessitate any
interpretation. For the cross-section approach under paragraph 9(a) to apply, it is
imperative to establish that the rocks blasted were solid in nature. Otherwise, the
joint survey procedure will be followed. Escobar failed to prove the nature of the
rocks it blasted in the disputed areas. It did not introduce in evidence object samples
of the rocks in the area. Neither did it present photographs, both wide and close-up
angles of representative portions of the said areas that it worked on, let alone
photographs of typical clusters of the rock it blasted.[11]

That the cross-section system was not at all followed by the parties is further
shown by Escobars act in the first seven months of the two-year agreement when it
received monthly payments computed on the basis of the joint survey method.
During the period from January to July 1977, its monthly billings were fixed after a
joint survey of the estimated quantity of rocks before blasting and another joint
assessment of the actual volume of rocks blasted by its own engineers and those of
Hanil, which is in accordance with Paragraph 9(b), not 9(a), of their Sub-contract
Agreement. Its belated assertion that these monthly collections were understood to
be mere partial compensation, subject to adjustment after applying the cross-section
approach, appears to be an afterthought. If the claim is true, it could have easily
indicated or annotated the condition in the billings that it sent Hanil and the receipts
for the payment. Since Escobar accepted payment for a considerable period of time
under the joint survey method [par. 9(b)], it cannot later be allowed to assume an
inconsistent position by invoking the cross-section approach [par. 9(a)].

We now discuss the merit of Hanils petition. For its part, it seeks an increase in
the grant of nominal damages and attorneys fees. It also prays for additional awards
of moral and exemplary damages.

Hanils plea for additional amount in the form of temperate damages in lieu of the
nominal damages awarded to it must be denied. We agree with the appellate courts
ruling that the amount of twenty thousand pesos (P20,000.00) is just. Hanil failed to
prove the actual value of pecuniary injury which it sustained as a consequence of
Escobars institution of an unfounded civil suit. The testimony of one of its witnesses
presented in the CFI, to the effect that the filing of the complaint affected Hanils
reputation and that it affected the management and engineers working in the site,
[12]1
is not enough proof. The institution of the suit, unfounded though it may be, does
not always lead to pecuniary loss as to warrant an award of actual or temperate
damages. The link between the cause (the suit) and the effect (the loss) must be
established by the required proof.

So, too, must its demand for payment of moral damages fail. The rule is that
moral damages can not be granted in favor of a corporation. Being an artificial
person and having existence only in legal contemplation, a corporation has no
feelings, no emotions, no senses. It cannot, therefore, experience physical suffering,
mental anguish, fright, serious anxiety, wounded feelings or moral shock or social
humiliation, which can be suffered only by one having a nervous system. [13]

Hanils prayer for exemplary damages must likewise be denied. It must be

remembered that this kind of damages cannot be recovered as a matter of right. Its
allowance rests in the sound discretion of the court, and only upon a showing of its
legal foundation. Under the Civil Code, the claimant must first establish that he is
entitled to moral, temperate, compensatory or liquidated damages before it may be
imposed in his favor.[14] Hanil failed to do so, hence, it cannot claim exemplary
damages.

We hold, however, that an increase in the grant of attorneys fees from fifty
thousand pesos (P50,000.00) to one hundred fifty thousand pesos (P150,000.00) is in
order. Although the original complaint lodged with the CFI was merely for collection of
a sum of money with damages, involving as it did modest legal issues, that complaint
had in reality generated several incidents during the close to twenty years that this
case was under litigation. Twice, Hanil filed Petitions for Certiorari with the Court of
Appeals. Once, it elevated the case to this Court questioning the dismissal of the
appeal by the appellate court. Then, after reinstatement of the appeal, it had to
present and defend its case not only for the appeal but also for its application on the
attachment bond. And now, Hanil has to contend with Escobars Petition in G.R. No.
113342, even as it concerns itself with its own Petition in G.R. No. 113176. In fine,
taking into account the over-all factual environment upon which this case proceeded,
we find the award of P50,000.00 insufficient and hereby augment it to P150,000.00.

Re: Application for Judgment on the Attachment Bond

Apropos the Application for Judgment on the Attachment Bond, Escobar claims in
its petition that the award of attorneys fees and injunction bond premium in favor of
Hanil is to law and jurisprudence. It contends that no malice or bad faith may be
imputed to it in procuring the writ.

Escobars protestation is now too late in the day. The question of the illegality of
the attachment and Escobars bad faith in obtaining it has long been settled in one of
the earlier incidents of this case. The Court of Appeals, in its decision rendered on
February 3, 1983 in C.A.-G.R. No. SP-14512, voided the challenged writ, having been
issued with grave abuse of discretion. Escobars bad faith in procuring the writ cannot
be doubted. Its Petition for the Issuance of Preliminary Attachment made such
damning allegations that: Hanil was already able to secure a complete release of its
final collection from the MPWH; it has moved out some of its heavy equipments for
unknown destination, and it may leave the country anytime. Worse, its Ex
Parte Motion to Resolve Petition alleged that after personal verification by (Escobar)
of (Hanils) equipment in Cagayan de Oro City, it appears that the equipments were
no longer existing from their compound. All these allegations of Escobar were found
to be totally baseless and untrue. So manifest was their baselessness that Escobar
did not even submit a reply to refute the assertions Hanil made in its Opposition to
the Petition for the Issuance of Preliminary Attachment. Nor did it attempt to negate
the same assertions of Hanil in its Motion for Reconsideration.Instead, it advanced
the evasive claim that the Motion has become moot and academic on the ground that
the writ of attachment has already been executed.

We therefore hold that on the basis of the evidence presented, Hanil is entitled to
temperate damages in the amount of five hundred thousand pesos (P500,000.00). As
a consequence of the illegal writ, Hanil suffered the following damages: (1) some of
the checks it issued were dishonored after its bank accounts were garnished; (2) its
operation stopped temporarily for five days because it was prevented from using its
equipments and machineries; and (3) its goodwill, reputation and commercial
standing as one of the top multi-national construction firms in Asia was tarnished.

In light of Escobars bad faith in procuring the attachment and garnishment

orders, we grant the additional award of exemplary damages in the amount of one
million pesos (P1,000,000.00) by way of example or correction for public good. This
should deter parties in litigations from resorting to baseless and preposterous
allegations to obtain writs of attachments from gullible judges. The misuse of our
legal processes cannot be tolerated especially if they victimize persons and
institutions of foreign nationality doing legitimate business in our jurisdiction. While
as a general rule, the liability on the attachment bond is limited to actual (or in some
cases, temperate or nominal) damages, exemplary damages may be recovered
where the attachment was established to be maliciously sued out. [15]

We, however, delete the award of attorneys fees for the litigation of the
application for damages against the bond since we have already included the same
in our grant of attorneys fees in the main action concerning the appeal.

In other aspects, we sustain the assailed Decision and Resolution of the Court of
Appeals. The claim of Hanil that as part of the cost of suit, Escobar should be made to
pay three thousand U.S. dollars (U.S.$3,000.00) for the money it spent in taking the
deposition upon written interrogatories of one of its witnesses, Engr. Chan Woo Park,
in South Korea on November 18, 1988 is bereft of merit. The case law on this issue is
now settled, viz.:

(T)he expenses of taking depositions are allowable as costs only if it appears to the
court: (1) that they were reasonably necessary; (2) the burden of so
demonstrating is upon the party claiming such expenses as costs; (3) whether that
burden is met is within the sound discretion of the trial court; and (4) its ruling
thereon is presumed to be correct and will not be disturbed unless it is so
unreasonable as to manifest a clear abuse of discretion.[16] (emphasis supplied)

Whether the taking of a deposition was reasonably necessary to the protection of

the partys interests as to entitle it to reimbursement of expenses is a question
primarily for the lower court to decide based on all the facts and circumstances of the
case. On this score, the Court of Appeals (which heard the Application for Damages)
disallowed Hanils claim since the deposition was merely corroborative in nature
and, therefore, superfluous.[17] We agree. A cursory reading of the transcript of
deposition of Engr. Chan will readily reveal that his testimony only corroborated that
of Hanils earlier witness, Mr. Chang Yong Ahn, its Operations Manager, who took the
stand on February 26, 1988. The two testimonies dealt with the same topic: the
illegal writ of attachment on Hanils equipments and garnishment of its funds, and the
pecuniary loss it suffered as a consequence thereof. In fact, despite the Court of
Appealss own conclusion about the superfluity of the deposition, it still decided in
favor of Hanil based on the other undisputed evidence on record.

In the same vein, we sustain the grant of seven thousand five hundred seven
pesos and ninety centavos (P7,507.90) as injunction bond premium for
being reasonable under the premises.

Finally, we find and so hold that, as between Escobar and its bondsman Sanpiro,
the former is liable to the latter by virtue of their Indemnity Agreement [18]1 for the
damages the subject attachment bond is herein made to answer. However, since the
extent of its liability will be determined only by the terms and conditions of the
contract of suretyship,[19] it can only be held answerable up to the amount of one
million three hundred forty-one thousand, seven hundred twenty-seven pesos and
forty centavos (P1,341,727.40).

IN VIEW WHEREOF, the assailed Decision and Resolution of the Court of

Appeals are hereby modified as follows:
 1. ORDERING Escobar to pay Hanil under the counterclaim in Civil Case No.
35966 the following sums of money:

a. TWENTY THOUSAND PESOS (P20,000.00) as nominal damages;

b. ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) for and as attorneys fees.

2. ORDERING Escobar, and bondsman Sanpiro to jointly and severally pay with it
up to the extent of one million three hundred forty-one thousand seven hundred
twenty-seven pesos and forty centavos (P1,341,727.40), to pay Hanil under the
attachment bond the following sums of money:

a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) as temperate damages;

b. ONE MILLION PESOS (P1,000,000.00) as exemplary damages;

c. SEVEN THOUSAND FIVE HUNDRED SEVEN PESOS AND NINETY CENTAVOS

(P7,507.90) for the Injunction Bond Premium.

3. ORDERING Escobar to pay Hanil the remainder of the amount of temperate,

exemplary and bond premium damages - which cannot be fully covered by the
attachment bond - in the sum of ONE HUNDRED SIXTY-FIVE THOUSAND SEVEN
HUNDRED EIGHTY PESOS AND FIFTY CENTAVOS (P165,780.50).

4. ORDERING Escobar to pay bondsman Sanpiro by way of reimbursement under

their Indemnity Agreement the sum of ONE MILLION THREE HUNDRED FORTY-ONE
THOUSAND SEVEN HUNDRED TWENTY-SEVEN PESOS AND FORTY CENTAVOS
(P1,341,727.40).

Costs against Escobar.

SO ORDERED.
147 Phil. 794
BACHE and Co. Case

VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus, with prayer for a
writ of preliminary mandatory and prohibitory injunction. In their petition Bache &
Co. (Phil.), Inc., a corporation duly organized and existing under the laws of the
Philippines, and its President, Frederick E. Seggerman, pray this Court to declare null
and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25,
1970; to order respondents to desist from enforcing the same and/or keeping the
documents, papers and effects seized by virtue thereof, as well as from enforcing the
tax assessments on petitioner corporation alleged by petitioners to have been made
on the basis of the said documents, papers and effects, and to order the return of the
latter to petitioners. We gave due course to the petition but did not issue the writ of
preliminary injunction prayed for therein.
The pertinent facts of this case, as gathered from the record, are as follows:
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue,
wrote a letter addressed to respondent Judge Vivencio M. Ruiz requesting the
issuance of a search warrant against petitioners for violation of Section 46(a) of the
National Internal Revenue Code, in relation to all other pertinent provisions thereof,
particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner
Rodolfo de Leon, one of herein respondents, to make and file the application for
search warrant which was attached to the letter.
In the afternoon of the following day, February 25, 1970, respondent de Leon and his
witness, respondent Arturo Logronio, went to the Court of First Instance
of Rizal. They brought with them the following papers: respondent Vera's aforesaid
letter-request; an application for search warrant already filled up but still unsigned by
respondent de Leon; an affidavit of respondent Logroniosubscribed before respondent
de Leon; a deposition in printed form of respondent Logronio already accomplished
and signed by him but not yet subscribed; and a search warrant already
accomplished but still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by means of a note, he
instructed his Deputy Clerk of Court to take the depositions of respondents de Leon
and Logronio. After the session had adjourned, respondent Judge was informed that
the depositions had already been taken. The stenographer, upon request of
respondent Judge, read to him her stenographic notes; and thereafter, respondent
Judge asked respondent Logronio to take the oath and warned him that if his
deposition was found to be false and without legal basis, he could be charged for
perjury. Respondent Judge signed respondent de Leon's application for search
warrant and respondent Logronio's deposition, Search Warrant No. 2-M-70 was then
signed by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR agents
served the search warrant on petitioners at the offices of petitioner corporation on
Ayala Avenue, Makati, Rizal. Petitioners' lawyers protested the search on the ground
that no formal complaint or transcript of testimony was attached to the warrant. The
agents nevertheless proceeded with their search which yielded six boxes of
documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance
of Rizal praying that the search warrant be quashed, dissolved or recalled, that
preliminary prohibitory and mandatory writs of injunction be issued, that the search
warrant be declared null and void, and that the respondents be ordered to pay
petitioners, jointly and severally, damages and attorney's fees. On March 18, 1970,
the respondents, thru the Solicitor General, filed an answer to the petition. After
hearing, the court, presided over by respondent Judge, issued on July 29, 1970, an
order dismissing the petition for dissolution of the search warrant. In the meantime,
or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on
petitioner corporation in the total sum of P2,594,729.97, partly, if not entirely, based
on the documents thus seized. Petitioners came to this Court.
The petition should be granted for the following reasons:
1. Respondent Judge failed to personally examine the complainant and his witness.
The pertinent provisions of the Constitution of the Philippines and of the Revised
Rules of Court are:
"(3) The right of the people to be secure in their persons, houses, papers and effects
against unreasonable searches and seizures shall not be violated, and no warrants
shall issue but upon probable cause, to be determined by the judge after examination
under oath or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the persons or things to be
seized." (Art. III, Sec. 1, Constitution.)

"SEC. 3. Requisites for issuing search warrant. - A search warrant shall not issue but
upon probable cause in connection with one specific offense to be determined by the
judge or justice of the peace after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place
to be searched and the persons or things to be seized.

"No search warrant shall issue for more than one specific offense.

"SEC. 4. Examination of the applicant. - The judge or justice of the peace must,
before issuing the warrant, personally examine on oath or affirmation the
complainant and any witnesses he may produce and take their depositions in writing,
and attach them to the record, in addition to any affidavits presented to him." (Rule
126, Revised Rules of Court.)

The examination of the complainant and the witnesses he may produce, required by
Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the
Revised Rules of Court, should be conducted by the judge himself and not by
others. The phrase "which shall be determined by the judge after examination under
oath or affirmation of the complainant and the witnesses he may produce," appearing
in the said constitutional provision, was introduced by Delegate Francisco as an
amendment to the draft submitted by the Sub-Committee of Seven. The following
discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine
Constitutional Convention, Vol. III, pp. 755-757) is enlightening:
"SR. ORENSE. Vamos a dejar compañero, los piropos y vamos al grano.

En los casos de una necesidad de actuar inmediatamente para que no

se frustren los fines de la justicia mediante el registroinmediato y
la incautacion del cuerpo del delito,
no cree Su Señoria que causaria cierta demora el procedimiento apuntado en suenmi
enda en tal forma que podria frustrar los fines de
la justicia o si Su Señoria encuentra un remedio para estos casos con el fin
de compaginar los fines de
la justicia con los derechos del individuo en su persona, bienes etcetera, etcetera.

"SR. FRANCISCO. No puedo ver en

la practica el caso hipotetico que Su Señoria pregunta por la sigutente razon: el que
solicitaun mandamiento de registro tiene que hacerlo por escrito y ese escrito no apa
recera en la Mesa
del Juez sin que alguien vaya al juez a presentar ese escrito o peticion de secuestro.
Esa persona que presenta el registro puede ser
el mismo denunciante o alguna persona que solicita dicho mandamiento de registro.
Ahora toda la enmienda en esos casos consiste en que haya peticionde registro y
el juez no
se atendra solamente a esa peticion sino que el juez examinara a ese denunciante y
si tiene testigostambien examinara a los testigos.

"SR. ORENSE. No cree Su Señoria que el tomar la declaracion de ese denunciante po

r escrito siempre requeriria algun tiempo?

"SR. FRANCISCO. Seria cuestion de un par

de horas, pero por otro lado minimizamos en todo lo posible las vejaciones injustasco
n
la expedicion & arbitraria de los mandamientos de registro. Creo que entre dos male
s debemos escoger el menor.

x x x x x

"MR. LAUREL. x x x The reason why we are in favor of this amendment is because we
are incorporating in our constitution something of a fundamental character. Now,
before a judge could issue a search warrant, he must be under the obligation to
examine personally under oath the complainant and if he has any witness, the
witnesses that he may produce. x x x."

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more
emphatic and candid, for it requires the judge, before issuing a search warrant, to
"personally examine on oath or affirmation the complainant and any witnesses he
may produce x x x."
Personal examination by the judge of the complainant and his witnesses is necessary
to enable him to determine the existence or non-existence of a probable cause,
pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the
Revised Rules of Court, both of which prohibit the issuance of warrants except "upon
probable cause." The determination of whether or not a probable cause exists calls
for the exercise of judgment after a judicial appraisal of facts and should not be
allowed to be delegated in the absence of any rule to the contrary.
In the case at bar, no personal examination at all was conducted by respondent Judge
of the complainant (respondent de Leon) and his witness
(respondent Logronio). While it is true that the complainant's application for search
warrant and the witness' printed-form deposition were subscribed and sworn to
before respondent Judge, the latter did not ask either of the two any question the
answer to which could possibly be the basis for determining whether or not there was
probable cause against herein petitioners. Indeed, the participants seem to have
attached so little significance to the matter that notes of the proceedings before
respondent Judge were not even taken. At this juncture it may be well to recall the
salient facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex J-2
of the Petition) taken at the hearing of this case in the court below shows that per
instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of
Court, took the depositions of the complainant and his witness, and that stenographic
notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at
the sala hearing a case. After respondent Judge was through with the hearing,
Deputy Clerk Gonzales, stenographer Gaspar, complainant de Leon and
witness Logronio went to respondent Judge's chamber and informed the Judge that
they had finished the depositions. Respondent Judge then requested the
stenographer to read to him her stenographic notes. Special Deputy Clerk Gonzales
testified as follows:
"A And after finishing reading the stenographic notes, the Honorable Judge
requested or instructed them, requested Mr. Logronio to raise his hand and warned
him if his deposition will be found to be false and without legal basis, he can be
charged criminally for perjury. The Honorable Court told Mr. Logronio whether he
affirms the facts contained in his deposition and the affidavit executed before Mr.
Rodolfo de Leon.

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.

"Q Who is this he?

"A The Honorable Judge.

"Q The deposition or the affidavit?

"A The affidavit, Your Honor."

Thereafter, respondent Judge signed the search warrant.

The participation of respondent Judge in the proceedings which led to the issuance of
Search Warrant No. 2-M-70 was thus limited to listening to the stenographer's reading
of her notes, to a few words of warning against the commission of perjury, and to
administering the oath to the complainant and his witness. This cannot be
considered as a personal examination. If there was an examination at all of the
complainant and his witness, it was the one conducted by the Deputy Clerk of
Court. But, as already stated, the Constitution and the rules require a personal
examination by the judge. It was precisely on account of the intention of the
delegates to the Constitutional Convention to make it a duty of the issuing judge to
personally examine the complainant and his witnesses that the question of how much
time would be consumed by the judge in examining them came up before the
Convention, as can be seen from the record of the proceedings quoted above. The
reading of the stenographic notes to respondent Judge did not constitute sufficient
compliance with the constitutional mandate and the rule; for by that manner
respondent Judge did not have the opportunity to observe the demeanor of the
complainant and his witness, and to propound initial and follow-up questions which
the judicial mind, on account of its training, was in the best position to
conceive. These were important in arriving at a sound inference on the all-important
question of whether or not there was probable cause.
2. The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for "[v]iolation of Sec. 46(a) of the National
Internal Revenue Code in relation to all other pertinent provisions thereof
particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the said search
warrant issued "in connection with one specific offense," as required by Sec. 3, Rule
126?
To arrive at the correct answer it is essential to examine closely the provisions of the
Tax Code referred to above. Thus we find the following:
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns and for rendering
false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to
supply the information required under the Tax Code.
Sec. 208 penalizes "[a]ny person who distills, rectifies, repacks, compounds, or
manufactures any article subject to a specific tax, without having paid the privilege
tax therefor, or who aids or abets in the conduct of illicit distilling, rectifying,
compounding, or illicit manufacture of any article subject to specific tax x x x," and
provides that in the case of a corporation, partnership, or association, the official
and/or employee who caused the violation shall be responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross
value of output removed, or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses under the
Tax Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of
income tax returns), which are interrelated. The second is the violation of Sec. 53
(withholding of income taxes at source). The third is the violation of Sec. 208
(unlawful pursuit of business or occupation); and the fourth is the violation of Sec.
209 (failure to make a return of receipts, sales, business or gross value of output
actually removed or to pay the tax due thereon). Even in their classification the six
above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72
and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V
(Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, et al. vs. Diokno, et al., L-19550, June 19, 1967 (20
SCRA 383), is not applicable, because there the search warrants were issued for
"violation of Central Bank Laws, Internal Revenue (Code) and Revised Penal Code;"
whereas, here Search Warrant No. 2-M-70 was issued for violation of only one code,
i.e., the National Internal Revenue Code. The distinction is more apparent than real,
because it was precisely on account of the Stonehill incident, which occurred
sometime before the present Rules of Court took effect on January 1, 1964, that this
Court amended the former rule by inserting therein the phrase "in connection with
one specific offense," and adding the sentence "No search warrant shall issue for
more than one specific offense," in what is now Sec. 3, Rule 126. Thus we said
in Stonehill:
"Such is the seriousness of the irregularities committed in connection with the
disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule
122 of the former Rules of Court by providing in its counterpart, under the Revised
Rules of Court that 'a search warrant shall not issue but upon probable cause in
connection with one specific offense.' Not satisfied with this qualification, the Court
added thereto a paragraph, directing that 'no search warrant shall issue for more
than one specific offense.'"

3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in Search
Warrant No. 2-M-70 in this manner:
"Unregistered and private books of accounts (ledgers, journals, columnars, receipts
and disbursements books, customers ledgers); receipts for payments received;
certificates of stocks and securities; contracts, promissory notes and deeds of sale;
telex and coded messages; business communications; accounting and business
records; checks and check stubs; records of bank deposits and withdrawals; and
records of foreign remittances, covering the years 1966 to 1970."

The description does not meet the requirement in Art. III, Sec. 1, of the Constitution,
and of Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should
particularly describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said:
"The grave violation of the Constitution made in the application for the contested
search warrants was compounded by the description therein made of the effects to
be searched for and seized, to wit:
'Books of accounts, financial records, vouchers, journals, correspondence, receipts,
ledgers, portfolios, credit journals, typewriters, and other documents and/or papers
showing all business transactions including disbursement receipts, balance sheets
and related profit and loss statements.'
"Thus, the warrants authorized the search for and seizure of records pertaining to all
business transactions of petitioners herein, regardless of whether the transactions
were legal or illegal. The warrants sanctioned the seizure of all records of the
petitioners and the aforementioned corporations, whatever their nature, thus openly
contravening the explicit command of our Bill of Rights - that the things to be seized
be particularly described - as well as tending to defeat its major objective: the
elimination of general warrants."

While the term "all business transactions" does not appear in Search Warrant No. 2-
M-70, the said warrant nevertheless tends to defeat the major objective of the Bill of
Rights, i.e., the elimination of general warrants, for the language used therein is so
all-embracing as to include all conceivable records of petitioner corporation, which, if
seized, could possibly render its business inoperative.
In Uy Kheytin, et al. vs. Villareal, etc., et al., 42 Phil. 886, 896, this Court had occasion
to explain the purpose of the requirement that the warrant should particularly
describe the place to be searched and the things to be seized, to wit:
"x x x Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically
require that a search warrant should particularly describe the place to be searched
and the things to be seized. The evident purpose and intent of this requirement is to
limit the things to be seized to those, and only those, particularly described in the
search warrant - to leave the officers of the law with no discretion regarding what
articles they shall seize, to the end that 'unreasonable searches and seizures' may
not be made, - that abuses may not be committed. That this is the correct
interpretation of this constitutional provision is borne out by American authorities."

The purpose as thus explained could, surely and effectively, be defeated under the
search warrant issued in this case.
A search warrant may be said to particularly describe the things to be seized when
the description therein is as specific as the circumstances will ordinarily allow (People
vs. Rubio, 57 Phil., 384); or when the description expresses a conclusion of fact - not
of law - by which the warrant officer may be guided in making the search and seizure
(idem., dissent of Abad Santos, J.); or when the things describes are limited to those
which bear direct relation to the offense for which the warrant is being issued (Sec. 2,
Rule 126, Revised Rules of Court). The herein search warrant does not conform to
any of the foregoing tests. If the articles desired to be seized have any direct relation
to an offense committed, the applicant must necessarily have some evidence, other
than those articles, to prove the said offense; and the articles subject of search and
seizure should come in handy merely to strengthen such evidence. In this event, the
description contained in the herein disputed warrant should have mentioned, at least,
the dates, amounts, persons, and other pertinent data regarding the receipts of
payments, certificates of stocks and securities, contracts, promissory notes, deeds of
sale, messages and communications, checks, bank deposits and withdrawals, records
of foreign remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a
motion for reconsideration of respondent Judge's order of July 29, 1970. The
contention is without merit. In the first place, when the questions raised before this
Court are the same as those which were squarely raised in and passed upon by the
court below, the filing of a motion for reconsideration in said court
before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc.,
et al. vs. Ago, et al., 108 Phil., 905). In the second place, the rule requiring the filing
of a motion for reconsideration before an application for a writ of certiorari can be
entertained was never intended to be applied without considering the
circumstances. (Matutina vs. Buslon, et al. 109 Phil., 140.) In the case at bar time is
of the essence in view of the tax assessments sought to be enforced by respondent
officers of the Bureau of Internal Revenue against petitioner corporation, on account
of which immediate and more direct action becomes necessary. (Matute vs. Court of
Appeals, et al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case,
the deprivation of petitioners' fundamental right to due process taints the proceeding
against them in the court below not only with irregularity but also with
nullity. (Matute vs. Court of Appeals, et al., supra.)
It is next contended by respondents that a corporation is not entitled to protection
against unreasonable searches and seizures. Again, we find no merit in the
contention.
"Although, for the reasons above stated, we are of the opinion that an officer of a
corporation which is charged with a violation of a statute of the state of its creation,
or of an act of Congress passed in the exercise of its constitutional powers, cannot
refuse to produce the books and papers of such corporation, we do not wish to be
understood as holding that a corporation is not entitled to immunity, under the 4th
Amendment, against unreasonable searches and seizures. A corporation is, after all,
but an association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional immunities
appropriate to such body. Its property cannot be taken without compensation. It can
only be proceeded against by due process of law, and is protected, under the 14th
Amendment, against unlawful discrimination. x xx." (Hale v. Henkel, 201 U.S. 43, 50
L. ed. 652.)

"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a
different rule applied to a corporation, on the ground that it was not privileged from
producing its books and papers. But the rights of a corporation against unlawful
search and seizure are to be protected even if the same result might have been
achieved in a lawful way." (Silverthorne Lumber Company, et al. v. United States of
America, 251 U.S. 385, 64 L. ed. 319.)

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

In the Stonehill case only the officers of the various corporations in whose offices
documents, papers and effects were searched and seized were the petitioners. In the
case at bar, the corporation to whom the seized documents belong, and whose rights
have thereby been impaired, is itself a petitioner. On that score, petitioner
corporation here stands on a different footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely - as
claimed by petitioners - at least partly - as in effect admitted by respondents - based
on the documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the
fact that the assessments were made some one and one-half months after the search
and seizure on February 25, 1970, is a strong indication that the documents thus
seized served as basis for the assessments. These assessments should therefore not
be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No.
2-M-70 issued by respondent Judge is declared null and void; respondents are
permanently enjoined from enforcing the said search warrant; the documents, papers
and effects seized thereunder are ordered to be returned to petitioners; and
respondent officials of the Bureau of Internal Revenue and their representatives are
permanently enjoined from enforcing the assessments mentioned in Annex "G" of the
present petition, as well as other assessments based on the documents, papers and
effects seized under the search warrant herein nullified, and from using the same
against petitioners in any criminal or other proceeding. No pronouncement as to
costs.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-31061 August 17, 1976

SULO NG BAYAN INC., plaintiff-appellant,

vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS
& SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF
DEEDS OF BULACAN, defendants-appellees.

Hill & Associates Law Offices for appellant.

Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.

Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.

Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the

Government Corporate Counsel for appellee National Waterworks & Sewerage
Authority.

Candido G. del Rosario for appellee Hacienda Caretas, Inc.

ANTONIO, J.:

The issue posed in this appeal is whether or not plaintiff corporation (non- stock may
institute an action in behalf of its individual members for the recovery of certain
parcels of land allegedly owned by said members; for the nullification of the transfer
certificates of title issued in favor of defendants appellees covering the aforesaid
parcels of land; for a declaration of "plaintiff's members as absolute owners of the
property" and the issuance of the corresponding certificate of title; and for damages.

On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de

revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District,
Valenzuela, Bulacan, against defendants-appellees to recover the ownership and
possession of a large tract of land in San Jose del Monte, Bulacan, containing an area
of 27,982,250 square meters, more or less, registered under the Torrens System in
the name of defendants-appellees' predecessors-in-interest. 1 The complaint, as
amended on June 13, 1966, specifically alleged that plaintiff is a corporation
organized and existing under the laws of the Philippines, with its principal office and
place of business at San Jose del Monte, Bulacan; that its membership is composed of
natural persons residing at San Jose del Monte, Bulacan; that the members of the
plaintiff corporation, through themselves and their predecessors-in-interest, had
pioneered in the clearing of the fore-mentioned tract of land, cultivated the same
since the Spanish regime and continuously possessed the said property openly and
public under concept of ownership adverse against the whole world; that defendant-
appellee Gregorio Araneta, Inc., sometime in the year 1958, through force and
intimidation, ejected the members of the plaintiff corporation fro their possession of
the aforementioned vast tract of land; that upon investigation conducted by the
members and officers of plaintiff corporation, they found out for the first time in the
year 1961 that the land in question "had been either fraudelently or erroneously
included, by direct or constructive fraud, in Original Certificate of Title No. 466 of the
Land of Records of the province of Bulacan", issued on May 11, 1916, which title is
fictitious, non-existent and devoid of legal efficacy due to the fact that "no original
survey nor plan whatsoever" appears to have been submitted as a basis thereof and
that the Court of First Instance of Bulacan which issued the decree of registration did
not acquire jurisdiction over the land registration case because no notice of such
proceeding was given to the members of the plaintiff corporation who were then in
actual possession of said properties; that as a consequence of the nullity of the
original title, all subsequent titles derived therefrom, such as Transfer Certificate of
Title No. 4903 issued in favor of Gregorio Araneta and Carmen Zaragoza, which was
subsequently cancelled by Transfer Certificate of Title No. 7573 in the name of
Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued in the name of, the
National Waterworks & Sewerage Authority (NWSA), Transfer Certificate of Title No.
4986 issued in the name of Hacienda Caretas, Inc., and another transfer certificate of
title in the name of Paradise Farms, Inc., are therefore void. Plaintiff-appellant
consequently prayed (1) that Original Certificate of Title No. 466, as well as all
transfer certificates of title issued and derived therefrom, be nullified; (2) that
"plaintiff's members" be declared as absolute owners in common of said property and
that the corresponding certificate of title be issued to plaintiff; and (3) that
defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages
therein specified.

On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to

dismiss the amended complaint on the grounds that (1) the complaint states no
cause of action; and (2) the cause of action, if any, is barred by prescription and
laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to dismiss based
on the same grounds. Appellee National Waterworks & Sewerage Authority did not
file any motion to dismiss. However, it pleaded in its answer as special and
affirmative defenses lack of cause of action by the plaintiff-appellant and the barring
of such action by prescription and laches.

During the pendency of the motion to dismiss, plaintiff-appellant filed a motion,

dated October 7, 1966, praying that the case be transferred to another branch of the
Court of First Instance sitting at Malolos, Bulacan, According to defendants-appellees,
they were not furnished a copy of said motion, hence, on October 14, 1966, the lower
court issued an Order requiring plaintiff-appellant to furnish the appellees copy of
said motion, hence, on October 14, 1966, defendant-appellant's motion dated
October 7, 1966 and, consequently, prayed that the said motion be denied for lack of
notice and for failure of the plaintiff-appellant to comply with the Order of October 14,
1966. Similarly, defendant-appellee paradise Farms, Inc. filed, on December 2, 1966,
a manifestation information the court that it also did not receive a copy of the afore-
mentioned of appellant. On January 24, 1967, the trial court issued an Order
dismissing the amended complaint.

On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal
on the grounds that the court had no jurisdiction to issue the Order of dismissal,
because its request for the transfer of the case from the Valenzuela Branch of the
Court of First Instance to the Malolos Branch of the said court has been approved by
the Department of Justice; that the complaint states a sufficient cause of action
because the subject matter of the controversy in one of common interest to the
members of the corporation who are so numerous that the present complaint should
be treated as a class suit; and that the action is not barred by the statute of
limitations because (a) an action for the reconveyance of property registered through
fraud does not prescribe, and (b) an action to impugn a void judgment may be
brought any time. This motion was denied by the trial court in its Order dated
February 22, 1967. From the afore-mentioned Order of dismissal and the Order
denying its motion for reconsideration, plaintiff-appellant appealed to the Court of
Appeals.

On September 3, 1969, the Court of Appeals, upon finding that no question of fact
was involved in the appeal but only questions of law and jurisdiction, certified this
case to this Court for resolution of the legal issues involved in the controversy.

Appellant contends, as a first assignment of error, that the trial court acted without
authority and jurisdiction in dismissing the amended complaint when the Secretary of
Justice had already approved the transfer of the case to any one of the two branches
of the Court of First Instance of Malolos, Bulacan.

Appellant confuses the jurisdiction of a court and the venue of cases with the
assignment of cases in the different branches of the same Court of First Instance.
Jurisdiction implies the power of the court to decide a case, while venue the place of
action. There is no question that respondent court has jurisdiction over the case. The
venue of actions in the Court of First Instance is prescribed in Section 2, Rule 4 of the
Revised Rules of Court. The laying of venue is not left to the caprice of plaintiff, but
must be in accordance with the aforesaid provision of the rules. 2The mere fact that a
request for the transfer of a case to another branch of the same court has been
approved by the Secretary of Justice does not divest the court originally taking
cognizance thereof of its jurisdiction, much less does it change the venue of the
action. As correctly observed by the trial court, the indorsement of the
Undersecretary of Justice did not order the transfer of the case to the Malolos Branch
of the Bulacan Court of First Instance, but only "authorized" it for the reason given by
plaintiff's counsel that the transfer would be convenient for the parties. The trial court
is not without power to either grant or deny the motion, especially in the light of a
strong opposition thereto filed by the defendant. We hold that the court a quo acted
within its authority in denying the motion for the transfer the case to Malolos
notwithstanding the authorization" of the same by the Secretary of Justice.

II

Let us now consider the substantive aspect of the Order of dismissal.

In dismissing the amended complaint, the court a quo said:

The issue of lack of cause of action raised in the motions to dismiss

refer to the lack of personality of plaintiff to file the instant action.
Essentially, the term 'cause of action' is composed of two elements: (1)
the right of the plaintiff and (2) the violation of such right by the
defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules require
that every action must be prosecuted and defended in the name of the
real party in interest and that all persons having an interest in the
subject of the action and in obtaining the relief demanded shall be
joined as plaintiffs (Sec. 2, Rule 3). In the amended complaint, the
people whose rights were alleged to have been violated by being
deprived and dispossessed of their land are the members of the
corporation and not the corporation itself. The corporation has a
separate. and distinct personality from its members, and this is not a
mere technicality but a matter of substantive law. There is no
allegation that the members have assigned their rights to the
corporation or any showing that the corporation has in any way or
manner succeeded to such rights. The corporation evidently did not
have any rights violated by the defendants for which it could seek
redress. Even if the Court should find against the defendants,
therefore, the plaintiff corporation would not be entitled to the reliefs
prayed for, which are recoveries of ownership and possession of the
land, issuance of the corresponding title in its name, and payment of
damages. Neither can such reliefs be awarded to the members
allegedly deprived of their land, since they are not parties to the suit. It
appearing clearly that the action has not been filed in the names of the
real parties in interest, the complaint must be dismissed on the ground
of lack of cause of action. 3

Viewed in the light of existing law and jurisprudence, We find that the trial court
correctly dismissed the amended complaint.

It is a doctrine well-established and obtains both at law and in equity that a

corporation is a distinct legal entity to be considered as separate and apart from the
individual stockholders or members who compose it, and is not affected by the
personal rights, obligations and transactions of its stockholders or members. 4 The
property of the corporation is its property and not that of the stockholders, as
owners, although they have equities in it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its
members. 5Conversely, a corporation ordinarily has no interest in the individual
property of its stockholders unless transferred to the corporation, "even in the case of
a one-man corporation. 6 The mere fact that one is president of a corporation does
not render the property which he owns or possesses the property of the corporation,
since the president, as individual, and the corporation are separate
similarities. 7 Similarly, stockholders in a corporation engaged in buying and dealing
in real estate whose certificates of stock entitled the holder thereof to an allotment in
the distribution of the land of the corporation upon surrender of their stock
certificates were considered not to have such legal or equitable title or interest in the
land, as would support a suit for title, especially against parties other than the
corporation. 8

It must be noted, however, that the juridical personality of the corporation, as

separate and distinct from the persons composing it, is but a legal fiction introduced
for the purpose of convenience and to subserve the ends of justice. 9 This separate
personality of the corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work
-an injustice, or where necessary to achieve equity. 10

Thus, when "the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, ... the law will regard the corporation as an
association of persons, or in the case of two corporations, merge them into one, the
one being merely regarded as part or instrumentality of the other. 11 The same is true
where a corporation is a dummy and serves no business purpose and is intended only
as a blind, or an alter ego or business conduit for the sole benefit of the
stockholders. 12 This doctrine of disregarding the distinct personality of the
corporation has been applied by the courts in those cases when the corporate entity
is used for the evasion of taxes 13 or when the veil of corporate fiction is used to
confuse legitimate issue of employer-employee relationship, 14 or when necessary for
the protection of creditors, in which case the veil of corporate fiction may be pierced
and the funds of the corporation may be garnished to satisfy the debts of a principal
stockholder. 15 The aforecited principle is resorted to by the courts as a measure
protection for third parties to prevent fraud, illegality or injustice. 16

It has not been claimed that the members have assigned or transferred whatever
rights they may have on the land in question to the plaintiff corporation. Absent any
showing of interest, therefore, a corporation, like plaintiff-appellant herein, has no
personality to bring an action for and in behalf of its stockholders or members for the
purpose of recovering property which belongs to said stockholders or members in
their personal capacities.

It is fundamental that there cannot be a cause of action 'without an antecedent

primary legal right conferred' by law upon a person. 17 Evidently, there can be no
wrong without a corresponding right, and no breach of duty by one person without a
corresponding right belonging to some other person. 18 Thus, the essential elements
of a cause of action are legal right of the plaintiff, correlative obligation of the
defendant, an act or omission of the defendant in violation of the aforesaid legal
right. 19 Clearly, no right of action exists in favor of plaintiff corporation, for as shown
heretofore it does not have any interest in the subject matter of the case which is
material and, direct so as to entitle it to file the suit as a real party in interest.

III

Appellant maintains, however, that the amended complaint may be treated as a class
suit, pursuant to Section 12 of Rule 3 of the Revised Rules of Court.

In order that a class suit may prosper, the following requisites must be present: (1)
that the subject matter of the controversy is one of common or general interest to
many persons; and (2) that the parties are so numerous that it is impracticable to
bring them all before the court. 20

Under the first requisite, the person who sues must have an interest in the
controversy, common with those for whom he sues, and there must be that unity of
interest between him and all such other persons which would entitle them to
maintain the action if suit was brought by them jointly. 21

As to what constitutes common interest in the subject matter of the controversy, it

has been explained in Scott v. Donald 22 thus:

The interest that will allow parties to join in a bill of complaint, or that
will enable the court to dispense with the presence of all the parties,
when numerous, except a determinate number, is not only an interest
in the question, but one in common in the subject Matter of the suit; ...
a community of interest growing out of the nature and condition of the
right in dispute; for, although there may not be any privity between the
numerous parties, there is a common title out of which the question
arises, and which lies at the foundation of the proceedings ... [here] the
only matter in common among the plaintiffs, or between them and the
defendants, is an interest in the Question involved which alone cannot
lay a foundation for the joinder of parties. There is scarcely a suit at
law, or in equity which settles a Principle or applies a principle to a
given state of facts, or in which a general statute is interpreted, that
does not involved a Question in which other parties are interested. ...
(Emphasis supplied )

Here, there is only one party plaintiff, and the plaintiff corporation does not even
have an interest in the subject matter of the controversy, and cannot, therefore,
represent its members or stockholders who claim to own in their individual capacities
ownership of the said property. Moreover, as correctly stated by the appellees, a class
suit does not lie in actions for the recovery of property where several persons claim
Partnership of their respective portions of the property, as each one could alleged
and prove his respective right in a different way for each portion of the land, so that
they cannot all be held to have Identical title through acquisition prescription. 23

Having shown that no cause of action in favor of the plaintiff exists and that the
action in the lower court cannot be considered as a class suit, it would be
unnecessary and an Idle exercise for this Court to resolve the remaining issue of
whether or not the plaintiffs action for reconveyance of real property based upon
constructive or implied trust had already prescribed.

ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the
plaintiff-appellant.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 131723 December 13, 2007

MANILA ELECTRIC COMPANY, petitioner,

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

DECISION

NACHURA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking
the reversal of the Decision1of the Court of Appeals (CA) dated June 18, 1997 and its
Resolution2 dated December 3, 1997 in CA-G.R. CV No. 40282 denying the appeal
filed by petitioner Manila Electric Company.

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

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

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

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

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

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

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

inspection of the electric meters installed at the DCIM building, witnessed by
Ultra's6 representative, Mr. Willie Abangan. The two meters covered by account
numbers 09341-1322-16 and 09341-1812-13, were found to be allegedly tampered
with and did not register the actual power consumption in the building. The results of
the inspection were reflected in the Service Inspection Reports 7 prepared by the
team.

In a letter dated November 25, 1987, petitioner informed TEC of the results of the
inspection and demanded from the latter the payment of P7,040,401.01 representing
its unregistered consumption from February 10, 1986 until September 28, 1987, as a
result of the alleged tampering of the meters.8 TEC received the letters on January 7,
1988. Since Ultra was in possession of the subject building during the covered period,
TEC's Managing Director, Mr. Bobby Tan, referred the demand letter to Ultra 9 which, in
turn, informed TEC that its Executive Vice-President had met with petitioner's
representative. Ultra further intimated that assuming that there was tampering of the
meters, petitioner's assessment was excessive.10 For failure of TEC to pay the
differential billing, petitioner disconnected the electricity supply to the DCIM building
on April 29, 1988.

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

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

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

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

1. Whether or not the defendant Meralco is liable for the plaintiffs'

disconnection of electric service at DCIM Building.

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

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

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

WHEREFORE, judgment is hereby rendered in this case in favor of the plaintiffs

and against the defendants as follows:

(1) Ordering both defendants Meralco and ULTRA Electronics

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

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

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

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

of P150,000.00 as actual damages with interest at legal rate from
January 19, 1989;

(4) Condemning defendant Meralco to pay both plaintiffs moral

damages in the amount pf P500,000.00;

(5) Condemning defendant Meralco to pay both plaintiffs corrective

and/or exemplary damages in the amount of P200,000.00;

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

of P200,000.00

Costs against defendant Meralco.

SO ORDERED.20

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

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

WHEREFORE, this Court renders judgment affirming in toto the Decision

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

SO ORDERED.24

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

Petitioner now comes before this Court in this petition for review on certiorari
contending that:
 The Court of Appeals committed grievous errors and decided matters of
substance contrary to law and the rulings of this Honorable Court:

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

2. In not finding that the issue is: whether or not, based on the tampered
meters, whether or not petitioner is entitled to differential billing, and if so,
how much.

3. In declaring that petitioner ME RALCO had the burden of proof to show by

clear and convincing evidence that with respect to the tampered meters that
TEC and/or TPC authored their tampering.

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

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

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

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

alleged tampering.

8. In making the finding that it is difficult to believe that when petitioner

MERALCO inspected on June 7, 1988 the meter installations, they were found
to be tampered.

9. In declaring that petitioner MERALCO estopped from claiming any

tampering of the meters.

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

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

12. In declaring that MERALCO acted arbitrarily in inspecting TEC's DCIM

building and the NS building.

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

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

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

The petition must fail.

The issues for resolution can be summarized as follows: 1) whether or not TEC
tampered with the electric meters installed at its DCIM and NS buildings; 2) If so,
whether or not it is liable for the differential billing as computed by petitioner; and 3)
whether or not petitioner was justified in disconnecting the electric power supply in
TEC's DCIM building.
Petitioner insists that the tampering of the electric meters installed at the DCIM and
NS buildings owned by respondent TEC has been established by overwhelming
evidence, as specifically shown by the shorting devices found during the inspection.
Thus, says petitioner, tampering of the meter is no longer an issue.

It is obvious that petitioner wants this Court to revisit the factual findings of the lower
courts. Well-established is the doctrine that under Rule 45 of the Rules of Court, only
questions of law, not of fact, may be raised before the Court. We would like to stress
that this Court is not a trier of facts and may not re-examine and weigh anew the
respective evidence of the parties. Factual findings of the trial court, especially those
affirmed by the Court of Appeals, are binding on this Court.26

Looking at the record, we note that petitioner claims to have discovered three
incidences of meter-tampering; twice in the DCIM building on September 28, 1987
and June 7, 1988; and once in the NS building on April 24, 1988.

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

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

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

No. 2), as evidenced by Exhibits "35" and "35-A," there was likewise a sudden
drop of electrical consumption from the year 1984 which recorded an average
141,300 kwh/month to 1985 which recorded an average kwh/month at 87,600
or a difference-drop of 53,700 kwh/month; from 1985's 87,600 recorded
consumption, the same dropped to 18,600 kwh/month or a difference-drop
of 69,000 kwh/month. Surely, a drop of 53,700 could be equally categorized
as a sudden drop amounting to 69,000 which, incidentally, the Meralco
claimed as "unexplainable. x x x.29

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

In this case, the period claimed to have been affected by the tampered electric
meters is from February 1986 until September 1987. Based on petitioner's Billing
Record31 (for the DCIM building), TEC's monthly electric consumption on Account No.
9341-1322-16 was between 4,500 and 27,000 kwh.32 Account No. 9341-1812-13
showed a monthly consumption between 9,600 and 34,200 kwh. 33 It is interesting to
note that, after correction of the allegedly tampered meters, TEC's monthly electric
consumption from October 1987 to February 1988 (the last month that Ultra occupied
the DCIM building) was between 8,700 and 24,300 kwh in its first account, and
16,200 to 46,800 kwh on the second account.

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

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

As to the alleged tampering of the electric meter in TEC's NS building, suffice it to

state that the allegation was not proven, considering that the meters therein were
enclosed in a metal cabinet the metal seal of which was unbroken, with petitioner
having sole access to the said meters.38

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

The law in force at the time material to this controversy was Presidential Decree
(P.D.) No. 40139 issued on March 1, 1974.40 The decree penalized unauthorized
installation of water, electrical or telephone connections and such acts as the use of
tampered electrical meters. It was issued in answer to the urgent need to put an end
to illegal activities that prejudice the economic well-being of both the companies
concerned and the consuming public.41P.D. 401 granted the electric companies the
right to conduct inspections of electric meters and the criminal prosecution 42 of erring
consumers who were found to have tampered with their electric meters. It did not
expressly provide for more expedient remedies such as the charging of differential
billing and immediate disconnection against erring consumers. Thus, electric
companies found a creative way of availing themselves of such remedies by inserting
into their service contracts (or agreements for the sale of electric energy) a provision
for differential billing with the option of disconnection upon non-payment by the
erring consumer. The Court has recognized the validity of such
stipulations.43 However, recourse to differential billing with disconnection was subject
to the prior requirement of a 48-hour written notice of disconnection. 44

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

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

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

However, despite the appellate court's conclusion that no tampering was committed,
it held Ultra solidarily liable with petitioner for P1,000,000.00, only because the
former, as occupant of the building, promised to settle the claims of the latter. This
ruling is erroneous. Ultra's promise was conditioned upon the finding of defect or
tampering of the meters. It did not acknowledge any culpability and liability, and
absent any tampered meter, it is absurd to make the lawful occupant liable. It was
petitioner who received the P1 million; thus, it alone should be held liable for the
return of the amount.

TEC also sufficiently established its claim for the reimbursement of the amount paid
as rentals for the generator set it was constrained to rent by reason of the illegal
disconnection of electrical service. The official receipts and purchase orders
submitted by TEC as evidence sufficiently show that such rentals were indeed made.
However, the amount of P150,000.00 per month for five months, awarded by the CA,
is excessive. Instead, a total sum of P150,000.00, as found by the RTC, is proper.

As to the payment of exemplary damages and attorney's fees, we find no cogent

reason to disturb the same. Exemplary damages are imposed by way of example or
correction for the public good in addition to moral, temperate, liquidated, or
compensatory damages.47 In this case, to serve as an example – that before a
disconnection of electrical supply can be effected by a public utility, the requisites of
law must be complied with – we affirm the award of P200,000.00 as exemplary
 damages. With the award of exemplary damages, the award of attorney's fees is
likewise proper, pursuant to Article 220848 of the Civil Code. It is obvious that TEC
needed the services of a lawyer to argue its cause through three levels of the judicial
hierarchy. Thus, the award of P200,000.00 is in order.49

We, however, deem it proper to delete the award of moral damages. TEC's claim was
premised allegedly on the damage to its goodwill and reputation. 50 As a rule, a
corporation is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. The only exception to this rule is when the
corporation has a reputation that is debased, resulting in its humiliation in the
business realm.51 But in such a case, it is imperative for the claimant to present proof
to justify the award. It is essential to prove the existence of the factual basis of the
damage and its causal relation to petitioner's acts.52 In the present case, the records
are bereft of any evidence that the name or reputation of TEC/TPC has been debased
as a result of petitioner's acts. Besides, the trial court simply awarded moral
damages in the dispositive portion of its decision without stating the basis thereof.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-
G.R. CV No. 40282 dated June 18, 1997 and its Resolution dated December 3, 1997
are AFFIRMED with the following MODIFICATIONS: (1) the award of P150,000.00
per month for five months as reimbursement for the rentals of the generator set
is REDUCED to P150,000.00; and (2) the award of P500,000.00 as moral damages is
hereby DELETED.

SO ORDERED.

EN BANC

WILSON P. GAMBOA, G.R. No. 176579

Petitioner,

Present:

- versus -

CORONA, C.J.,

FINANCE SECRETARY MARGARITO B. CARPIO,

TEVES, FINANCE UNDERSECRETARY
JOHN P. SEVILLA, AND COMMISSIONER VELASCO, JR.,
RICARDO ABCEDE OF THE
PRESIDENTIAL COMMISSION ON LEONARDO-DE CASTRO,
GOOD GOVERNMENT (PCGG) IN THEIR
BRION,
CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PERALTA,
PRIVATIZATION COUNCIL,
BERSAMIN,
CHAIRMAN ANTHONI SALIM OF FIRST
PACIFIC CO., LTD. IN HIS CAPACITY AS DEL CASTILLO,
DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL ABAD,
V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY VILLARAMA, JR.,
(PLDT) IN HIS CAPACITY AS
MANAGING DIRECTOR OF FIRST PEREZ,
PACIFIC CO., LTD., PRESIDENT
MENDOZA, and
NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE SERENO, JJ.
TELEPHONE COMPANY, CHAIR FE
BARIN OF THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT
FRANCIS LIM OF THE PHILIPPINE
STOCK EXCHANGE,

Respondents.

PABLITO V. SANIDAD and Promulgated:

ARNO V. SANIDAD,

Petitioners-in-Intervention. June 28, 2011

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

DECISION
CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and

declaration of nullity of the sale of shares of stock of Philippine Telecommunications
Investment Corporation (PTIC) by the government of the Republic of the Philippines
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long

Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company
and a major PLDT stockholder, sold 26 percent of the outstanding common shares of
PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the
owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent
about 46.125 percent of the outstanding capital stock of PTIC, were later declared by
this Court to be owned by the Republic of the Philippines. 2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,

acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent
of the outstanding capital stock of PTIC, through a public bidding to be conducted on
4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,
and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510
million.
Thereafter, First Pacific announced that it would exercise its right of first refusal as a
PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by
IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2
March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with
the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125
percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3
percent of the outstanding common shares of PLDT. With the sale, First Pacifics
common shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the common shareholdings of foreigners in PLDT to
about 81.47 percent. This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility to not
more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves,

Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business
of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847
percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125
percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Courts decision 4 which became final
and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the
Inter-Agency Privatization Council (IPC), composed of the Department of Finance and
the PCGG, as the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-
bid conference was held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension was published in nine
different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as

the highest bidder with a bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the bidding results and gave First Pacific
until 1 February 2007 to exercise its right of first refusal in accordance with PTICs
Articles of Incorporation. First Pacific announced its intention to match Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good

Government conducted a public hearing on the particulars of the then impending sale
of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)
the auction of the governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First Pacifics
intended acquisition of the governments 111,415 PTIC shares resulting in
First Pacifics 100% ownership of PTIC will not violate the 40 percent
constitutional limit on foreign ownership of a public utility since PTIC holds
only 13.847 percent of the total outstanding common shares of PLDT. 5 On 28
February 2007, First Pacific completed the acquisition of the 111,415 shares of stock
of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a
public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding
capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by
First Pacific and its affiliates); (b) Parallax offered the highest bid amounting
to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific affiliate,
exercised its right of first refusal by matching the highest bid offered for PTIC shares
on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when
MPAH paid IPC P25,217,556,000 and the government delivered the certificates for the
111,415 PTIC shares. Respondent Pangilinan denies the other allegations of facts of
petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result
in an increase in First Pacifics common shareholdings in PLDT from 30.7 percent to 37
percent, and this, combined with Japanese NTT DoCoMos common shareholdings in
PLDT, would result to a total foreign common shareholdings in PLDT of 51.56 percent
which is over the 40 percent constitutional limit. 6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from
30.7 percent to 37.0 percent of its common or voting- stockholdings, x x x.
Hence, the consummation of the sale will put the two largest foreign investors
in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds largest
wireless telecommunications firm, owning 51.56 percent of PLDT common
equity. x x x With the completion of the sale, data culled from the official
website of the New York Stock Exchange (www.nyse.com) showed that those
foreign entities, which own at least five percent of common equity, will
collectively own 81.47 percent of PLDTs common equity. x x x
 x x x as the annual disclosure reports, also referred to as Form
20-K reports x x x which PLDT submitted to the New York Stock
Exchange for the period 2003-2005, revealed that First Pacific
and several other foreign entities breached the constitutional
limit of 40 percent ownership as early as 2003. x x x7

Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit
on foreign ownership of a public utility; (2) whether public respondents committed
grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First
Pacific; and (3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the constitutional
limit on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to
Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28 August
2007, the Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among

others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,
they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution.

The Issue

This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the evidence of
the parties, are generally beyond this Courts jurisdiction. Adhering to this well-settled
principle, the Court shall confine the resolution of the instant controversy solely on
the threshold and purely legal issue of whether the term capital in Section 11,
Article XII of the Constitution refers to the total common shares only or to the total
outstanding capital stock (combined total of common and non-voting preferred
shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction of
this court, which however is not exclusive but is concurrent with the Regional Trial
Court and the Court of Appeals. The actions for declaratory relief, 10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition, 11 the
Court shall nevertheless refrain from discussing the grounds in support of the petition
for prohibition since on 28 February 2007, the questioned sale was consummated
when MPAH paid IPC P25,217,556,000 and the government delivered the certificates
for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for declaratory relief as one for
mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime of
rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting
foreign currency deposits from attachment, garnishment or any other order or
process of any court, inapplicable due to the peculiar circumstances of the case. The
Court held that injustice would result especially to a citizen aggrieved by a foreign
guest like accused x x x that would negate Article 10 of the Civil Code which provides
that in case of doubt in the interpretation or application of laws, it is presumed that
the lawmaking body intended right and justice to prevail. The Court therefore
required respondents Central Bank of the Philippines, the local bank, and the accused
to comply with the writ of execution issued in the civil case for damages and to
release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed

aside the procedural infirmity of the petition for declaratory relief and treated the
same as one for mandamus. In Alliance, the issue was whether the government
unlawfully excluded petitioners, who were government employees, from the
enjoyment of rights to which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included among
the four employers under Presidential Decree No. 851 which are required to pay their
employees x x x a thirteenth (13th) month pay x x x ? The Constitutional principle
involved therein affected all government employees, clearly justifying a relaxation of
the technical rules of procedure, and certainly requiring the interpretation of the
assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching implications
and raises questions that should be resolved, it may be treated as
one for mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term capital in
Section 11, Article XII of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such shares constitute the sole
basis in determining foreign equity in a public utility. Petitioner further asks this Court
to declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the Constitution has
far-reaching implications to the national economy. In fact, a resolution of this issue
will determine whether Filipinos are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective
control of the national economy. Indeed, if ever there is a legal issue that has far-
reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term capital in Section
11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as
G.R. No. 157360.16 That case involved the same public utility (PLDT) and substantially
the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and
instead denied the same for disregarding the hierarchy of courts.17 There, petitioner
Fernandez assailed on a pure question of law the Regional Trial Courts Decision of 21
February 2003 via a petition for review under Rule 45. The Courts Resolution, denying
the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to ensure,
in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources,19 in Section 7, Article XII on
ownership of private lands,20 in Section 10, Article XII on the reservation of certain
investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article XVI on the ownership of
advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue
in this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters
of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a public
right and the object of mandamus is to obtain the enforcement of a public
duty, the people are regarded as the real parties in interest; and because it
is sufficient that petitioner is a citizen and as such is interested in the
execution of the laws, he need not show that he has any legal or special
interest in the result of the action. In the aforesaid case, the petitioners sought
to enforce their right to be informed on matters of public concern, a right then
recognized in Section 6, Article IV of the 1973 Constitution, in connection with the
rule that laws in order to be valid and enforceable must be published in the Official
Gazette or otherwise effectively promulgated. In ruling for the petitioners legal
standing, the Court declared that the right they sought to be enforced is a public
right recognized by no less than the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared
that when a mandamus proceeding involves the assertion of a public right,
the requirement of personal interest is satisfied by the mere fact that
petitioner is a citizen and, therefore, part of the general public which
possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may not
have been involved under the questioned contract for the development,
management and operation of the Manila International Container Terminal, public
interest [was] definitely involved considering the important role [of the
subject contract] . . . in the economic development of the country and the
magnitude of the financial consideration involved. We concluded that, as a
consequence, the disclosure provision in the Constitution would constitute sufficient
authority for upholding the petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of

transcendental public importance, the petitioner has the requisite locus standi.

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of

authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall
such franchise, certificate, or authorization be exclusive in character or for a
 longer period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:

Section 5. No franchise, certificate, or any other form of

authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least
sixty per centum of the capital of which is owned by such citizens, nor
shall such franchise, certificate, or authorization be exclusive in character or
for a longer period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the National Assembly when the public interest so
requires. The State shall encourage equity participation in public utilities by
the general public. The participation of foreign investors in the governing body
of any public utility enterprise shall be limited to their proportionate share in
the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of
the 1935 Constitution, viz:

Section 8. No franchise, certificate, or any other form of

authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or other
entities organized under the laws of the Philippines sixty per centum
of the capital of which is owned by citizens of the Philippines, nor
shall such franchise, certificate, or authorization be exclusive in character or
for a longer period than fifty years. No franchise or right shall be granted to
any individual, firm, or corporation, except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the public
interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Commission, reminds us that the Filipinization provision in the 1987 Constitution is
one of the products of the spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution provides for the Filipinization of public utilities by
requiring that any form of authorization for the operation of public utilities should be
granted only to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least sixty per centum of whose capital is owned
by such citizens. The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for
national security.26 The evident purpose of the citizenship requirement is to prevent
aliens from assuming control of public utilities, which may be inimical to the national
interest.27 This specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and independent
national economy effectively controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public utility must therefore meet
the minimum nationality requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority to operate a public
utility, at least 60 percent of its capital must be owned by Filipino citizens.

The crux of the controversy is the definition of the term capital. Does the term
capital in Section 11, Article XII of the Constitution refer to common shares or to the
total outstanding capital stock (combined total of common and non-voting preferred
shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and it
is through voting that control over a corporation is exercised. Petitioner posits that
the term capital in Section 11, Article XII of the Constitution refers to the ownership of
common capital stock subscribed and outstanding, which class of shares alone, under
the corporate set-up of PLDT, can vote and elect members of the board of directors. It
is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino
citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by
then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line
to subscribe to non-voting preferred shares to pay for the investment cost of
installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt

petitioners definition of the term capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common stock, which means
that foreigners exercise significant control over PLDT, patently violating the 40
percent foreign equity limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40
percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps

mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders.
Respondent Nazareno does not deny petitioners allegation of foreigners dominating
the common shareholdings of PLDT. Nazarenostressed mainly that the petition seeks
to divest foreign common shareholders purportedly exceeding 40% of the
total common shareholdings in PLDT of their ownership over their shares.
Thus, the foreign natural and juridical PLDT shareholders must be impleaded in this
suit so that they can be heard.34 Essentially, Nazareno invokes denial of due process
on behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term capital, he states
that among the factual assertions that need to be established to counter
petitioners allegations is the uniform interpretation by government
agencies (such as the SEC), institutions and corporations (such as the
Philippine National Oil Company-Energy Development Corporation or PNOC-
EDC) of including both preferred shares and common shares in controlling
interest in view of testing compliance with the 40% constitutional limitation
on foreign ownership in public utilities.35

Similarly, respondent Manuel V. Pangilinan does not define the term capital in Section
11, Article XII of the Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes
in his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2)
petitioners lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether owners of shares in
PLDT as well as owners of shares in companies holding shares in PLDT may be
required to relinquish their shares in PLDT and in those companies without any law
requiring them to surrender their shares and also without notice and trial.

Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of
the utility company as a condition for keeping their shares in the utility
company. According to him, Section 11 does not authorize taking one persons
property (the shareholders stock in the utility company) on the basis of another
partys alleged failure to satisfy a requirement that is a condition only for that other
partys retention of another piece of property (the utility company being at least 60%
Filipino-owned to keep its franchise).36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary

John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise
silent on the definition of the term capital. In its Memorandum 37 dated 24 September
2007, the OSG also limits its discussion on the supposed procedural defects of the
petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties,
and lack of basis for injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII of the Constitution. The
OSG contends that the petition actually partakes of a collateral attack on PLDTs
franchise as a public utility, which in effect requires a full-blown trial where all the
parties in interest are given their day in court.38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of

the Philippine Stock Exchange (PSE), does not also define the term capital and seeks
the dismissal of the petition on the following grounds: (1) failure to state a cause of
action against Lim; (2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs
prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be

a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed
by the Constitution refers to ownership of shares of stock entitled to vote, i.e.,
common shares, considering that it is through voting that control is being
exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations

and restrictions on fully nationalized and partially nationalized activities is for
Filipino nationals to be always in control of the corporation undertaking said
activities. Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the ownership
structure of a public utility corporation to be divided into one percent (1%)
common stocks and ninety-nine percent (99%) preferred stocks. Following the
Trial Courts ruling adopting respondents arguments, the common shares can
be owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public
utility corporation.

xxxx
 Thus, the 40% foreign ownership limitation should be interpreted to apply to
both the beneficial ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public
utilities prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares. Furthermore, ownership of record of
shares will not suffice but it must be shown that the legal and beneficial
ownership rests in the hands of Filipino citizens. Consequently, in the case of
petitioner PLDT, since it is already admitted that the voting interests of
foreigners which would gain entry to petitioner PLDT by the acquisition of
SMART shares through the Questioned Transactions is equivalent to 82.99%,
and the nominee arrangements between the foreign principals and the Filipino
owners is likewise admitted, there is, therefore, a violation of Section 11,
Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited
by the Trial Court to support the proposition that the meaning of the word
capital as used in Section 11, Article XII of the Constitution allegedly refers to
the sum total of the shares subscribed and paid-in by the shareholder and it
allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the
FIA which took effect in 1991 or way after said opinions were rendered, and as
clarified by the above-quoted Amendments. In this regard, suffice it to state
that as between the law and an opinion rendered by an administrative
agency, the law indubitably prevails. Moreover, said Opinions are merely
advisory and cannot prevail over the clear intent of the framers of the
Constitution.

In the same vein, the SECs construction of Section 11, Article XII of the
Constitution is at best merely advisory for it is the courts that finally
determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan,

Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo,
Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario,
and Orlando B. Vea, argued that the term capital in Section 11, Article XII of the
Constitution includes preferred shares since the Constitution does not distinguish
among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporations
 capital, without distinction as to classes of shares. x x x

In this connection, the Corporation Code which was already in force at the
time the present (1987) Constitution was drafted defined outstanding capital
stock as follows:

Section 137. Outstanding capital stock defined. The term outstanding capital
stock, as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or
not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between
common and preferred shares, nor exclude either class of shares, in
determining the outstanding capital stock (the capital) of a corporation.
Consequently, petitioners suggestion to reckon PLDTs foreign equity only on
the basis of PLDTs outstanding common shares is without legal basis. The
language of the Constitution should be understood in the sense it has in
common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the Constitutional
Commission (Vol. III) which petitioner misleadingly cited in the Petition
x x x which supports petitioners view that only common shares should form
the basis for computing a public utilitys foreign equity.

xxxx

18. In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the responsibility of
ensuring compliance with the Constitutions foreign equity restrictions as
regards nationalized activities x x x has categorically ruled that both common
and preferred shares are properly considered in determining outstanding
capital stock and the nationality composition thereof. 40

We agree with petitioner and petitioners-in-intervention. The term capital in Section

11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, 41 and not
to the total outstanding capital stock comprising both common and non-voting
preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations

may be divided into classes or series of shares, or both, any of which classes
or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as
preferred or redeemable shares, unless otherwise provided in this
Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares
may have a par value or have no par value as may be provided for in the
articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall
not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference

in the distribution of the assets of the corporation in case of liquidation and in
the distribution of dividends, or such other preferences as may be stated in
the articles of incorporation which are not violative of the provisions of this
Code: Provided, That preferred shares of stock may be issued only with a
stated par value. The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock or
any series thereof: Provided, That such terms and conditions shall be effective
upon the filing of a certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to every other
share.

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;
 4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation

or other corporations;

7. Investment of corporate funds in another corporation or business in

accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote

necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control
or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from
any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in
the corporation for income in the same manner as bondholders.45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the right to vote
in the election of directors. In short, the term capital in Section 11, Article XII
of the Constitution refers only to shares of stock that can vote in the
election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, capital refers to
the voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and
2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: Where
do we base the equity requirement, is it on the authorized capital stock, on
the subscribed capital stock, or on the paid-up capital stock of a corporation?
Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the
team from the UP Law Center who provided us a draft. The phrase that is
contained here which we adopted from the UP draft is 60 percent of
voting stock.

MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say,

a corporation with 60-40 percent equity invests in another corporation which
is permitted by the Corporation Code, does the Committee adopt the
grandfather rule?

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

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

MR. VILLEGAS. Yes.48

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by
the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase voting stock or controlling interest.

MR. AZCUNA. Hence, without the Davide amendment, the committee report
would read: corporations or associations at least sixty percent of whose
CAPITAL is owned by such citizens.

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60

percent of the capital to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they
are the minority. Let us say 40 percent of the capital is owned by
them, but it is the voting capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation where the corporation
is controlled by foreigners despite being the minority because they
have the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word stock as

stated in the 1973 and 1935 Constitutions is that according to
Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say CAPITAL.

MR. AZCUNA. We should not eliminate the phrase controlling

interest.

MR. BENGZON. In the case of stock corporations, it is

assumed.49 (Emphasis supplied)
Thus, 60 percent of the capital assumes, or should result in, controlling interest in
the corporation. Reinforcing this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the definition of a Philippine national
in the Foreign Investments Act of 1991,50 to wit:

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

a. The term Philippine national shall mean a citizen of the Philippines; or a

domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national
and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both corporations must be
citizens of the Philippines, in order that the corporation, shall be considered a
Philippine national. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing Rules and

Regulations of the Foreign Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic

partnership or association wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at
least sixty percent [60%] of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent
[60%] of the fund will accrue to the benefit of the Philippine
nationals; Provided, that where a corporation its non-Filipino stockholders own
stocks in a Securities and Exchange Commission [SEC] registered enterprise,
at least sixty percent [60%] of the capital stock outstanding and entitled to
vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent [60%] of the members of the Board of
Directors of each of both corporation must be citizens of the Philippines, in
order that the corporation shall be considered a Philippine national. The
control test shall be applied for this purpose.
 Compliance with the required Filipino ownership of a corporation
shall be determined on the basis of outstanding capital stock
whether fully paid or not, but only such stocks which are generally
entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or

Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the
voting rights of which have been assigned or transferred to aliens
cannot be considered held by Philippine citizens or Philippine
nationals.

Individuals or juridical entities not meeting the aforementioned

qualifications are considered as non-Philippine nationals. (Emphasis
supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress
may prescribe, certain areas of investments. Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to corporations at least
sixty percent of the capital of which is owned by Filipino citizens. Some of these laws
are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and
Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development
Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.
9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section 11, Article XII
of the Constitution is also used in the same context in numerous lawsreserving
certain areas of investments to Filipino citizens.

To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to
control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital.
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (P1.00) per share. Under the broad definition of the
term capital, such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total outstanding capital stock is
Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact
exists in the present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the holders
of Serial Preferred Stock shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other purpose or
otherwise participate in any action taken by the corporation or its stockholders, or to
receive notice of any meeting of stockholders.51

On the other hand, holders of common shares are granted the exclusive right to vote
in the election of directors. PLDTs Articles of Incorporation 52 state that each holder of
Common Capital Stock shall have one vote in respect of each share of such stock
held by him on all matters voted upon by the stockholders, and the holders of
Common Capital Stock shall have the exclusive right to vote for the election
of directors and for all other purposes.53

In short, only holders of common shares can vote in the election of directors,
meaning only common shareholders exercise control over PLDT. Conversely, holders
of preferred shares, who have no voting rights in the election of directors, do not
have any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of
common shares have voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a

majority of the common shares of PLDT. In fact, based on PLDTs 2010 General
Information Sheet (GIS),54 which is a document required to be submitted annually to
the Securities and Exchange Commission,55 foreigners hold 120,046,690 common
shares of PLDT whereas Filipinos hold only 66,750,622 common shares. 56 In other
words, foreigners hold 64.27% of the total number of PLDTs common shares, while
Filipinos hold only 35.73%. Since holding a majority of the common shares equates to
control, it is clear that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of public
utilities expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,
shows that per share the SIP58 preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared dividends for the common shares
at P70.00 per share, while the declared dividends for the preferred shares amounted
to a measly P1.00 per share.59So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend
earning capacity compared to common shares.

As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares
is P10.00 per share. In other words, preferred shares have twice the par value of
common shares but cannot elect directors and have only 1/70 of the dividends of
common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos
while foreigners own only a minuscule 0.56% of the preferred shares. 61 Worse,
preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%.62 This undeniably shows that beneficial
interest in PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino control
and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred
shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a public
utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn
less than 60 percent of the dividends, of PLDT. This directly contravenes the
express command in Section 11, Article XII of the Constitution that [n]o franchise,
certificate, or any other form of authorization for the operation of a public utility shall
be granted except to x x xcorporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such
citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise
control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn; 63 (5)
preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares
only 22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 while PLDT preferred shares with
a par value of P10.00 per share have a current stock market value ranging from
only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that control
and beneficial ownership of PLDT rest with the common shares, not with the preferred
shares.

Indisputably, construing the term capital in Section 11, Article XII of the Constitution
to include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the
States constitutional duty to limit control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional provision reserving certain
areas of investment to Filipino citizens, such as the exploitation of natural resources
as well as the ownership of land, educational institutions and advertising businesses.
The Court should never open to foreign control what the Constitution has expressly
reserved to Filipinos for that would be a betrayal of the Constitution and of the
national interest. The Court must perform its solemn duty to defend and uphold the
intent and letter of the Constitution to ensure, in the words of the Constitution, a self-
reliant and independent national economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution
expressly reserving to Filipinos specific areas of investment, such as the development
of natural resources and ownership of land, educational institutions and advertising
business, is self-executing. There is no need for legislation to implement these self-
executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary

to enforce a constitutional mandate, the presumption now is that all provisions
of the constitution are self-executing. If the constitutional provisions are
treated as requiring legislation instead of self-executing, the legislature would
have the power to ignore and practically nullify the mandate of the
fundamental law. This can be cataclysmic. That is why the prevailing view is,
as it has always been, that

. . . in case of doubt, the Constitution should be considered self-executing

rather than non-self-executing. . . . Unless the contrary is clearly
intended, the provisions of the Constitution should be considered
self-executing, as a contrary rule would give the legislature
discretion to determine when, or whether, they shall be effective.
These provisions would be subordinated to the will of the lawmaking body,
which could make them entirely meaningless by simply refusing to pass the
needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate

Justice Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing,

rather than as requiring future legislation for their enforcement. The reason is
not difficult to discern. For if they are not treated as self-executing, the
mandate of the fundamental law ratified by the sovereign people can
be easily ignored and nullified by Congress. Suffused with wisdom of
the ages is the unyielding rule that legislative actions may give
breath to constitutional rights but congressional inaction should not
suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on

arrests, searches and seizures, the rights of a person under custodial
investigation, the rights of an accused, and the privilege against self-
incrimination. It is recognized that legislation is unnecessary to enable courts
 to effectuate constitutional provisions guaranteeing the fundamental rights of
life, liberty and the protection of property. The same treatment is accorded to
constitutional provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing

legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale

by a citizen of his land to an alien, and as both the citizen and the alien have
violated the law, none of them should have a recourse against the other, and
it should only be the State that should be allowed to intervene and determine
what is to be done with the property subject of the violation. We have said
that what the State should do or could do in such matters is a matter of public
policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee
Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature
has not definitely decided what policy should be followed in cases of
violations against the constitutional prohibition, courts of justice
cannot go beyond by declaring the disposition to be null and void
as violative of the Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the capital of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like
the operation by corporations of public utilities, the exploitation by corporations of
mineral resources, the ownership by corporations of real estate, and the ownership of
educational institutions. All the legislatures that convened since 1935 also miserably
failed to enact legislations to implement these vital constitutional provisions that
determine who will effectively control the national economy, Filipinos or foreigners.
This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by mandamus
to perform its statutory duty when it unlawfully neglects to perform the same. Under
its adjudicative or quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it administers or
enforces when it is mandated by law to investigate such violation.
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to
reject or disapprove the Articles of Incorporation of any corporation where the
required percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by
existing laws or the Constitution. Thus, the SEC is the government agency tasked
with the statutory duty to enforce the nationality requirement prescribed in Section
11, Article XII of the Constitution on the ownership of public utilities. This Court, in a
petition for declaratory relief that is treated as a petition for mandamus as in the
present case, can direct the SEC to perform its statutory duty under the law, a duty
that the SEC has apparently unlawfully neglected to do based on the 2010 GIS that
respondent PLDT submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
power and function to suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law. The SEC is mandated
under Section 5(d) of the same Code with the power and function to investigate
x x x the activities of persons to ensure compliance with the laws and
regulations that SEC administers or enforces. The GIS that all corporations are
required to submit to SEC annually should put the SEC on guard against violations of
the nationality requirement prescribed in the Constitution and existing laws. This
Court can compel the SEC, in a petition for declaratory relief that is treated as a
petition for mandamus as in the present case, to hear and decide a possible violation
of Section 11, Article XII of the Constitution in view of the ownership structure of
PLDTs voting shares, as admitted by respondents and as stated in PLDTs 2010 GIS
that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in
Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term capital in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SPECIAL THIRD DIVISION

G.R. No. 195580 January 28, 2015

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT, INC., and McARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
 RESOLUTION

VELASCO, JR., J.:

Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision,
which denied the Petition for Review on Certiorari under Rule 45 jointly interposed by
petitioners Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and
Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), and affirmed the
October 1, 2010 Decision and February 15, 2011 Resolution of the Court of Appeals
(CA) in CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court's ruling that
petitioners, being foreign corporations, are not entitled to Mineral Production Sharing
Agreements (MPSAs). In reaching its conclusion, this Court upheld with approval the
appellate court's finding that there was doubt as to petitioners' nationality since a
100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns 60% of
the common stocks of the petitioners by owning equity interest of petitioners' other
majority corporate shareholders.

In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-

movants argued, in the main, that the Court's Decision was not in accord with law
and logic. In its September 2, 2014 Comment, on the other hand, respondent
Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’ motion for
reconsideration is nothing but a rehash of their arguments and should, thus, be
denied outright for being pro-forma. Petitioners have interposed on September 30,
2014 their Reply to the respondent’s Comment.

After considering the parties’ positions, as articulated in their respective submissions,

We resolve to deny the motion for reconsideration.

I.

The case has not been rendered moot and academic

Petitioners have first off criticized the Court for resolving in its Decision a substantive
issue, which,as argued, has supposedly been rendered moot by the fact that
petitioners’ applications for MPSAs had already been converted to an application for a
Financial Technical Assistance Agreement (FTAA), as petitioners have in fact been
granted an FTAA. Further, the nationality issue, so petitioners presently claim, had
been rendered moribund by the fact that MBMI had already divested itself and sold
all its shareholdings in the petitioners, as well as in their corporate stockholders, to a
Filipino corporation—DMCI Mining Corporation (DMCI).

As a counterpoint, respondent Redmontavers that the present case has not been
rendered moot by the supposed issuance of an FTAA in petitioners’ favor as this FTAA
was subsequently revoked by the Office of the President (OP) and is currently a
subject of a petition pending in the Court’s First Division. Redmont likewise contends
that the supposed sale of MBMI’s interest in the petitioners and in their "holding
companies" is a question of fact that is outside the Court’s province to verify in a Rule
45 certiorari proceedings. In any case, assuming that the controversy has been
rendered moot, Redmont claims that its resolution on the merits is still justified by
the fact that petitioners have violated a constitutional provision, the violation is
capable of repetition yet evading review, and the present case involves a matter of
public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA application
to one for FTAAs and the issuance by the OP of an FTAA in petitioners’ favor are
irrelevant. The OP itself has already cancelled and revoked the FTAA thusissued to
petitioners. Petitioners curiously have omitted this critical factin their motion for
reconsideration. Furthermore, the supposed sale by MBMI of its shares in the petition
ercorporations and in their holding companies is not only a question of fact that this
Court is without authority toverify, it also does not negate any violation of the
Constitutional provisions previously committed before any such sale.

We can assume for the nonce that the controversy had indeed been rendered moot
by these two events. Asthis Court has time and again declared, the "moot and
academic" principle is not a magical formula that automatically dissuades courts in
resolving a case.1 The Court may still take cognizance of an otherwise moot and
academic case, if it finds that (a) there is a grave violation of the Constitution;(b) the
situation is of exceptional character and paramount public interest is involved; (c) the
constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public; and (d) the case is capable of repetition yet evading
review.2The Court’s April 21, 2014 Decision explained in some detail that all four (4)
of the foregoing circumstances are present in the case. If only to stress a point, we
will do so again. First, allowing the issuance of MPSAs to applicants that are owned
and controlled by a 100% foreign-owned corporation, albeit through an intricate web
of corporate layering involving alleged Filipino corporations, is tantamount to
permitting a blatant violation of Section 2, Article XII of the Constitution. The Court
simply cannot allow this breach and inhibit itself from resolving the controversy on
the facile pretext that the case had already been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to make it

appear that there is compliance with the minimum Filipino ownership in the
Constitution is deftly exceptional in character. More importantly, the case is of
paramount public interest, as the corporate layering employed by petitioners was
evidently designed to circumvent the constitutional caveat allowing only Filipino
citizens and corporations 60%-owned by Filipino citizens to explore, develop, and use
the country’s natural resources.

Third, the facts of the case, involving as they do a web of corporate layering intended
to go around the Filipino ownership requirement in the Constitution and pertinent
laws, requirethe establishment of a definite principle that will ensure that the
Constitutional provision reserving to Filipino citizens or "corporations at least sixty
per centum of whose capital is owned by such citizens" be effectively enforced and
complied with. The case, therefore, is an opportunity to establish a controlling
principle that will "guide the bench, the bar, and the public."

Lastly, the petitioners’ actions during the lifetime and existence of the instant case
that gave rise to the present controversy are capable of repetition yet evading review
because, as shown by petitioners’ actions, foreign corporations can easily utilize
dummy Filipino corporations through various schemes and stratagems to skirt the
constitutional prohibition against foreign mining in Philippine soil.

II.

The application of the Grandfather Ruleis justified by the circumstances of the case to
determine the nationality of petitioners.

To petitioners, the Court’s application of the Grandfather Rule to determine their

nationality is erroneous and allegedly without basis in the Constitution, the Foreign
Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and the Rules
issued by the Securities and Exchange Commission (SEC). These laws and rules
supposedly espouse the application of the Control Test in verifying the Philippine
nationality of corporate entities for purposes of determining compliance withSec. 2,
Art. XII of the Constitution that only "corporations or associations at least sixty per
centum of whose capital is owned by such [Filipino] citizens" may enjoy certain rights
and privileges, like the exploration and development of natural resources.

The application of the Grandfather Rule in the present case does not eschew the
Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import of, the
Court’s April 21, 2014 Decision. Nowhere in that disposition did the Court foreclose
the application of the Control Test in determining which corporations may be
considered as Philippine nationals. Instead, to borrow Justice Leonen’s term, the
Court used the Grandfather Rule as a "supplement" to the Control Test so that the
intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The
following excerpts of the April 21, 2014 Decision cannot be clearer:

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. XII 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."
(emphasis supplied)

With that, the use of the Grandfather Rule as a "supplement" to the Control Test is
not proscribed by the Constitution or the Philippine Mining Act of 1995.

The Grandfather Rule implements the intent of the Filipinization provisions of the
Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development,
and utilization of natural resources to Filipino citizens and "corporations or
associations at least sixty per centum of whose capital is owned by such citizens."
Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers a "corporation
x x x registered in accordance with law at least sixty per cent of the capital of which
is owned by citizens of the Philippines" as a person qualified to undertake a mining
operation. Consistent with this objective, the Grandfather Rulewas originally
conceived to look into the citizenshipof the individuals who ultimately own and
control the shares of stock of a corporation for purposes of determining compliance
with the constitutional requirement of Filipino ownership. It cannot, therefore, be
denied that the framers of the Constitution have not foreclosed the Grandfather Rule
as a tool in verifying the nationality of corporations for purposes of ascertaining their
right to participate in nationalized or partly nationalized activities. The following
excerpts from the Record of the 1986 Constitutional Commission suggest as much:

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.

xxxx
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.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by
which the percentage of Filipino equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities, provided for under the Constitution and
other nationalization laws, is computed, in cases where corporate shareholders are
present, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder." 4 Thus, to arrive
at the actual Filipino ownership and control in a corporation, both the direct and
indirect shareholdings in the corporation are determined.

This concept of stock attribution inherent in the Grandfather Rule to determine the
ultimate ownership in a corporation is observed by the Bureau of Internal Revenue
(BIR) in applying Section 127 (B)5 of the National Internal Revenue Code on taxes
imposed on closely held corporations, in relation to Section 96 of the Corporation
Code6 on close corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim
Henares held:

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to
run continuously along the chain of ownership until it finally reaches the individual
stockholders. This is in consonance with the "grandfather rule" adopted in the
Philippines under Section 96 of the Corporation Code(Batas Pambansa Blg. 68) which
provides that notwithstanding the fact that all the issued stock of a corporation are
held by not more than twenty persons, among others, a corporation is nonetheless
not to be deemed a close corporation when at least two thirds of its voting stock or
voting rights is owned or controlled by another corporation which is not a close
corporation.7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC
applied the Grandfather Rule even if the corporation engaged in mining operation
passes the 60-40 requirement of the Control Test, viz:

You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML
owns 40% equity in MEDC, while the 60% is ostensibly owned by Philippine individual
citizens who are actually MML’s controlled nominees; (2) MEDC, in turn, owns 60%
equity in MOHC, while MML owns the remaining 40%; (3) Lastly, MOHC owns 60% of
PHILSAGA, while MML owns the remaining 40%. You provide the following figure to
illustrate this structure:

xxxx

We note that the Constitution and the statute use the concept "Philippine citizens."
Article III, Section 1 of the Constitution provides who are Philippine citizens: x x x This
enumeration is exhaustive. In other words, there can be no other Philippine citizens
other than those falling within the enumeration provided by the Constitution.
Obviously, only natural persons are susceptible of citizenship. Thus, for purposes of
the Constitutional and statutory restrictions on foreign participation in the
exploitation of mineral resources, a corporation investing in a mining joint venture
can never be considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose
Petroleum [Inc.]. The Court held that a corporation investing in another corporation
engaged ina nationalized activity cannot be considered as a citizen for purposes of
the Constitutional provision restricting foreign exploitation of natural resources:

xxxx

Accordingly, we opine that we must look into the citizenship of the individual
stockholders, i.e. natural persons, of that investor-corporation in order to determine if
the Constitutional and statutory restrictions are complied with. If the shares of stock
of the immediate investor corporation is in turn held and controlled by another
corporation, then we must look into the citizenship of the individual stockholders of
the latter corporation. In other words, if there are layers of intervening corporations
investing in a mining joint venture, we must delve into the citizenship of the
individual stockholders of each corporation. This is the strict application of the
grandfather rule, which the Commission has been consistently applying prior to the
1990s. Indeed, the framers of the Constitution intended for the "grandfather rule" to
apply in case a 60%-40% Filipino-Foreign equity corporation invests in another
corporation engaging in an activity where the Constitution restricts foreign
participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture is 87.04 %
foreign owned, while it is only 12.96% owned by Philippine citizens. Thus, the
constitutional requirement of 60% ownership by Philippine citizens isviolated.
(emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur

Mining Inc., et al.,8 the SEC en bancapplied the Grandfather Rule despite the fact that
the subject corporations ostensibly have satisfied the 60-40 Filipino equity
requirement. The SEC en bancheld that to attain the Constitutional objective of
reserving to Filipinos the utilization of natural resources, one should not stop where
the percentage of the capital stock is 60%.Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI,
provided practically all the funds of the remaining appellee-corporations. The records
disclose that: (1) Olympic Mines and Development Corporation ("OMDC"), a domestic
corporation, and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the
authorized capital stock of Madridejos; however, OMDC paid nothing for this
subscription while MBMI paid ₱2,803,900.00 out of its total subscription cost of
₱3,331,000.00; (2) Palawan Alpha South Resource Development Corp. ("Palawan
Alpha"), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996
shares, respectively, out of the authorized capital stock of PatriciaLouise; however,
Palawan Alpha paid nothing for this subscription while MBMI paid ₱2,796,000.00 out
of its total subscription cost of ₱3,996,000.00; (3) OMDC and MBMI subscribed to
6,663 and 3,331 shares, respectively, out of the authorized capital stock of Sara
Marie; however, OMDC paid nothing for this subscription while MBMI paid
₱2,794,000.00 out of its total subscription cost of ₱3,331,000.00; and (4) Falcon
Ridge Resources Management Corp. ("Falcon Ridge"), another domestic corporation,
and MBMI subscribed to 5,997 and 3,998 shares, respectively, out of the authorized
capital stock of San Juanico; however, Falcon Ridge paid nothing for this subscription
while MBMI paid ₱2,500,000.00 out of its total subscription cost of ₱3,998,000.00.
Thus, pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.
 xxxx

The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting the
constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and
practicedvia the 1967 SEC Rules, has favored foreigners contrary to the command of
the Constitution. Hence, the Grandfather Rule must be applied to accurately
determine the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.

The method employed in the Grandfather Rule of attributing the shareholdings of a

given corporate shareholder to the second or even the subsequent tier of ownership
hews with the rule that the "beneficial ownership" of corporations engaged in
nationalized activities must reside in the hands of Filipino citizens. Thus, even if the
60-40 Filipino equity requirement appears to have been satisfied, the Department of
Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may
distort the actual economic or beneficial ownership of a mining corporation may be
struck down as violative of the constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter into a
mining service contract with a foreign company granting the latter a share of not
morethan 40% from the proceeds of the operations?

xxxx

By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or

partnership registered with the [SEC] at least 60% of the capital of which is owned by
Filipino citizens and possessing x x x.The sixty percent Philippine equity requirement
in mineral resource exploitation x x xis intended to insure, among other purposes, the
conservation of indigenous natural resources, for Filipino posterityx x x. I think it is
implicit in this provision, even if it refers merely to ownership of stock in the
corporation holding the mining concession, that beneficial ownership of the right to
dispose, exploit, utilize, and develop natural resources shall pertain to Filipino
citizens, and that the nationality requirementis not satisfied unless Filipinos are the
principal beneficiaries in the exploitation of the country’s natural resources. This
criterion of beneficial ownership is tacitly adopted in Section 44 of P.D. No. 463,
above-quoted, which limits the service fee in service contracts to 40% of the
proceeds of the operation, thereby implying that the 60-40 benefit-sharing ration is
derived from the 60-40 equity requirement in the Constitution.

xxxx

It is obvious that while payments to a service contractor may be justified as a service

fee, and therefore, properly deductible from gross proceeds, the service contract
could be employed as a means of going about or circumventing the constitutional
limit on foreign equity participation and the obvious constitutional policy to insure
that Filipinos retain beneficial ownership of our mineral resources. Thus, every service
contract scheme has to be evaluated in its entirety, on a case to case basis, to
determine reasonableness of the total "service fee" x x x like the options available
tothe contractor to become equity participant in the Philippine entity holding the
concession, or to acquire rights in the processing and marketing stages. x x x
(emphasis supplied)
The "beneficial ownership" requirement was subsequently used in tandem with the
"situs of control" todetermine the nationality of a corporation in DOJ Opinion No. 84,
S.of 1988, through the Grandfather Rule, despite the fact that both the investee and
investor corporations purportedly satisfy the 60-40 Filipino equity requirement: 9

This refers to your request for opinion on whether or not there may be an investment
in real estate by a domestic corporation (the investing corporation) seventy percent
(70%) of the capital stock of which is owned by another domestic corporation withat
least 60%-40% Filipino-Foreign Equity, while the remaining thirty percent (30%) of
the capital stock is owned by a foreign corporation.

xxxx

This Department has had the occasion to rule in several opinions that it is implicit in
the constitutional provisions, even if it refers merely to ownership of stock in the
corporation holding the land or natural resource concession, that the nationality
requirement is not satisfied unless it meets the criterion of beneficial ownership, i.e.
Filipinos are the principal beneficiaries in the exploration of natural resources(Op. No.
144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial
consideration is situs of control, whether in a stock or nonstock corporation"(Op. No.
178, s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58),
obviously toinsure that corporations and associations allowed to acquire agricultural
land or to exploit natural resources "shall be controlled by Filipinos." Accordingly, any
arrangement which attempts to defeat the constitutional purpose should be
eschewed (Op. No 130, s. 1985).

We are informed that in the registration of corporations with the [SEC], compliance
with the sixty per centum requirement is being monitored by SEC under the
"Grandfather Rule" a method by which the percentage of Filipino equity in
corporations engaged in nationalized and/or partly nationalized areas of activities
provided for under the Constitution and other national laws is accurately computed,
and the diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather
Rule" is applied specifically in cases where the corporation has corporate
stockholders with alien stockholdings, otherwise, if the rule is not applied, the
presence of such corporate stockholders could diminish the effective control of
Filipinos.

Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the
total foreign equity in the investing corporation is 58% while the Filipino equity is only
42%, in the investing corporation, subject of your query, is disqualified from investing
in real estate, which is a nationalized activity, as it does not meet the 60%-40%
Filipino-Foreign equity requirement under the Constitution.

This pairing of the concepts "beneficial ownership" and the "situs of control" in
determining what constitutes"capital" has been adopted by this Court in Heirs of
Gamboa v. Teves.10 In its October 9, 2012 Resolution, the Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is heldby "a trustee of funds for pension or other employee retirement
or separation benefits," the trustee is a Philippine national if "at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section
1(b) of the Implementing Rules of the FIA provides that "for stocks to be deemed
owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights, is essential." (emphasis supplied)
In emphasizing the twin requirements of "beneficial ownership" and "control" in
determining compliance with the required Filipino equity in Gamboa, the en
bancCourt explicitly cited with approval the SEC en banc’s application in Redmont
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the Grandfather Rule, to
wit:

Significantly, the SEC en banc, which is the collegial body statutorily empowered to
issue rules and opinions on behalf of SEC, has adopted the Grandfather Rulein
determining compliance with the 60-40 ownership requirement in favor of Filipino
citizens mandated by the Constitution for certain economic activities. This prevailing
SEC ruling, which the SEC correctly adopted to thwart any circumvention of the
required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en
banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x x
(emphasis supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel
Communications, Inc.,11 denied the foreign creditors’ proposal to convert part of
Bayantel’s debts to common shares of the company at a rate of 77.7%. Supposedly,
the conversion of the debts to common shares by the foreign creditors would be
done, both directly and indirectly, in order to meet the control test principle under the
FIA.Under the proposed structure, the foreign creditors would own 40% of the
outstanding capital stock of the telecommunications company on a direct basis, while
the remaining 40% of shares would be registered to a holding company that shall
retain, on a direct basis, the other 60% equity reserved for Filipino citizens.
Nonetheless, the Court found the proposal non-compliant with the Constitutional
requirement of Filipino ownership as the proposed structure would give more than
60% of the ownership of the common shares of Bayantel to the foreign corporations,
viz:

In its Rehabilitation Plan, among the material financial commitments made by

respondent Bayantelis that its shareholders shall relinquish the agreed-upon amount
of common stock[s] as payment to Unsecured Creditors as per the Term Sheet.
Evidently, the parties intend to convert the unsustainable portion of respondent’s
debt into common stocks, which have voting rights. If we indulge petitioners on their
proposal, the Omnibus Creditors which are foreign corporations, shall have control
over 77.7% of Bayantel, a public utility company. This is precisely the scenario
proscribed by the Filipinization provision of the Constitution.Therefore, the Court of
Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on conversion.
(emphasis supplied) As shown by the quoted legislative enactments, administrative
rulings, opinions, and this Court’s decisions, the Grandfather Rule not only finds
basis, but more importantly, it implements the Filipino equity requirement, in the
Constitution.

Application of the Grandfather

Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in

determining compliance with the minimum Filipino equity requirement vis-à-vis the
Control Test. This confusion springs from the erroneous assumption that the use of
one method forecloses the use of the other.

As exemplified by the above rulings, opinions, decisions and this Court’s April 21,
2014 Decision, the Control Test can be, as it has been, applied jointly withthe
Grandfather Rule to determine the observance of foreign ownership restriction in
nationalized economic activities. The Control Test and the Grandfather Rule are not,
as it were, incompatible ownership-determinant methods that canonly be applied
alternative to each other. Rather, these methodscan, if appropriate, be used
cumulatively in the determination of the ownership and control of corporations
engaged in fully or partly nationalized activities, as the mining operation involved in
this case or the operation of public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied. Put in another manner, if the subject corporation’s
Filipino equity falls below the threshold 60%, the corporation is immediately
considered foreign-owned, in which case, the needto resort to the Grandfather Rule
disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign
equity requirement can be considered a Filipino corporation if there is no doubtas to
who has the "beneficial ownership" and "control" of the corporation. In that instance,
there is no need fora dissection or further inquiry on the ownership of the corporate
shareholders in both the investing and investee corporation or the application of the
Grandfather Rule.12 As a corollary rule, even if the 60-40 Filipino to foreign equity
ratio is apparently met by the subject or investee corporation, a resort to the
Grandfather Rule is necessary if doubt existsas to the locusof the "beneficial
ownership" and "control." In this case, a further investigation as to the nationality of
the personalities with the beneficial ownership and control of the corporate
shareholders in both the investing and investee corporations is necessary.

As explained in the April 21,2012 Decision, the "doubt" that demands the application
of the Grandfather Rule in addition to or in tandem with the Control Test is not
confined to, or more bluntly, does not refer to the fact that the apparent Filipino
ownership of the corporation’s equity falls below the 60% threshold. Rather, "doubt"
refers to various indicia that the "beneficial ownership" and "control" of the
corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.
As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent
provisions of the Anti-DummyLaw in relation to the minimum Filipino equity
requirement in the Constitution, "significant indicators of the dummy status" have
been recognized in view of reports "that some Filipino investors or businessmen are
being utilized or [are] allowing themselves to be used as dummies by foreign
investors" specifically in joint ventures for national resource exploitation. These
indicators are:

1. That the foreign investors provide practically all the funds for the joint
investment undertaken by these Filipino businessmen and their foreign
partner;

2. That the foreign investors undertake to provide practically all the

technological support for the joint venture;

3. That the foreign investors, while being minority stockholders, manage the
company and prepare all economic viability studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of
Linear Works Realty Development Corporation,13 the SEC held that when foreigners
contribute more capital to an enterprise, doubt exists as to the actual control and
ownership of the subject corporation even if the 60% Filipino equity threshold is met.
Hence, the SEC in that one ordered a further investigation, viz:

x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the
basis for determining the level of foreign participation is the number of shares
subscribed, regardless of the par value. Applying such an interpretation, the EPD
rules that the foreign equity participation in Linear works Realty Development
Corporation amounts to 26.41% of the corporation’s capital stock since the amount of
shares subscribed by foreign nationals is 1,795 only out of the 6,795 shares. Thus,
the subject corporation is compliant with the 40% limit on foreign equity
participation. Accordingly, the EPD dismissed the complaint, and did not pursue any
investigation against the subject corporation.

xxxx

x x x [I]n this respect we find no error in the assailed order made by the EPD. The
EPD did not err when it did not take into account the par value of shares in
determining compliance with the constitutional and statutory restrictionson foreign
equity.

However, we are aware that some unscrupulous individuals employ schemes to

circumvent the constitutional and statutory restrictions on foreign equity. In the
present case, the fact that the shares of the Japanese nationals have a greater par
value but only have similar rights to those held by Philippine citizens having much
lower par value, is highly suspicious. This is because a reasonable investor would
expect to have greater control and economic rights than other investors who
invested less capital than him. Thus, it is reasonable to suspectthat there may be
secret arrangements between the corporation and the stockholders wherein the
Japanese nationals who subscribed to the shares with greater par value actually have
greater control and economic rights contrary to the equality of shares based on the
articles of incorporation.

With this in mind, we find it proper for the EPD to investigate the subject corporation.
The EPD is advised to avail of the Commission’s subpoena powers in order to gather
sufficient evidence, and file the necessary complaint.

As will be discussed, even if atfirst glance the petitioners comply with the 60-40
Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a
reasonable suspicion that the Filipino shareholders do not actually have the requisite
number of control and beneficial ownership in petitioners Narra, Tesoro, and
McArthur. Hence, a further investigation and dissection of the extent of the ownership
of the corporate shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is

impractical as tracing the shareholdings to the point when natural persons hold rights
to the stocks may very well lead to an investigation ad infinitum. Suffice it to say in
this regard that, while the Grandfather Rule was originally intended to trace the
shareholdings to the point where natural persons hold the shares, the SEC had
already set up a limit as to the number of corporate layers the attribution of the
nationality of the corporate shareholders may be applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule
on two (2) levels of corporate relations for publicly-held corporations or where the
shares are traded in the stock exchanges, and to three (3) levels for closely held
corporations or the shares of which are not traded in the stock exchanges. 14 These
 limits comply with the requirement in Palting v. San Jose Petroleum, Inc. 15 that the
application of the Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the
petitioners and their investing corporate stockholders.

In the Decision subject of this recourse, the Court applied the Grandfather Rule to
determine the matter of true ownership and control over the petitioners as doubt
exists as to the actual extent of the participation of MBMI in the equity of the
petitioners and their investing corporations.

We considered the following membership and control structures and like nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of
the 10,000 commonshares of petitioner Tesoro while the Canadian-owned company,
MBMI, holds 39.98% of its shares.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Mining, Inc.
MBMI Resources, Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60
Inc.16
Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,708,174.60
In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds
66.63% of Sara Marie’s shares while the same Canadian company MBMI holds
33.31% of Sara Marie’s shares. Nonetheless, it is admitted that Olympic did not pay a
single peso for its shares. On the contrary, MBMI paid for 99% of the paid-up capital
of Sara Marie.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp.17
MBMI Resources, Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00
Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Hernando
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
The fact that MBMI had practically provided all the funds in Sara Marie and
Tesoro creates serious doubt as to the true extent of its (MBMI) control and
ownership over both Sara Marie and Tesoro since, as observed by the SEC, "a
reasonable investor would expect to have greater control and economic rights than
other investors who invested less capital than him." The application of the
Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control and
economic benefits in petitioner Tesoro (through Sara Marie) fallbelow the threshold
60%, viz:

Filipino participation in petitioner Tesoro: 40.01%

66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) =
39.98%
100
39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)
=40.01%
Foreign participation in petitioner Tesoro: 59.99%
33.33
(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%
100
19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign
individual SHs in Tesoro)
= 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99%
foreign ownership of its shares, it is clear that petitioner Tesoro does not comply with
the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the
Constitution. Hence, the appellate court’s observation that Tesoro is a foreign
corporation not entitled to an MPSA is apt.

McArthur

Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of

its 10, 000 common shares is owned by supposedly Filipino Madridejos Mining
Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Madridejos Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Mining
Corporation
MBMI Resources, Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60
Inc.18
Lauro L. Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,708,174.60
In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its
 shares belonged to MBMI. Yet again, Olympic did not contribute to the paid-up capital
of Madridejos and it was MBMI that provided 99.79% of the paid-up capital of
Madridejos.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Olympic Mines & Filipino 6,663 ₱6,663,000.00 P0.00
Development
Corp.19
MBMI Resources, Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00
Inc.
Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Hernando
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Kenneth Cawkel Canadian 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,809,900.00
Again, the fact that MBMI had practically provided all the funds in Madridejos and
McArthur creates serious doubt as to the true extent of its control and ownership of
MBMI over both Madridejos and McArthur. The application of the Grandfather Rule is
clearly called for, and as will be shown below, MBMI, along with the other foreign
shareholders, breached the maximum limit of 40% ownership in petitioner McArthur,
rendering the petitioner disqualified to an MPSA:

Filipino participation in petitioner McArthur: 40.01%

66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) =
39.98%
100
39.98% + .03% (shares of individual Filipino SHs in McArthur)
=40.01%
Foreign participation in petitioner McArthur: 59.99%
33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) =
19.99%
19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign
individual SHs in McArthur)
= 59.99%
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur,
as compared to 59.99% foreign ownership of its shares, it is clear that petitioner
McArthur does not comply with the minimum Filipino equity requirement imposed in
Sec. 2, Art. XII of the Constitution. Thus, the appellate court did not err in holding that
petitioner McArthur is a foreign corporation not entitled to an MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining &
Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Patricia Lousie Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00
Mining and
Development
Corp.
MBMI Resources, Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00
Inc.20
Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00
Mendoza,
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Bayani H. Agabin Filipino 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development
Corporation (PASRDC), which subscribed to 65.96% of PLMDC’s shares, and the
Canadian MBMI, which subscribed to 33.96% of PLMDC’s shares.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Palawan Alpha Filipino 6,596 ₱6,596,000.00 P0
South Resource
Development
Corp.
MBMI Resources, Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00
Inc.21
Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00
Mendoza, Jr.
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Michael T. Mason American 1 ₱1,000.00 ₱1,000.00
Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Bayani H, Agabin Filipino 1 ₱1,000.00 ₱1,000.00
Total 10,000 ₱10,000,000.00 ₱2,804,000.00
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI
contributed 99.75% of PLMDC’s paid-up capital. This fact creates serious doubt as to
the true extent of MBMI’s control and ownership over both PLMDC and Narra since "a
reasonable investor would expect to have greater control and economic rights than
other investors who invested less capital than him." Thus, the application of the
Grandfather Rule is justified. And as will be shown, it is clear that the Filipino
ownership in petitioner Narra falls below the limit prescribed in both the Constitution
and the Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02
(Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) =
39.59%
100
39.59% + .05% (shares of individual Filipino SHs in McArthur)
=39.64%
Foreign participation in petitioner Narra: 60.36%
33.98
(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%
100
20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign
individual SHs in McArthur)
= 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64%
Filipino ownership of its shares, it is clear that petitioner Narra does not comply with
the minimum Filipino equity requirement imposed in Section 2, Article XII of the
Constitution. Hence, the appellate court did not err in holding that petitioner
McArthur is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners’

Filipino equity composition was based on their common shareholdings, not preferred
or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly
provides that "no share may be deprived of voting rights except those classified as
‘preferred’ or ‘redeemable’ shares." Further, as Justice Leonen puts it, there is "no
indication that any of the shares x x x do not have voting rights, [thus] it must be
assumed that all such shares have voting rights."22 It cannot therefore be gain said
that the foregoing computation hewed with the pronouncements of Gamboa, as
implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No.
8)23 Section 2 of which states:

Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory requirement.1âwphi1 For purposes of determining compliance therewith,
the required percentage of Filipino ownership shall be applied to BOTH (a) the total
outstanding shares of stock entitled to vote in the election of directors; AND (b) the
total number of outstanding shares of stock, whether or not entitled to vote in the
election of directors.

In fact, there is no indication that herein petitioners issued any other class of shares
besides the 10,000 common shares. Neither is it suggested that the common shares
were further divided into voting or non-voting common shares. Hence, for purposes of
this case, items a) and b) in SEC Memo No. 8 both refer to the 10,000 common
shares of each of the petitioners, and there is no need to separately apply the 60-40
ratio to any segment or part of the said common shares.

III.

In mining disputes, the POA has jurisdiction to pass upon the nationality of
applications for MPSAs

Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel
of Arbitrators (POA) of the Department of Environment and Natural Resources (DENR)
since the POA’s determination of petitioners’ nationalities is supposedly beyond its
limited jurisdiction, as defined in Gonzales v. Climax Mining Ltd. 24 and Philex Mining
Corp. v. Zaldivia.25

The April 21, 2014 Decision did not dilute, much less overturn, this Court’s
pronouncements in either Gonzales or Philex Mining that POA’s jurisdiction "is limited
only to mining disputes which raise questions of fact," and not judicial questions
cognizable by regular courts of justice. However, to properly recognize and give
effect to the jurisdiction vested in the POA by Section 77 of the Philippine Mining Act
of 1995,26 and in parallel with this Court’s ruling in Celestial Nickel Mining Exploration
Corporation v. Macroasia Corp.,27 the Court has recognized in its Decision that in
resolving disputes "involving rights to mining areas" and "involving mineral
agreements or permits," the POA has jurisdiction to make a preliminary finding of the
required nationality of the corporate applicant in order to determine its right to a
mining area or a mineral agreement.

There is certainly nothing novel or aberrant in this approach. In ejectment and

unlawful detainer cases, where the subject of inquiry is possession de facto, the
jurisdiction of the municipal trial courts to make a preliminary adjudication regarding
ownership of the real property involved is allowed, but only for purposes of ruling on
the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they asserted
their respective rights to the mining areas each applied for. Since respondent
Redmont, itself an applicant for exploration permits over the same mining areas, filed
petitions for the denial of petitioners' applications, it should be clear that there exists
a controversy between the parties and it is POA's jurisdiction to resolve the said
dispute. POA's ruling on Redmont's assertion that petitioners are foreign corporations
not entitled to MPSA is but a necessary incident of its disposition of the mining
dispute presented before it, which is whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining
areas," it necessarily follows that the POA likewise wields the authority to pass upon
the nationality issue involving petitioners, since the resolution of this issue is
essential and indispensable in the resolution of the main issue, i.e., the determination
of the petitioners' right to the mining areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further

pleadings shall be entertained. Let entry of judgment be made in due course.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-8527 March 30, 1914

WEST COAST LIFE INSURANCE CO., plaintiff,

vs.
GEO N. HURD, Judge of Court of First Instance, defendant.
Southworth, Hargis & Springer for plaintiff.
Haussermann, Cohn & Fisher for defendant.

MORELAND, J.:

This is an action for the issuance of a writ of prohibition against the defendant
"commanding the defendant to desist or refrain from further proceedings in a
criminal action pending in that court."

The petitioner is a foreign life-insurance corporation, duly organized under and by

virtue of the laws of the State of California, doing business regularly and legally in the
Philippine Islands pursuant to its laws.

On the 16th of December, 1912, the assistant prosecuting attorney of the city of
Manila filed an information in a criminal action in the Court of First Instance of that
city against the plaintiff, said corporation, and also against John Northcott and
Manuel C. Grey, charging said corporation and said individuals with the crime of libel.
On the 17th day of December the defendant in his official capacity as judge of the
court of First Instance signed and issued a process directed to the plaintiff and the
other accused in said criminal action, which said process reads as follows:

UNITED STATES OF AMERICA,

PHILIPPINE ISLANDS.

In the Court of First Instance of the Judicial District of Manila.

THE UNITED STATES No. 9661

versus Libel.

WEST COAST LIFE INSURANCE CO., JOHN NORTHCOTT, AND MANUEL C. GREY.

To West Coast Life Insurance Co., John Northcott, and Manuel C. Grey, Manila.

SUMMONS.

You are hereby summoned to appear before the Court of First Instance of the
city of Manila P.I., on the 18th day of December, 1912, at the hour of 8 a.m., to
answer the charge made against you upon the information of F. H. Nesmith,
assistant prosecuting attorney of the city of Manila, for libel, as set forth in the
said information filed in this copurt on December 16, 1912, a copy of which is
hereto attached and herewith served upon you.

Dated at the city of Manila, P. I., this 17th day of December, 1912.

(Sgd.) GEO N. HURD,

Judge, Court of First Instance.

The information upon which said process was issued is as follows:

The undersigned accuses the West Coast Life Insurance Company, John
Northcott, and Manuel C. Grey of the crime of libel, committed as follows:

That on or about the 14th day of September, 1912, and continuously

thereafter up to and including the date of this complaint, in the city of Manila,
P. I., the said defendant West Coast Life Insurance Company was and has been
 a foreign corporation duly organized in the State of California, United States of
America, and registered and doing business in the Philippine Islands; that the
said defendant John Nortcott then and there was and has been the general
agent and manager for the Philippine Islands of the said defendant
corporation West Coast Life Insurance Company, and the said defendant
Manuel C. Grey was and has been an agent and employee of the said
defendant corporation West Coast Life Insurance Company, acting in the
capacity of treasurer of the branch of the said defendant corporation in the
Philippine Islands; that on or about the said 14th day of September, 1912, and
for some time thereafter, to wit, during the months of September and
October, 1912, in the city of Manila, P.I., the said defendants West Coast Life
Insurance Company, John Northcott, and Manuel C. Grey, conspiring and
confederating together, did then and there willfully, unlawfully, and
maliciously, and to the damage of the Insular Life Insurance Company, a
domestic corporation duly organized, registered, and doing business in the
Philippine Islands, and with intent o cause such damage and to expose the
said Insular Life Insurance Company to public hatred, contempt, and ridicule,
compose and print, and cause to be printed a large number of circulars, and,
in numerous printings in the form of said circulars, did publish and distribute,
and cause to be published and distributed, among other persons, to policy
holders and prospective policy holders of the said Insular Life Insurance
Company, among other things, a malicious defamation and libel in the
Spanish language, of the words and tenor following:

"First. For some time past various rumors are current to the effect that
the Insular Life Insurance Company is not in as good a condition as i
should be at the present time, and that really it is in bad shape.
Nevertheless, the investigations made by the representative of the
"Bulletin" have failed fully to confirm these rumors. It is known that the
Insular Auditor has examined the books of the company and has found
that its capital has diminished, and that by direction of said official the
company has decided to double the amount of its capital, and also to
pay its reserve fund. All this is true."

That the said circulars, and the matters therein contained hereinbefore set
forth in this information, tend to impeach and have impeached the honesty,
virtue, and reputation of the said Insular Life Insurance Company by exposing
it to public hatred, contempt, and ridicule; that by the matters printed in said
circulars, and hereinbefore set forth in this information, the said defendants
West Coast Life Insurance Company, John Northcott, and Manuel C. Grey
meant and intended to state and represent to those to whom the said
defendants delivered said circulars as aforesaid, that the said Insular Life
Insurance Company was then and there in a dangerous financial condition and
on the point of going into insolvency, to the detriment of the policy holders of
the said Insular Life Insurance Company, and of those with whom the said
Insular Life Insurance Company have and have had business transactions, and
each and all of said persons to whom the said defendants delivered said
circulars, and all persons as well who read said circulars understood the said
matters in said circulars to have said libelous sense and meaning. Contrary to
law.

On the 20th day of December, 1912, the plaintiff, together with the other persons
named as accused in said process through their attorneys, served upon the
prosecuting attorney and filed with the clerk of the court a motion to quash said
summons and the service thereof, on the ground that the court had no jurisdiction
over the said company, there being no authority in the court for the issuance of the
process, Exhibit B, the order under which it was issued being void. The court denied
the motion and directed plaintiff to appear before it on the 28th day of December,
1912, and to plead to the information, to which order the plaintiff then and there duly
excepted.

It is alleged in the complaint that "unless restrained by this Court the respondent will
proceed to carry out said void order and compel your petitioner to appear before his
court and plead and submit to criminal prosecution without having acquired any
jurisdiction whatever over your petitioner."

The prayer of the complaint is, "your petitioner prays judgment for the issuance of a
writ of prohibition against the respondent, commanding the respondent absolutely to
desist or refrain from further proceedings against your petitioner in the said criminal
action."

The basis of the action is that the Court of First Instance has no power or authority,
under the laws of the Philippine Islands, to proceed against a corporation, as such,
criminally, to bring it into court for the purpose of making it amenable to the criminal
laws. It is contended that the court had no jurisdiction to issue the process in
evidence against the plaintiff corporation; that the issuance and service thereof upon
the plaintiff corporation were outside of the authority and jurisdiction of the court,
were authorized by no law, conferred no jurisdiction over said corporation, and that
they were absolutely void and without force or effect.

The plaintiff, further attacking said process, alleges that the process is a mixture of
civil and criminal process, that it is not properly signed, that it does not direct or
require an arrest; that it s an order to appear and answer on a date certain without
restraint of the person, and that it is not in the form required by law.

Section 5 of General Orders, No. 58, defines an information as "accusation in writing

charging a period with a public offense." Section 6 provide that a complaint or
information is sufficient it if shows "the name of the defendant, or if his name cannot
be discovered, that he is described under a fictitious name with a statement that his
true name is unknown to the informant or official signing the same. His true name
may be inserted at any stage of the proceedings instituted against him, whenever
ascertained." These provisions, as well as those which relate to arraignment and
counsel, and to demurrers and pleas, indicate clearly that the maker of the Code of
Criminal Procedure had no intention or expectation that corporations would be
included among those who would fall within the provisions thereof. The only process
known to the Code of Criminal Procedure, or which any court is by that order
authorized to issue, is an order of arrest. The Code of Criminal Procedure provides
that "if the magistrate be satisfied from the investigation that the crime complained
of has been committed, and there is reasonable ground to believe that the party
charged has committed it, he must issue an order for his arrest. If the offense be
bailable, and the defendant offer a sufficient security, he shall be admitted to bail;
otherwise he shall be committed to prison." There is no authority for the issuance of
any other process than an order of arrest. As a necessary consequence, the process
issued in the case before us is without express authorization of statute.

The question remains as to whether or not he court may, of itself and on its own
motion, create not only a process but a procedure by which the process may be made
effective.
We do not believe that the authority of the courts of the Philippine Islands extends so
far. While having the inherent powers which usually go with courts of general
jurisdiction, we are of the opinion that, under the circumstances of their creation,
they have only such authority in criminal matters as is expressly conferred upon
them by statute or which it is necessary to imply from such authority in order to carry
out fully and adequately the express authority conferred. We do not feel that Courts
of First Instance have authority to create new procedure and new processes in
criminal law. The exercise of such power verges too closely on legislation. Even
though it be admitted, a question we do not now decide, that there are various penal
laws in the Philippine Islands which corporation as such may violate, still we do not
believe that the courts are authorized to go to the extent of creating special
procedure and special processes for the purpose of carrying out those penal statutes,
when the legislature itself has neglected to do so. To bring a corporation into court
criminally requires many additions to the present criminal procedure. While it may be
said to be the duty of courts to see to it that criminals are punished, it is no less their
duty to follow prescribed forms of procedure and to go out upon unauthorized ways
or act in an unauthorized manner.

There are many cases cited by counsel for the defendant which show that
corporations have been proceeded against criminally by indictment and otherwise
and have been punished as malefactors by the courts. Of this, of course, there can be
no doubt; but it is clear that, in those cases, the statute, by express words or by
necessary intendment, included corporations within the persons who could offend
against the criminal laws; and the legislature, at the same time established a
procedure applicable to corporations. No case has been cited to us where a
corporation has been proceeded against under a criminal statute where the court did
not exercise its common law powers or where there was not in force a special
procedure applicable to corporations.

The courts of the Philippine Islands are creatures of statute and, as we have said,
have only those powers conferred upon them by statute and those which are required
to exercise that authority fully and adequately. The courts here have no common law
jurisdiction or powers. If they have any powers not conferred by statute, expressly or
impliedly, they would naturally come from Spanish and not from common law
sources. It is undoubted that, under the Spanish criminal law and procedure, a
corporation could not have been proceeded against criminally, as such, if such an
entity as a corporation in fact existed under the Spanish law, and as such it could not
have committed a crime in which a willful purpose or a malicious intent was required.
Criminal actions would have been restricted or limited, under that system, to the
officials of such corporations and never would have been directed against the
corporation itself. This was the rule with relation to associations or combinations of
persons approaching, more or less, the corporation as it is now understood, and it
would undoubtedly have been the rue with corporations. From this source, then, the
courts derive no authority to bring corporations before them in criminal actions, nor
to issue processes for that purpose.

The case was submitted to this Court on an agreed statement of facts with a
stipulation for a decision upon the merits. We are of the opinion that the plaintiff is
entitled, under that stipulation, to the remedy prayed for.

It is adjudged that the Court of First Instance of the city of Manila be and it is hereby
enjoined and prohibited from proceeding further in the criminal cause which is before
us in this proceeding, entitled United States vs. West Coast Life Insurance Company,
a corporation, John Northcott and Manuel C. Grey, so far as said proceedings relate to
the said West Coast Life Insurance Company, a corporation, the plaintiff in the case.

Arellano, C.J. and Araullo, J., concur.

Carson, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,

vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737,

promulgated on 21 August 1991,1reversing and setting aside the Decision, dated 19
February 1990, 2 of Branch 47 of the Regional Trial Court (RTC) of Manila in Civil Case
No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST CO.," is challenged
in this petition for review on certiorari under Rule 45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss
of the stamp collection of the plaintiff (petitioner herein) contained in Safety Deposit
Box No. 54 which had been rented from the defendant pursuant to a contract
denominated as a Lease Agreement. 3 Judgment therein was rendered in favor of the
dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in

favor of the plaintiff and against the defendant, Security Bank & Trust
Company, ordering the defendant bank to pay the plaintiff the sum of
—

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual

damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as

moral damages; and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's

fees and legal expenses.

The counterclaim set up by the defendant are hereby dismissed for

lack of merit.
 No costs.

SO ORDERED.4

The antecedent facts of the present controversy are summarized by the public
respondent in its challenged decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of
the defendant bank at its Binondo Branch located at the Fookien Times
Building, Soler St., Binondo, Manila wherein he placed his collection of
stamps. The said safety deposit box leased by the plaintiff was at the
bottom or at the lowest level of the safety deposit boxes of the
defendant bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered
into the defendant bank's premises, seeped into the safety deposit box
leased by the plaintiff and caused, according to the plaintiff, damage to
his stamps collection. The defendant bank rejected the plaintiff's claim
for compensation for his damaged stamps collection, so, the plaintiff
instituted an action for damages against the defendant bank.

The defendant bank denied liability for the damaged stamps collection
of the plaintiff on the basis of the "Rules and Regulations Governing the
Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"), particularly
paragraphs 9 and 13, which reads (sic):

"9. The liability of the Bank by reason of the lease, is limited to the
exercise of the diligence to prevent the opening of the safe by any
person other than the Renter, his authorized agent or legal
representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith."

The defendant bank also contended that its contract with the plaintiff
over safety deposit box No. 54 was one of lease and not of deposit and,
therefore, governed by the lease agreement (Exhs. "A", "L") which
should be the applicable law; that the destruction of the plaintiff's
stamps collection was due to a calamity beyond obligation on its part
to notify the plaintiff about the floodwaters that inundated its premises
at Binondo branch which allegedly seeped into the safety deposit box
leased to the plaintiff.

The trial court then directed that an ocular inspection on (sic) the
contents of the safety deposit box be conducted, which was done on
December 8, 1988 by its clerk of court in the presence of the parties
and their counsels. A report thereon was then submitted on December
12, 1988 (Records, p. 98-A) and confirmed in open court by both
parties thru counsel during the hearing on the same date (Ibid., p. 102)
stating:
 "That the Safety Box Deposit No. 54 was opened by both
plaintiff Luzan Sia and the Acting Branch Manager Jimmy
B. Ynion in the presence of the undersigned, plaintiff's
and defendant's counsel. Said Safety Box when opened
contains two albums of different sizes and thickness,
length and width and a tin box with printed word 'Tai
Ping Shiang Roast Pork in pieces with Chinese designs
and character."

Condition of the above-stated Items —

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width

and 3/4 in thick. The leaves of the album are attached to every page
and cannot be lifted without destroying it, hence the stamps contained
therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1

inch thick. Some of its pages can still be lifted. The stamps therein can
still be distinguished but beyond restoration. Others have lost its
original form.

3. The tin box is rusty inside. It contains an album with several pieces
of papers stuck up to the cover of the box. The condition of the album
is the second abovementioned album."5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed
the trial court's decision to the public respondent Court of Appeals. The appeal was
docketed as CA-G.R. CV No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC
contended that the latter erred in (a) holding that the lease agreement is a contract
of adhesion; (b) finding that the defendant had failed to exercise the required
diligence expected of a bank in maintaining the safety deposit box; (c) awarding to
the plaintiff actual damages in the amount of P20,000.00, moral damages in the
amount of P100,000.00 and attorney's fees and legal expenses in the amount of
P5,000.00; and (d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion
of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and

instead the appellee's complaint is hereby DISMISSED. The appellant
bank's counterclaim is likewise DISMISSED. No costs.6

In reversing the trial court's decision and absolving SBTC from liability, the public
respondent found and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the
terms and conditions of the contract of lease which the appellee (now petitioner) had
voluntarily and knowingly executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not
a contract of deposit wherein the bank became a depositary of the subject stamp
collection; hence, as contended by SBTC, the provisions of Book IV, Title XII of the
Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit
box limiting SBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the

exercise of the diligence to prevent the opening of the Safe by any
person other than the Renter, his authorized agent or legal
representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs, public
order or public policy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required
diligence in maintaining the safety deposit box; what was proven was that the floods
of 1985 and 1986, which were beyond the control of SBTC, caused the damage to the
stamp collection; said floods were fortuitous events which SBTC should not be held
liable for since it was not shown to have participated in the aggravation of the
damage to the stamp collection; on the contrary, it offered its services to secure the
assistance of an expert in order to save most of the stamps, but the appellee refused;
appellee must then bear the lose under the principle of "res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the public
respondent, 7 petitioner filed the instant petition wherein he contends that:

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART

OF THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC
DID NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING
THE SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT
SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE

RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE
PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS.
"A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE

AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES,
INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE
PETITIONER.8

We subsequently gave due course the petition and required both parties to submit
their respective memoranda, which they complied with.9
Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise
the required diligence expected of a bank maintaining such safety deposit box . . . in
the light of the environmental circumstance of said safety deposit box after the floods
of 1985 and 1986." He argues that such a conclusion is supported by the evidence on
record, to wit: SBTC was fully cognizant of the exact location of the safety deposit box
in question; it knew that the premises were inundated by floodwaters in 1985 and
1986 and considering that the bank is guarded twenty-four (24) hours a day , it is
safe to conclude that it was also aware of the inundation of the premises where the
safety deposit box was located; despite such knowledge, however, it never bothered
to inform the petitioner of the flooding or take any appropriate measures to insure
the safety and good maintenance of the safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings
of facts of the Court of Appeals, when supported by substantial exidence, are not
reviewable on appeal by certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there
exists a disparity between the factual findings and conclusions of the Court of
Appeals and the trial court. 11 Such a disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the
"Lease Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that
— a contract of lease — and not a contract of deposit, and that paragraphs 9 and 13
thereof, which expressly limit the bank's liability as follows:

9. The liability of the bank by reason of the lease, is limited to the

exercise of the diligence to prevent the opening of the Safe by any
person other than the Renter, his autliorized agent or legal
representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public
respondent further avers that even without such a limitation of liability, SBTC should
still be absolved from any responsibility for the damage sustained by the petitioner
as it appears that such damage was occasioned by a fortuitous event and that the
respondent bank was free from any participation in the aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the
petition to be impressed with merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this
Court explicitly rejected the contention that a contract for the use of a safety deposit
box is a contract of lease governed by Title VII, Book IV of the Civil Code. Nor did We
fully subscribe to the view that it is a contract of deposit to be strictly governed by
the Civil Code provision on deposit; 14 it is, as We declared, a special kind of deposit.
The prevailing rule in American jurisprudence — that the relation between a bank
renting out safe deposit boxes and its customer with respect to the contents of the
box is that of a bailor and bailee, the bailment for hire and mutual benefit 15 — has
been adopted in this jurisdiction, thus:
In the context of our laws which authorize banking institutions to rent
out safety deposit boxes, it is clear that in this jurisdiction, the
prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act [R.A. 337, as amended] pertinently provides:

"Sec. 72. In addition to the operations specifically authorized elsewhere

in this Act, banking institutions other than building and loan
associations may perform the following services:

(a) Receive in custody funds, documents, and valuable

objects, and rent safety deposit boxes for the
safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a),
(b) and (c) of this section as depositories or as agents. . . ."(emphasis
supplied)

Note that the primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds, documents
and other valuable objects for safekeeping. The renting out of the
safety deposit boxes is not independent from, but related to or in
conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing (Art. 1969, Civil Code] and, pursuant to
Article 1306 of the Civil Code, the parties thereto may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the
agreement [Art. 1170, id.]. In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a
family is to be observed [Art. 1173, id.]. Hence, any stipulation
exempting the depositary from any liability arising from the loss of the
thing deposited on account of fraud, negligence or delay would be void
for being contrary to law and public policy. In the instant case,
petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has
neither the possession nor control of the same.

"14. The bank has no interest whatsoever in said contents, except as

herein expressly provided, and it assumes absolutely no liability in
connection therewith."

are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said provisions
are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72 (a) of the General Banking Act. Both
exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable
 diligence only with respect to who shall be admitted to any rented safe,
to wit:

"8. The Bank shall use due diligence that no

unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible
for the contents of any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to

the actual practice of the Bank. It is not correct to assert that the Bank
has neither the possession nor control of the contents of the box since
in fact, the safety deposit box itself is located in its premises and is
under its absolute control; moreover, the respondent Bank keeps the
guard key to the said box. As stated earlier, renters cannot open their
respective boxes unless the Bank cooperates by presenting and using
this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has
been said:

"With respect to property deposited in a safe-deposit box

by a customer of a safe-deposit company, the parties,
since the relation is a contractual one, may by special
contract define their respective duties or provide for
increasing or limiting the liability of the deposit
company, provided such contract is not in violation of
law or public policy. It must clearly appear that there
actually was such a special contract, however, in order
to vary the ordinary obligations implied by law from the
relationship of the parties; liability of the deposit
company will not be enlarged or restricted by words of
doubtful meaning. The company, in renting safe-deposit
boxes, cannot exempt itself from liability for loss of the
contents by its own fraud or negligence or that, of its
agents or servants, and if a provision of the contract
may be construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has been held
that the lessor of a safe-deposit box cannot limit its
liability for loss of the contents thereof through its own
negligence, the view has been taken that such a lessor
may limit its liability to some extent by agreement or
stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety
Deposit Box in CA Agro-Industrial Development Corp. are strikingly similar to
condition No. 13 in the instant case. On the other hand, both condition No. 8 in CA
Agro-Industrial Development Corp. and condition No. 9 in the present case limit the
scope of the exercise of due diligence by the banks involved to merely seeing to it
that only the renter, his authorized agent or his legal representative should open or
have access to the safety deposit box. In short, in all other situations, it would seem
that SBTC is not bound to exercise diligence of any kind at all. Assayed in the light of
Our aforementioned pronouncements in CA Agro-lndustrial Development Corp., it is
not at all difficult to conclude that both conditions No. 9 and No. 13 of the "Lease
Agreement" covering the safety deposit box in question (Exhibits "A" and "1") must
be stricken down for being contrary to law and public policy as they are meant to
exempt SBTC from any liability for damage, loss or destruction of the contents of the
safety deposit box which may arise from its own or its agents' fraud, negligence or
delay. Accordingly, SBTC cannot take refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the
destruction or loss of the stamp collection because the flooding was a fortuitous
event and there was no showing of SBTC's participation in the aggravation of the loss
or injury. It states:

Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when

it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk,
no person shall be responsible for those events which
could not be foreseen, or which, though foreseen, were
inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia

Jurisdicada Española 17 says: "In a legal sense and, consequently, also
in relation to contracts, a "caso fortuito" prevents (sic) 18 the following
essential characteristics: (1) the cause of the unforeseen ands
unexpected occurrence, or of the failure of the debtor to comply with
his obligation, must be independent of the human will; (2) it must be
impossible to foresee the event which constitutes the "caso
fortuito," or if it can be foreseen, it must be impossible to avoid; (3) the
occurrence must be such as to render it impossible for one debtor to
fulfill his obligation in a normal manner; and (4) the obligor must be
free from any participation in the aggravation of the injury resulting to
the creditor." (cited in Servando vs.Phil., Steam Navigation
Co., supra). 19

Here, the unforeseen or unexpected inundating floods were

independent of the will of the appellant bank and the latter was not
shown to have participated in aggravating damage (sic) to the stamps
collection of the appellee. In fact, the appellant bank offered its
services to secure the assistance of an expert to save most of the then
good stamps but the appelle refused and let (sic) these recoverable
stamps inside the safety deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further elucidation.
Unfortunately, however, the public respondent failed to consider that in the instant
case, as correctly held by the trial court, SBTC was guilty of negligence. The facts
constituting negligence are enumerated in the petition and have been summarized in
thisponencia. SBTC's negligence aggravated the injury or damage to the stamp
collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the
floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view
thereof, it should have lost no time in notifying the petitioner in order that the box
could have been opened to retrieve the stamps, thus saving the same from further
deterioration and loss. In this respect, it failed to exercise the reasonable care and
prudence expected of a good father of a family, thereby becoming a party to the
aggravation of the injury or loss. Accordingly, the aforementioned fourth
characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which
reads:
 Those who in the performance of their obligation are guilty of fraud,
negligence, or delay, and those who in any manner contravene the
tenor thereof, are liable for damages,

thus comes to the succor of the petitioner. The destruction or loss of the stamp
collection which was, in the language of the trial court, the "product of 27 years of
patience and diligence" 21 caused the petitioner pecuniary loss; hence, he must be
compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral
damages. Since the relationship between the petitioner and SBTC is based on a
contract, either of them may be held liable for moral damages for breach thereof only
if said party had acted fraudulently or in bad faith. 22 There is here no proof of fraud
or bad faith on the part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and
Resolution of the public respondent Court of Appeals of 21 August 1991 and 21
November 1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE and
the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila in
Civil Case No. 87-42601 is hereby REINSTATED in full, except as to the award of moral
damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.

SECOND DIVISION

[G.R. No. 131719. May 25, 2004]

THE EXECUTIVE SECRETARY, THE SECRETARY OF JUSTICE, THE SECRETARY OF

LABOR AND EMPLOYMENT, AND THE SECRETARY OF FOREIGN
AFFAIRS, OWWA ADMINISTRATOR, and POEA
ADMINISTRATOR, petitioners, vs. THE HON. COURT OF APPEALS and
ASIAN RECRUITMENT COUNCIL PHILIPPINE CHAPTER (ARCO-PHIL.),
INC., representing its members: Worldcare Services Internationale,
Inc., Steadfast International Recruitment Corporation, Dragon
International Manpower Services Corporation, Verdant Manpower
Mobilization Corporation, Brent Overseas Personnel, Inc., ARL
Manpower Services, Inc., Dahlzhen International Services, Inc.,
Interworld Placement Center, Inc., Lakas Tao Contract Services, Ltd.
Co., and SSC Multiservices, respondents.

DECISION

CALLEJO, SR., J.:

 In this petition for review on certiorari, the Executive Secretary of the President
of the Philippines, the Secretary of Justice, the Secretary of Foreign Affairs, the
Secretary of Labor and Employment, the POEA Administrator and the OWWA
Administrator, through the Office of the Solicitor General, assail the Decision [1] of the
Court of Appeals in CA-G.R. SP No. 38815 affirming the Order [2] of the Regional Trial
Court of Quezon City dated August 21, 1995 in Civil Case No. Q-95-24401, granting
the plea of the petitioners therein for a writ of preliminary injunction and of the writ
of preliminary injunction issued by the trial court on August 24, 1995.

The Antecedents

Republic Act No. 8042, otherwise known as the Migrant Workers and Overseas
Filipinos Act of 1995, took effect on July 15, 1995. The Omnibus Rules and
Regulations Implementing the Migrant Workers and Overseas Filipino Act of 1995
was, thereafter, published in the April 7, 1996 issue of the Manila Bulletin. However,
even before the law took effect, the Asian Recruitment Council Philippine Chapter,
Inc. (ARCO-Phil.) filed, on July 17, 1995, a petition for declaratory relief under Rule 63
of the Rules of Court with the Regional Trial Court of Quezon City to declare as
unconstitutional Section 2, paragraph (g), Section 6, paragraphs (a) to (j), (l) and (m),
Section 7, paragraphs (a) and (b), and Sections 9 and 10 of the law, with a plea for
the issuance of a temporary restraining order and/or writ of preliminary injunction
enjoining the respondents therein from enforcing the assailed provisions of the law.

In a supplement to its petition, the ARCO-Phil. alleged that Rep. Act No. 8042 was
self-executory and that no implementing rules were needed. It prayed that the court
issue a temporary restraining order to enjoin the enforcement of Section 6,
paragraphs (a) to (m) on illegal recruitment, Section 7 on penalties for illegal
recruitment, and Section 9 on venue of criminal actions for illegal recruitments, viz:

Viewed in the light of the foregoing discussions, there appears to be urgent an

imperative need for this Honorable Court to maintain the status quo by enjoining the
implementation or effectivity of the questioned provisions of RA 8042, by way of a
restraining order otherwise, the member recruitment agencies of the petitioner will
suffer grave or irreparable damage or injury. With the effectivity of RA 8042, a great
majority of the duly licensed recruitment agencies have stopped or suspended their
operations for fear of being prosecuted under the provisions of a law that are unjust
and unconstitutional. This Honorable Court may take judicial notice of the fact that
processing of deployment papers of overseas workers for the past weeks have come
to a standstill at the POEA and this has affected thousands of workers everyday just
because of the enactment of RA 8042. Indeed, this has far reaching effects not only
to survival of the overseas manpower supply industry and the active participating
recruitment agencies, the countrys economy which has survived mainly due to the
dollar remittances of the overseas workers but more importantly, to the poor and the
needy who are in dire need of income-generating jobs which can only be obtained
from abroad. The loss or injury that the recruitment agencies will suffer will then be
immeasurable and irreparable. As of now, even foreign employers have already
reduced their manpower requirements from the Philippines due to their knowledge
that RA 8042 prejudiced and adversely affected the local recruitment agencies. [3]

On August 1, 1995, the trial court issued a temporary restraining order effective
for a period of only twenty (20) days therefrom.

After the petitioners filed their comment on the petition, the ARCO-Phil. filed an
amended petition, the amendments consisting in the inclusion in the caption thereof
eleven (11) other corporations which it alleged were its members and which it
represented in the suit, and a plea for a temporary restraining order enjoining the
respondents from enforcing Section 6 subsection (i), Section 6 subsection (k) and
paragraphs 15 and 16 thereof, Section 8, Section 10, paragraphs 1 and 2, and
Sections 11 and 40 of Rep. Act No. 8042.

The respondent ARCO-Phil. assailed Section 2(g) and (i), Section 6 subsection (a)
to (m), Section 7(a) to (b), and Section 10 paragraphs (1) and (2), quoted as follows:

(g) THE STATE RECOGNIZES THAT THE ULTIMATE PROTECTION TO ALL MIGRANT
WORKERS IS THE POSSESSION OF SKILLS. PURSUANT TO THIS AND AS SOON AS
PRACTICABLE, THE GOVERNMENT SHALL DEPLOY AND/OR ALLOW THE DEPLOYMENT
ONLY OF SKILLED FILIPINO WORKERS.[4]

Sec. 2 subsection (i, 2nd par.)

Nonetheless, the deployment of Filipino overseas workers, whether land-based or

sea-based, by local service contractors and manning agents employing them shall be
encourages (sic). Appropriate incentives may be extended to them.

II. ILLEGAL RECRUITMENT

SEC. 6. Definition. For purposes of this Act, illegal recruitment shall mean any act of
canvassing, enlisting, contracting, transporting, utilizing, hiring, or procuring workers
and includes referring, contract services, promising or advertising for employment
abroad, whether for profit or not, when undertaken by a non-licensee or non-holder of
authority contemplated under Article 13(f) of Presidential Decree No. 442, as
amended, otherwise known as the Labor Code of the Philippines: Provided, That any
such non-licensee or non-holder who, in any manner, offers or promises for a fee
employment abroad to two or more persons shall be deemed so engaged. It shall,
likewise, include the following acts, whether committed by any person, whether a
non-licensee, non-holder, licensee or holder of authority:

(a) To charge or accept directly or indirectly any amount greater than that specified in
the schedule of allowable fees prescribed by the Secretary of Labor and Employment,
or to make a worker pay any amount greater than that actually received by him as a
loan or advance;

(b) To furnish or publish any false notice or information or document in relation to

recruitment or employment;

(c) To give any false notice, testimony, information or document or commit any act of
misrepresentation for the purpose of securing a license or authority under the Labor
Code;

(d) To induce or attempt to induce a worker already employed to quit his employment
in order to offer him another unless the transfer is designed to liberate a worker from
oppressive terms and conditions of employment;

(e) To influence or attempt to influence any person or entity not to employ any
worker who has not applied for employment through his agency;
(f) To engage in the recruitment or placement of workers in jobs harmful to public
health or morality or to the dignity of the Republic of the Philippines;

(g) To obstruct or attempt to obstruct inspection by the Secretary of Labor and

Employment or by his duly authorized representative;

(h) To fail to submit reports on the status of employment, placement vacancies,

remittance of foreign exchange earnings, separation from jobs, departures and such
other matters or information as may be required by the Secretary of Labor and
Employment;

(i) To substitute or alter to the prejudice of the worker, employment contracts

approved and verified by the Department of Labor and Employment from the time of
actual signing thereof by the parties up to and including the period of the expiration
of the same without the approval of the Department of Labor and Employment;

(j) For an officer or agent of a recruitment or placement agency to become an officer

or member of the Board of any corporation engaged in travel agency or to be
engaged directly or indirectly in the management of a travel agency;

(k) To withhold or deny travel documents from applicant workers before departure for
monetary or financial considerations other than those authorized under the Labor
Code and its implementing rules and regulations;

(l) Failure to actually deploy without valid reason as determined by the Department of
Labor and Employment; and

(m) Failure to reimburse expenses incurred by the worker in connection with his
documentation and processing for purposes of deployment, in cases where the
deployment does not actually take place without the workers fault. Illegal recruitment
when committed by a syndicate or in large scale shall be considered an offense
involving economic sabotage.

Illegal recruitment is deemed committed by a syndicate if carried out by a group of

three (3) or more persons conspiring or confederating with one another. It is deemed
committed in large scale if committed against three (3) or more persons individually
or as a group.

The persons criminally liable for the above offenses are the principals, accomplices
and accessories. In case of juridical persons, the officers having control, management
or direction of their business shall be liable.

SEC. 7. Penalties.

(a) Any person found guilty of illegal recruitment shall suffer the penalty of
imprisonment of not less than six (6) years and one (1) day but not more than twelve
(12) years and a fine of not less than two hundred thousand pesos (P200,000.00) nor
more than five hundred thousand pesos (P500,000.00).

(b) The penalty of life imprisonment and a fine of not less than five hundred thousand
pesos (P500,000.00) nor more than one million pesos (P1,000,000.00) shall be
imposed if illegal recruitment constitutes economic sabotage as defined herein.

Provided, however, That the maximum penalty shall be imposed if the person illegally
recruited is less than eighteen (18) years of age or committed by a non-licensee or
non-holder of authority.
Sec. 8.

Prohibition on Officials and Employees. It shall be unlawful for any official or

employee of the Department of Labor and Employment, the Philippine Overseas
Employment Administration (POEA), or the Overseas Workers Welfare Administration
(OWWA), or the Department of Foreign Affairs, or other government agencies
involved in the implementation of this Act, or their relatives within the fourth civil
degree of consanguinity or affinity, to engage, directly or indirectly, in the business of
recruiting migrant workers as defined in this Act. The penalties provided in the
immediate preceding paragraph shall be imposed upon them. (underscoring
supplied)

Sec. 10, pars. 1 & 2.

Money Claims. Notwithstanding any provision of law to the contrary, the Labor
Arbiters of the National Labor Relations Commission (NLRC) shall have the original
and exclusive jurisdiction to hear and decide, within ninety (90) calendar days after
the filing of the complaint, the claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino workers for overseas
deployment including claims for actual, moral, exemplary and other forms of
damages.

The liability of the principal/employer and the recruitment/placement agency for any
and all claims under this section shall be joint and several. This provision shall be
incorporated in the contract for overseas employment and shall be a condition
precedent for its approval. The performance bond to be filed by the
recruitment/placement agency, as provided by law, shall be answerable for all money
claims or damages that may be awarded to the workers. If the recruitment/placement
agency is a juridical being, the corporate officers and directors and partners as the
case may be, shall themselves be jointly and solidarily liable with the corporation or
partnership for the aforesaid claims and damages.

SEC. 11. Mandatory Periods for Resolution of Illegal Recruitment Cases. The
preliminary investigations of cases under this Act shall be terminated within a period
of thirty (30) calendar days from the date of their filing.Where the preliminary
investigation is conducted by a prosecution officer and a prima facie case is
established, the corresponding information shall be filed in court within twenty-four
(24) hours from the termination of the investigation. If the preliminary investigation is
conducted by a judge and a prima facie case is found to exist, the corresponding
information shall be filed by the proper prosecution officer within forty-eight (48)
hours from the date of receipt of the records of the case.

The respondent averred that the aforequoted provisions of Rep. Act No. 8042
violate Section 1, Article III of the Constitution. [5] According to the respondent, Section
6(g) and (i) discriminated against unskilled workers and their families and, as such,
violated the equal protection clause, as well as Article II, Section 12 [6] and Article XV,
Sections 1[7] and 3(3) of the Constitution.[8] As the law encouraged the deployment of
skilled Filipino workers, only overseas skilled workers are granted rights. The
respondent stressed that unskilled workers also have the right to seek employment
abroad. According to the respondent, the right of unskilled workers to due process is
violated because they are prevented from finding employment and earning a living
abroad. It cannot be argued that skilled workers are immune from abuses by
employers, while unskilled workers are merely prone to such abuses. It was pointed
out that both skilled and unskilled workers are subjected to abuses by foreign
employers. Furthermore, the prohibition of the deployment of unskilled workers
abroad would only encourage fly-by-night illegal recruiters.

According to the respondent, the grant of incentives to service contractors and

manning agencies to the exclusion of all other licensed and authorized recruiters is
an invalid classification.Licensed and authorized recruiters are thus deprived of their
right to property and due process and to the equality of the person. It is
understandable for the law to prohibit illegal recruiters, but to discriminate against
licensed and registered recruiters is unconstitutional.

The respondent, likewise, alleged that Section 6, subsections (a) to (m) is

unconstitutional because licensed and authorized recruitment agencies are placed on
equal footing with illegal recruiters. It contended that while the Labor Code
distinguished between recruiters who are holders of licenses and non-holders thereof
in the imposition of penalties, Rep. Act No. 8042 does not make any distinction. The
penalties in Section 7(a) and (b) being based on an invalid classification are,
therefore, repugnant to the equal protection clause, besides being excessive; hence,
such penalties are violative of Section 19(1), Article III of the Constitution. [9] It was
also pointed out that the penalty for officers/officials/employees of recruitment
agencies who are found guilty of economic sabotage or large-scale illegal recruitment
under Rep. Act No. 8042 is life imprisonment. Since recruitment agencies usually
operate with a manpower of more than three persons, such agencies are forced to
shut down, lest their officers and/or employees be charged with large scale illegal
recruitment or economic sabotage and sentenced to life imprisonment. Thus, the
penalty imposed by law, being disproportionate to the prohibited acts, discourages
the business of licensed and registered recruitment agencies.

The respondent also posited that Section 6(m) and paragraphs (15) and (16),
Sections 8, 9 and 10, paragraph 2 of the law violate Section 22, Article III of the
Constitution[10] prohibiting ex-post facto laws and bills of attainder. This is because
the provisions presume that a licensed and registered recruitment agency is guilty of
illegal recruitment involving economic sabotage, upon a finding that it committed any
of the prohibited acts under the law. Furthermore, officials, employees and their
relatives are presumed guilty of illegal recruitment involving economic sabotage
upon such finding that they committed any of the said prohibited acts.

The respondent further argued that the 90-day period in Section 10, paragraph
(1) within which a labor arbiter should decide a money claim is relatively short, and
could deprive licensed and registered recruiters of their right to due process. The
period within which the summons and the complaint would be served on foreign
employees and, thereafter, the filing of the answer to the complaint would take more
than 90 days. This would thereby shift on local licensed and authorized recruiters the
burden of proving the defense of foreign employers. Furthermore, the respondent
asserted, Section 10, paragraph 2 of the law, which provides for the joint and several
liability of the officers and employees, is a bill of attainder and a violation of the right
of the said corporate officers and employees to due process. Considering that such
corporate officers and employees act with prior approval of the board of directors of
such corporation, they should not be liable, jointly and severally, for such corporate
acts.

The respondent asserted that the following provisions of the law are
unconstitutional:
SEC. 9. Venue. A criminal action arising from illegal recruitment as defined herein
shall be filed with the Regional Trial Court of the province or city where the offense
was committed or where the offended party actually resides at the time of the
commission of the offense: Provided, That the court where the criminal action is first
filed shall acquire jurisdiction to the exclusion of other courts: Provided, however,
That the aforestated provisions shall also apply to those criminal actions that have
already been filed in court at the time of the effectivity of this Act.

SEC. 10. Money Claims. Notwithstanding any provision of law to the contrary, the
Labor Arbiters of the National Labor Relations Commission (NLRC) shall have the
original and exclusive jurisdiction to hear and decide, within ninety (90) calendar
days after the filing of the complaint, the claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino workers for overseas
deployment including claims for actual, moral, exemplary and other forms of
damages.

Sec. 40.

The departments and agencies charged with carrying out the provisions of this Act
shall, within ninety (90) days after the effectiviy of this Act, formulate the necessary
rules and regulations for its effective implementation.

According to the respondent, the said provisions violate Section 5(5), Article VIII
of the Constitution[11] because they impair the power of the Supreme Court to
promulgate rules of procedure.

In their answer to the petition, the petitioners alleged, inter alia, that (a) the
respondent has no cause of action for a declaratory relief; (b) the petition was
premature as the rules implementing Rep. Act No. 8042 not having been released as
yet; (c) the assailed provisions do not violate any provisions of the Constitution; and,
(d) the law was approved by Congress in the exercise of the police power of the
State. In opposition to the respondents plea for injunctive relief, the petitioners
averred that:

As earlier shown, the amended petition for declaratory relief is devoid of merit for
failure of petitioner to demonstrate convincingly that the assailed law is
unconstitutional, apart from the defect and impropriety of the petition.One who
attacks a statute, alleging unconstitutionality must prove its invalidity beyond
reasonable doubt (Caleon v. Agus Development Corporation, 207 SCRA 748). All
reasonable doubts should be resolved in favor of the constitutionality of a statute
(People v. Vera, 65 Phil. 56). This presumption of constitutionality is based on the
doctrine of separation of powers which enjoin upon each department a becoming
respect for the acts of the other departments (Garcia vs. Executive Secretary, 204
SCRA 516 [1991]). Necessarily, the ancillary remedy of a temporary restraining order
and/or a writ of preliminary injunction prayed for must fall. Besides, an act of
legislature approved by the executive is presumed to be within constitutional bounds
(National Press Club v. Commission on Elections, 207 SCRA 1). [12]

After the respective counsels of the parties were heard on oral arguments, the
trial court issued on August 21, 1995, an order granting the petitioners plea for a writ
of preliminary injunction upon a bond of P50,000. The petitioner posted the requisite
bond and on August 24, 1995, the trial court issued a writ of preliminary injunction
enjoining the enforcement of the following provisions of Rep. Act No. 8042 pending
the termination of the proceedings:
Section 2, subsections (g) and (i, 2nd par.); Section 6, subsections (a) to (m), and
pars. 15 & 16; Section 7, subsections (a) & (b); Section 8; Section 9; Section 10; pars.
1 & 2; Section 11; and Section 40 of Republic Act No. 8042, otherwise known as the
Migrant Workers and Overseas Filipinos Act of 1995. [13]

The petitioners filed a petition for certiorari with the Court of Appeals assailing
the order and the writ of preliminary injunction issued by the trial court on the
following grounds:

1. Respondent ARCO-PHIL. had utterly failed to show its clear right/s or that of its
member-agencies to be protected by the injunctive relief and/or violation of said
rights by the enforcement of the assailed sections of R.A. 8042;

2. Respondent Judge fixed a P50,000 injunction bond which is grossly inadequate to

answer for the damage which petitioner-officials may sustain, should respondent
ARCO-PHIL. be finally adjudged as not being entitled thereto. [14]

The petitioners asserted that the respondent is not the real party-in-interest as
petitioner in the trial court. It is inconceivable how the respondent, a non-stock and
non-profit corporation, could sustain direct injury as a result of the enforcement of
the law. They argued that if, at all, any damage would result in the implementation of
the law, it is the licensed and registered recruitment agencies and/or the unskilled
Filipino migrant workers discriminated against who would sustain the said injury or
damage, not the respondent. The respondent, as petitioner in the trial court, was
burdened to adduce preponderant evidence of such irreparable injury, but failed to
do so. The petitioners further insisted that the petition a quo was premature since the
rules and regulations implementing the law had yet to be promulgated when such
petition was filed. Finally, the petitioners averred that the respondent failed to
establish the requisites for the issuance of a writ of preliminary injunction against the
enforcement of the law and the rules and regulations issued implementing the same.

On December 5, 1997, the appellate court came out with a four-page decision
dismissing the petition and affirming the assailed order and writ of preliminary
injunction issued by the trial court. The appellate court, likewise, denied the
petitioners motion for reconsideration of the said decision.

The petitioners now come to this Court in a petition for review on certiorari on
the following grounds:

1. Private respondent ARCO-PHIL. had utterly failed to show its clear right/s or that of
its member-agencies to be protected by the injunctive relief and/or violation of said
rights by the enforcement of the assailed sections of R.A. 8042;

2. The P50,000 injunction bond fixed by the court a quo and sustained by the Court of
Appeals is grossly inadequate to answer for the damage which petitioners-officials
may sustain, should private respondent ARCO-PHIL. be finally adjudged as not being
entitled thereto.[15]

On February 16, 1998, this Court issued a temporary restraining order enjoining
the respondents from enforcing the assailed order and writ of preliminary injunction.
 The Issues

The core issue in this case is whether or not the trial court committed grave
abuse of its discretion amounting to excess or lack of jurisdiction in issuing the
assailed order and the writ of preliminary injunction on a bond of only P50,000 and
whether or not the appellate court erred in affirming the trial courts order and the
writ of preliminary injunction issued by it.

The petitioners contend that the respondent has no locus standi. It is a non-
stock, non-profit organization; hence, not the real party-in-interest as petitioner in the
action. Although the respondent filed the petition in the Regional Trial Court in behalf
of licensed and registered recruitment agencies, it failed to adduce in evidence a
certified copy of its Articles of Incorporation and the resolutions of the said members
authorizing it to represent the said agencies in the proceedings. Neither is the suit of
the respondent a class suit so as to vest in it a personality to assail Rep. Act No.
8042; the respondent is service-oriented while the recruitment agencies it purports to
represent are profit-oriented. The petitioners assert that the law is presumed
constitutional and, as such, the respondent was burdened to make a case strong
enough to overcome such presumption and establish a clear right to injunctive relief.

The petitioners bewail the P50,000 bond fixed by the trial court for the issuance
of a writ of preliminary injunction and affirmed by the appellate court. They assert
that the amount is grossly inadequate to answer for any damages that the general
public may suffer by reason of the non-enforcement of the assailed provisions of the
law. The trial court committed a grave abuse of its discretion in granting the
respondents plea for injunctive relief, and the appellate court erred in affirming the
order and the writ of preliminary injunction issued by the trial court.

The respondent, for its part, asserts that it has duly established its locus
standi and its right to injunctive relief as gleaned from its pleadings and the
appendages thereto. Under Section 5, Rule 58 of the Rules of Court, it was incumbent
on the petitioners, as respondents in the RTC, to show cause why no injunction should
issue. It avers that the injunction bond posted by the respondent was more than
adequate to answer for any injury or damage the petitioners may suffer, if any, by
reason of the writ of preliminary injunction issued by the RTC. In any event, the
assailed provisions of Rep. Act No. 8042 exposed its members to the immediate and
irreparable damage of being deprived of their right to a livelihood without due
process, a property right protected under the Constitution.

The respondent contends that the commendable purpose of the law to eradicate
illegal recruiters should not be done at the expense and to the prejudice of licensed
and authorized recruitment agencies. The writ of preliminary injunction was
necessitated by the great number of duly licensed recruitment agencies that had
stopped or suspended their business operations for fear that their officers and
employees would be indicted and prosecuted under the assailed oppressive penal
provisions of the law, and meted excessive penalties. The respondent, likewise, urges
that the Court should take judicial notice that the processing of deployment papers of
overseas workers have come to a virtual standstill at the POEA.
 The Courts Ruling

The petition is meritorious.

The Respondent Has Locus Standi

To File the Petition in the RTC in
Representation of the Eleven
Licensed and Registered
Recruitment Agencies Impleaded
in the Amended Petition

The modern view is that an association has standing to complain of injuries to its
members. This view fuses the legal identity of an association with that of its
members.[16] An association has standing to file suit for its workers despite its lack of
direct interest if its members are affected by the action. An organization has standing
to assert the concerns of its constituents.[17]

In Telecommunications and Broadcast Attorneys of the Philippines v. Commission

on Elections,[18] we held that standing jus tertii would be recognized only if it can be
shown that the party suing has some substantial relation to the third party, or that
the right of the third party would be diluted unless the party in court is allowed to
espouse the third partys constitutional claims.

In this case, the respondent filed the petition for declaratory relief under Rule 64
of the Rules of Court for and in behalf of its eleven (11) licensed and registered
recruitment agencies which are its members, and which approved separate
resolutions expressly authorizing the respondent to file the said suit for and in their
behalf. We note that, under its Articles of Incorporation, the respondent was
organized for the purposes inter alia of promoting and supporting the growth and
development of the manpower recruitment industry, both in the local and
international levels; providing, creating and exploring employment opportunities for
the exclusive benefit of its general membership; enhancing and promoting the
general welfare and protection of Filipino workers; and, to act as the representative
of any individual, company, entity or association on matters related to the manpower
recruitment industry, and to perform other acts and activities necessary to
accomplish the purposes embodied therein. The respondent is, thus, the appropriate
party to assert the rights of its members, because it and its members are in every
practical sense identical. The respondent asserts that the assailed provisions violate
the constitutional rights of its members and the officers and employees thereof. The
respondent is but the medium through which its individual members seek to make
more effective the expression of their voices and the redress of their grievances. [19]

However, the respondent has no locus standi to file the petition for and in behalf
of unskilled workers. We note that it even failed to implead any unskilled workers in
its petition. Furthermore, in failing to implead, as parties-petitioners, the eleven
licensed and registered recruitment agencies it claimed to represent, the respondent
failed to comply with Section 2 of Rule 63 [20] of the Rules of Court. Nevertheless, since
the eleven licensed and registered recruitment agencies for which the respondent
filed the suit are specifically named in the petition, the amended petition is deemed
amended to avoid multiplicity of suits.[21]

The Assailed Order and Writ of

Preliminary Injunction Is Mooted
By Case Law

The respondent justified its plea for injunctive relief on the allegation in its
amended petition that its members are exposed to the immediate and irreparable
danger of being deprived of their right to a livelihood and other constitutional rights
without due process, on its claim that a great number of duly licensed recruitment
agencies have stopped or suspended their operations for fear that (a) their officers
and employees would be prosecuted under the unjust and unconstitutional penal
provisions of Rep. Act No. 8042 and meted equally unjust and excessive penalties,
including life imprisonment, for illegal recruitment and large scale illegal recruitment
without regard to whether the recruitment agencies involved are licensed and/or
authorized; and, (b) if the members of the respondent, which are licensed and
authorized, decide to continue with their businesses, they face the stigma and the
curse of being labeled illegal recruiters. In granting the respondents plea for a writ of
preliminary injunction, the trial court held, without stating the factual and legal basis
therefor, that the enforcement of Rep. Act No. 8042, pendente lite, would cause
grave and irreparable injury to the respondent until the case is decided on its merits.

We note, however, that since Rep. Act No. 8042 took effect on July 15, 1995, the
Court had, in a catena of cases, applied the penal provisions in Section 6, including
paragraph (m) thereof, and the last two paragraphs therein defining large scale
illegal recruitment committed by officers and/or employees of recruitment agencies
by themselves and in connivance with private individuals, and imposed the penalties
provided in Section 7 thereof, including the penalty of life imprisonment. [22] The
Informations therein were filed after preliminary investigations as provided for in
Section 11 of Rep. Act No. 8042 and in venues as provided for in Section 9 of the said
act. In People v. Chowdury,[23] we held that illegal recruitment is a crime of economic
sabotage and must be enforced.

In People v. Diaz,[24] we held that Rep. Act No. 8042 is but an amendment of the
Labor Code of the Philippines and is not an ex-post facto law because it is not applied
retroactively. In JMM Promotion and Management, Inc. v. Court of Appeals,[25] the issue
of the extent of the police power of the State to regulate a business, profession or
calling vis--vis the equal protection clause and the non-impairment clause of the
Constitution were raised and we held, thus:

A profession, trade or calling is a property right within the meaning of our

constitutional guarantees. One cannot be deprived of the right to work and the right
to make a living because these rights are property rights, the arbitrary and
unwarranted deprivation of which normally constitutes an actionable wrong.

Nevertheless, no right is absolute, and the proper regulation of a profession, calling,

business or trade has always been upheld as a legitimate subject of a valid exercise
of the police power by the state particularly when their conduct affects either the
execution of legitimate governmental functions, the preservation of the State, the
public health and welfare and public morals. According to the maxim, sic utere tuo ut
alienum non laedas, it must of course be within the legitimate range of legislative
action to define the mode and manner in which every one may so use his own
property so as not to pose injury to himself or others.

In any case, where the liberty curtailed affects at most the rights of property, the
permissible scope of regulatory measures is certainly much wider. To pretend that
licensing or accreditation requirements violates the due process clause is to ignore
the settled practice, under the mantle of the police power, of regulating entry to the
practice of various trades or professions. Professionals leaving for abroad are
required to pass rigid written and practical exams before they are deemed fit to
practice their trade. Seamen are required to take tests determining their
seamanship. Locally, the Professional Regulation Commission has begun to require
previously licensed doctors and other professionals to furnish documentary proof that
they had either re-trained or had undertaken continuing education courses as a
requirement for renewal of their licenses. It is not claimed that these requirements
pose an unwarranted deprivation of a property right under the due process clause. So
long as professionals and other workers meet reasonable regulatory standards no
such deprivation exists.

Finally, it is a futile gesture on the part of petitioners to invoke the non-impairment

clause of the Constitution to support their argument that the government cannot
enact the assailed regulatory measures because they abridge the freedom to
contract. In Philippine Association of Service Exporters, Inc. vs. Drilon, we held that
[t]he non-impairment clause of the Constitution must yield to the loftier purposes
targeted by the government. Equally important, into every contract is read provisions
of existing law, and always, a reservation of the police power for so long as the
agreement deals with a subject impressed with the public welfare.

A last point. Petitioners suggest that the singling out of entertainers and performing
artists under the assailed department orders constitutes class legislation which
violates the equal protection clause of the Constitution. We do not agree.

The equal protection clause is directed principally against undue favor and individual
or class privilege. It is not intended to prohibit legislation which is limited to the
object to which it is directed or by the territory in which it is to operate. It does not
require absolute equality, but merely that all persons be treated alike under like
conditions both as to privileges conferred and liabilities imposed. We have held, time
and again, that the equal protection clause of the Constitution does not forbid
classification for so long as such classification is based on real and substantial
differences having a reasonable relation to the subject of the particular legislation. If
classification is germane to the purpose of the law, concerns all members of the
class, and applies equally to present and future conditions, the classification does not
violate the equal protection guarantee.[26]

The validity of Section 6 of R.A. No. 8042 which provides that employees of
recruitment agencies may be criminally liable for illegal recruitment has been upheld
in People v. Chowdury:[27]

As stated in the first sentence of Section 6 of RA 8042, the persons who may be held
liable for illegal recruitment are the principals, accomplices and accessories. An
employee of a company or corporation engaged in illegal recruitment may be held
liable as principal, together with his employer, if it is shown that he actively and
consciously participated in illegal recruitment. It has been held that the existence of
the corporate entity does not shield from prosecution the corporate agent who
knowingly and intentionally causes the corporation to commit a crime. The
corporation obviously acts, and can act, only by and through its human agents, and it
is their conduct which the law must deter. The employee or agent of a corporation
engaged in unlawful business naturally aids and abets in the carrying on of such
business and will be prosecuted as principal if, with knowledge of the business, its
purpose and effect, he consciously contributes his efforts to its conduct and
promotion, however slight his contribution may be. [28]

By its rulings, the Court thereby affirmed the validity of the assailed penal and
procedural provisions of Rep. Act No. 8042, including the imposable penalties
therefor. Until the Court, by final judgment, declares that the said provisions are
unconstitutional, the enforcement of the said provisions cannot be enjoined.

The RTC Committed Grave Abuse

of Its Discretion Amounting to
Excess or Lack of Jurisdiction in
Issuing the Assailed Order and the
Writ of Preliminary Injunction

The matter of whether to issue a writ of preliminary injunction or not is

addressed to the sound discretion of the trial court. However, if the court commits
grave abuse of its discretion in issuing the said writ amounting to excess or lack of
jurisdiction, the same may be nullified via a writ of certiorari and prohibition.

In Social Security Commission v. Judge Bayona,[29] we ruled that a law is

presumed constitutional until otherwise declared by judicial interpretation. The
suspension of the operation of the law is a matter of extreme delicacy because it is
an interference with the official acts not only of the duly elected representatives of
the people but also of the highest magistrate of the land.

In Younger v. Harris, Jr.,[30] the Supreme Court of the United States emphasized,
thus:

Federal injunctions against state criminal statutes, either in their entirety or with
respect to their separate and distinct prohibitions, are not to be granted as a matter
of course, even if such statutes are unconstitutional. No citizen or member of the
community is immune from prosecution, in good faith, for his alleged criminal
acts. The imminence of such a prosecution even though alleged to be unauthorized
and, hence, unlawful is not alone ground for relief in equity which exerts its
extraordinary powers only to prevent irreparable injury to the plaintiff who seeks its
aid. 752 Beal v. Missouri Pacific Railroad Corp., 312 U.S. 45, 49, 61 S.Ct. 418, 420, 85
L.Ed. 577.

And similarly, in Douglas, supra, we made clear, after reaffirming this rule, that:

It does not appear from the record that petitioners have been threatened with any
injury other than that incidental to every criminal proceeding brought lawfully and in
good faith 319 U.S., at 164, 63 S.Ct., at 881.[31]
 The possible unconstitutionality of a statute, on its face, does not of itself justify
an injunction against good faith attempts to enforce it, unless there is a showing of
bad faith, harassment, or any other unusual circumstance that would call for
equitable relief.[32] The on its face invalidation of statutes has been described as
manifestly strong medicine, to be employed sparingly and only as a last resort, and is
generally disfavored.[33]

To be entitled to a preliminary injunction to enjoin the enforcement of a law

assailed to be unconstitutional, the party must establish that it will suffer irreparable
harm in the absence of injunctive relief and must demonstrate that it is likely to
succeed on the merits, or that there are sufficiently serious questions going to the
merits and the balance of hardships tips decidedly in its favor.[34] The higher standard
reflects judicial deference toward legislation or regulations developed through
presumptively reasoned democratic processes. Moreover, an injunction will alter,
rather than maintain, the status quo, or will provide the movant with substantially all
the relief sought and that relief cannot be undone even if the defendant prevails at a
trial on the merits.[35] Considering that injunction is an exercise of equitable relief and
authority, in assessing whether to issue a preliminary injunction, the courts must
sensitively assess all the equities of the situation, including the public interest.[36] In
litigations between governmental and private parties, courts go much further both to
give and withhold relief in furtherance of public interest than they are accustomed to
go when only private interests are involved.[37] Before the plaintiff may be entitled to
injunction against future enforcement, he is burdened to show some substantial
hardship.[38]

The fear or chilling effect of the assailed penal provisions of the law on the
members of the respondent does not by itself justify prohibiting the State from
enforcing them against those whom the State believes in good faith to be punishable
under the laws:

Just as the incidental chilling effect of such statutes does not automatically render
them unconstitutional, so the chilling effect that admittedly can result from the very
existence of certain laws on the statute books does not in itself justify prohibiting the
State from carrying out the important and necessary task of enforcing these laws
against socially harmful conduct that the State believes in good faith to be
punishable under its laws and the Constitution.[39]

It must be borne in mind that subject to constitutional limitations, Congress is

empowered to define what acts or omissions shall constitute a crime and to prescribe
punishments therefor.[40]The power is inherent in Congress and is part of the
sovereign power of the State to maintain peace and order. Whatever views may be
entertained regarding the severity of punishment, whether one believes in its
efficiency or its futility, these are peculiarly questions of legislative policy. [41] The
comparative gravity of crimes and whether their consequences are more or less
injurious are matters for the State and Congress itself to determine. [42] Specification
of penalties involves questions of legislative policy. [43]

Due process prohibits criminal stability from shifting the burden of proof to the
accused, punishing wholly passive conduct, defining crimes in vague or overbroad
language and failing to grant fair warning of illegal conduct. [44] Class legislation is
such legislation which denies rights to one which are accorded to others, or inflicts
upon one individual a more severe penalty than is imposed upon another in like case
offending.[45] Bills of attainder are legislative acts which inflict punishment on
individuals or members of a particular group without a judicial trial. Essential to a bill
of attainder are a specification of certain individuals or a group of individuals, the
imposition of a punishment, penal or otherwise, and the lack of judicial trial. [46]

Penalizing unlicensed and licensed recruitment agencies and their officers and
employees and their relatives employed in government agencies charged with the
enforcement of the law for illegal recruitment and imposing life imprisonment for
those who commit large scale illegal recruitment is not offensive to the
Constitution. The accused may be convicted of illegal recruitment and large scale
illegal recruitment only if, after trial, the prosecution is able to prove all the elements
of the crime charged.[47]

The possibility that the officers and employees of the recruitment agencies,
which are members of the respondent, and their relatives who are employed in the
government agencies charged in the enforcement of the law, would be indicted for
illegal recruitment and, if convicted sentenced to life imprisonment for large scale
illegal recruitment, absent proof of irreparable injury, is not sufficient on which to
base the issuance of a writ of preliminary injunction to suspend the enforcement of
the penal provisions of Rep. Act No. 8042 and avert any indictments under the law.
[48]
The normal course of criminal prosecutions cannot be blocked on the basis of
allegations which amount to speculations about the future.[49]

There is no allegation in the amended petition or evidence adduced by the

respondent that the officers and/or employees of its members had been threatened
with any indictments for violations of the penal provisions of Rep. Act No.
8042. Neither is there any allegation therein that any of its members and/or their
officers and employees committed any of the acts enumerated in Section 6(a) to (m)
of the law for which they could be indicted. Neither did the respondent adduce any
evidence in the RTC that any or all of its members or a great number of other duly
licensed and registered recruitment agencies had to stop their business operations
because of fear of indictments under Sections 6 and 7 of Rep. Act No. 8042. The
respondent merely speculated and surmised that licensed and registered recruitment
agencies would close shop and stop business operations because of the assailed
penal provisions of the law. A writ of preliminary injunction to enjoin the enforcement
of penal laws cannot be based on such conjectures or speculations. The Court cannot
take judicial notice that the processing of deployment papers of overseas workers
have come to a virtual standstill at the POEA because of the assailed provisions of
Rep. Act No. 8042. The respondent must adduce evidence to prove its allegation, and
the petitioners accorded a chance to adduce controverting evidence.

The respondent even failed to adduce any evidence to prove irreparable injury
because of the enforcement of Section 10(1)(2) of Rep. Act No. 8042. Its fear or
apprehension that, because of time constraints, its members would have to defend
foreign employees in cases before the Labor Arbiter is based on speculations. Even if
true, such inconvenience or difficulty is hardly irreparable injury.

The trial court even ignored the public interest involved in suspending the
enforcement of Rep. Act No. 8042 vis--vis the eleven licensed and registered
recruitment agencies represented by the respondent. In People v. Gamboa,[50] we
emphasized the primary aim of Rep. Act No. 8042:

Preliminarily, the proliferation of illegal job recruiters and syndicates preying on

innocent people anxious to obtain employment abroad is one of the primary
considerations that led to the enactment of The Migrant Workers and Overseas
Filipinos Act of 1995. Aimed at affording greater protection to overseas Filipino
workers, it is a significant improvement on existing laws in the recruitment and
placement of workers for overseas employment. Otherwise known as the Magna
Carta of OFWs, it broadened the concept of illegal recruitment under the Labor Code
and provided stiffer penalties thereto, especially those that constitute economic
sabotage, i.e., Illegal Recruitment in Large Scale and Illegal Recruitment Committed
by a Syndicate.[51]

By issuing the writ of preliminary injunction against the petitioners sans any
evidence, the trial court frustrated, albeit temporarily, the prosecution of illegal
recruiters and allowed them to continue victimizing hapless and innocent people
desiring to obtain employment abroad as overseas workers, and blocked the
attainment of the salutary policies [52] embedded in Rep. Act No. 8042. It bears
stressing that overseas workers, land-based and sea-based, had been remitting to
the Philippines billions of dollars which over the years had propped the economy.

In issuing the writ of preliminary injunction, the trial court considered paramount
the interests of the eleven licensed and registered recruitment agencies represented
by the respondent, and capriciously overturned the presumption of the
constitutionality of the assailed provisions on the barefaced claim of the respondent
that the assailed provisions of Rep. Act No. 8042 are unconstitutional. The trial court
committed a grave abuse of its discretion amounting to excess or lack of jurisdiction
in issuing the assailed order and writ of preliminary injunction. It is for this reason
that the Court issued a temporary restraining order enjoining the enforcement of the
writ of preliminary injunction issued by the trial court.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The assailed

decision of the appellate court is REVERSED AND SET ASIDE. The Order of the
Regional Trial Court dated August 21, 1995 in Civil Case No. Q-95-24401 and the Writ
of Preliminary Injunction issued by it in the said case on August 24, 1995 are
NULLIFIED. No costs.

SO ORDERED.

EN BANC

[G.R. No. 32652. March 15, 1930.]

THE PEOPLE OF THE PHILIPPINE ISLANDS, Plaintiff-Appellant, v. TAN BOON

KONG, Defendant-Appellee.

Attorney-General Jaranilla, for Appellant.

Alejandro de Aboitiz Pinaga, for Appellee.

SYLLABUS

1. CORPORATIONS; LIABILITY OF OFFICERS AND AGENTS. — A corporation can act

only through its officers and agents, and where the business itself involves a violation
of the law, the correct rule is that all who participate in it are liable.
 2. ID.; ID.; CRIMINAL LIABILITY. — The manager of a corporation who fails to make
true return of the corporation’s receipts and sales in violation of sections 1458 and
2723 of the Administrative Code, may be held criminally liable.

DECISION

OSTRAND, J.:

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

"That on and during the four quarters of the year 1924, in the municipality of Iloilo,
Province of Iloilo, Philippine Islands, the said accused, as manager of the Visayan
General Supply Co., Inc., a corporation organized under the laws of the Philippine
Islands and engaged in the purchase and sale of sugar, ’bayon,’ coprax, and other
native products and as such subject to the payment of internal-revenue taxes upon
its sales, did then and there voluntarily, illegally, and criminally declare in 1924 for
the purpose of taxation only the sum of P2,352,761.94, when in truth and in fact, and
the accused well knew that the total gross sales of said corporation during that year
amounted to P2,543,303.44, thereby failing to declare for the purpose of taxation the
amount of P190,541.50, and voluntarily and illegally not paying the Government as
internal-revenue percentage taxes the sum of P2,960.12, corresponding to 1½ per
cent of said undeclared sales."cralaw virtua1aw library

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

"SEC. 1458. Payment of percentage taxes — Quarterly report of earnings. — The

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

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

"And any such person who shall make a false or fraudulent return shall be punished
by a fine not exceeding ten thousand pesos or by imprisonment for a term not
exceeding two years, or both." (Act No. 2711.)
Apparently, the court below based the appealed ruling on the ground that the offense
charged must be regarded as committed by the corporation and not by its officials or
agents. This view is in direct conflict with the great weight of authority. A corporation
can act only through its officers and agents, and where the business itself involves a
violation of the law, the correct rule is that all who participate in it are liable (Grall
and Ostrander’s Case, 103 Va., 855, and authorities there cited).

In case of State v. Burnam (71 Wash., 199), the court went so far as to hold that the
manager of a dairy corporation was criminally liable for the violation of a statute by
the corporation though he was not present when the offense was committed.

In the present case the information or complaint alleges that the defendant was the
manager of a corporation which was engaged in business as a merchant, and as such
manager, he made a false return, for purposes of taxation, of the total amount of
sales made by said corporation during the year 1924. As the filing of such false return
constitutes a violation of law, the defendant, as the author of the illegal act, must
necessarily answer for its consequences, provided that the allegations are proven.

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

Johnson, Malcolm, Villamor, Johns, Romualdez and Villa-Real, JJ., concur.

G. R. No. 164317 February 6, 2006

ALFREDO CHING, Petitioner,

vs.
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-
VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila,
Branch 52; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE
PHILIPPINES, Respondents.

DECISION

CALLEJO, SR., J.:

Before the Court is a petition for review on certiorari of the Decision 1 of the Court of
Appeals (CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition
and mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28,
2004 denying the motion for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI).
Sometime in September to October 1980, PBMI, through petitioner, applied with the
Rizal Commercial Banking Corporation (respondent bank) for the issuance of
commercial letters of credit to finance its importation of assorted goods. 3

Respondent bank approved the application, and irrevocable letters of credit were
issued in favor of petitioner. The goods were purchased and delivered in trust to
PBMI. Petitioner signed 13 trust receipts4 as surety, acknowledging delivery of the
following goods:

T/R Nos. Date Granted Maturity Date Principal Description of Goods

1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" Brand

Synthetic Graphite
Electrode

1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles)

Calorized Lance Pipes

1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired

Refractory Tundish Bricks

1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for

CCM

1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds

2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory

Nozzle Bricks

1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite

Electrode [with] tapered
pitch filed nipples

1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles

calorized lance pipes [)]

1895 12-17-80 03-17-81 P67,652.04 Spare parts for

Spectrophotometer

1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds

2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds

2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for

rolling mills

2100 02-10-81 05-12-81 P210,748.00 Spare parts for

Lacolaboratory
Equipment5

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with
authority to sell but not by way of conditional sale, pledge or otherwise; and in case
such goods were sold, to turn over the proceeds thereof as soon as received, to apply
against the relative acceptances and payment of other indebtedness to respondent
bank. In case the goods remained unsold within the specified period, the goods were
to be returned to respondent bank without any need of demand. Thus, said "goods,
manufactured products or proceeds thereof, whether in the form of money or bills,
receivables, or accounts separate and capable of identification" were respondent
bank’s property.

When the trust receipts matured, petitioner failed to return the goods to respondent
bank, or to return their value amounting to ₱6,940,280.66 despite demands. Thus,
the bank filed a criminal complaint for estafa 6 against petitioner in the Office of the
City Prosecutor of Manila.

After the requisite preliminary investigation, the City Prosecutor found probable cause
estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to
Presidential Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law.
Thirteen (13) Informations were filed against the petitioner before the Regional Trial
Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 86-42169 to
86-42181, raffled to Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of
Justice. The appeal was dismissed in a Resolution7 dated March 17, 1987, and
petitioner moved for its reconsideration. On December 23, 1987, the Minister of
Justice granted the motion, thus reversing the previous resolution finding probable
cause against petitioner.8 The City Prosecutor was ordered to move for the withdrawal
of the Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was
denied on February 24, 1988.9The RTC, for its part, granted the Motion to Quash the
Informations filed by petitioner on the ground that the material allegations therein
did not amount to estafa.10

In the meantime, the Court rendered judgment in Allied Banking Corporation v.

Ordoñez,11 holding that the penal provision of P.D. No. 115 encompasses any act
violative of an obligation covered by the trust receipt; it is not limited to transactions
involving goods which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold. The Court also ruled that "the non-payment
of the amount covered by a trust receipt is an act violative of the obligation of the
entrustee to pay."12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa
against petitioner before the Office of the City Prosecutor of Manila. The case was
docketed as I.S. No. 95B-07614.

Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled

that there was no probable cause to charge petitioner with violating P.D. No. 115, as
petitioner’s liability was only civil, not criminal, having signed the trust receipts as
surety.13 Respondent bank appealed the resolution to the Department of Justice (DOJ)
via petition for review, alleging that the City Prosecutor erred in ruling:

1. That there is no evidence to show that respondent participated in the

misappropriation of the goods subject of the trust receipts;

2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature. 14

On July 13, 1999, the Secretary of Justice issued Resolution No. 250 15 granting the
petition and reversing the assailed resolution of the City Prosecutor. According to the
Justice Secretary, the petitioner, as Senior Vice-President of PBMI, executed the 13
trust receipts and as such, was the one responsible for the offense. Thus, the
execution of said receipts is enough to indict the petitioner as the official responsible
for violation of P.D. No. 115. The Justice Secretary also declared that petitioner could
not contend that P.D. No. 115 covers only goods ultimately destined for sale, as this
issue had already been settled in Allied Banking Corporation v. Ordoñez, 16where the
Court ruled that P.D. No. 115 is "not limited to transactions in goods which are to be
sold (retailed), reshipped, stored or processed as a component of a product ultimately
sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to
return said goods if unsold or not otherwise disposed of in accordance with the terms
of the trust receipts."

The Justice Secretary further stated that the respondent bound himself under the
terms of the trust receipts not only as a corporate official of PBMI but also as its
surety; hence, he could be proceeded against in two (2) ways: first, as surety as
determined by the Supreme Court in its decision in Rizal Commercial Banking
Corporation v. Court of Appeals;17 and second, as the corporate official responsible for
the offense under P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115
explicitly allows the prosecution of corporate officers "without prejudice to the civil
liabilities arising from the criminal offense." Thus, according to the Justice Secretary,
following Rizal Commercial Banking Corporation, the civil liability imposed is clearly
separate and distinct from the criminal liability of the accused under P.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed
13 Informations against petitioner for violation of P.D. No. 115 before the RTC of
Manila. The cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and
consolidated for trial before Branch 52 of said court. Petitioner filed a motion for
reconsideration, which the Secretary of Justice denied in a Resolution 18 dated January
17, 2000.

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA,
assailing the resolutions of the Secretary of Justice on the following grounds:

1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE
ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS
PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED
TO PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS.

2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE

ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY
CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME
INCURRED IN THE TERMINATION OF THE PRELIMINARY INVESTIGATION THAT
SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY

PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN
EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE
PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19

In his petition, petitioner incorporated a certification stating that "as far as this
Petition is concerned, no action or proceeding in the Supreme Court, the Court of
Appeals or different divisions thereof, or any tribunal or agency. It is finally certified
that if the affiant should learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions
thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable
Court within five (5) days from such notice."20

In its Comment on the petition, the Office of the Solicitor General alleged that -

A.
 THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER
ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED
AND THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION
OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED
PENAL CODE.

B.

THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY

HAS MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE
CASE, JUSTIFYING ITS DISMISSAL.

C.

THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND

MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF
THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE
DISMISSED.21

On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit,
and on procedural grounds. On the procedural issue, it ruled that (a) the certification
of non-forum shopping executed by petitioner and incorporated in the petition was
defective for failure to comply with the first two of the three-fold undertakings
prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the
petition for certiorari, prohibition and mandamus was not the proper remedy of the
petitioner.

On the merits of the petition, the CA ruled that the assailed resolutions of the
Secretary of Justice were correctly issued for the following reasons: (a) petitioner,
being the Senior Vice-President of PBMI and the signatory to the trust receipts, is
criminally liable for violation of P.D. No. 115; (b) the issue raised by the petitioner, on
whether he violated P.D. No. 115 by his actuations, had already been resolved and
laid to rest in Allied Bank Corporation v. Ordoñez;22 and (c) petitioner was estopped
from raising the

City Prosecutor’s delay in the final disposition of the preliminary investigation

because he failed to do so in the DOJ.

Thus, petitioner filed the instant petition, alleging that:

THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE

GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED
THEREIN WAS DEFECTIVE.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS
COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE
ASSAILED RESOLUTIONS.23

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere
technicality. He claims that the rules of procedure should be used to promote, not
frustrate, substantial justice. He insists that the Rules of Court should be construed
liberally especially when, as in this case, his substantial rights are adversely affected;
hence, the deficiency in his certification of non-forum shopping should not result in
the dismissal of his petition.

The Office of the Solicitor General (OSG) takes the opposite view, and asserts that
indubitably, the certificate of non-forum shopping incorporated in the petition before
the CA is defective because it failed to disclose essential facts about pending actions
concerning similar issues and parties. It asserts that petitioner’s failure to comply
with the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule 42, as
well as the ruling of this Court in Melo v. Court of Appeals. 24

We agree with the ruling of the CA that the certification of non-forum shopping
petitioner incorporated in his petition before the appellate court is defective. The
certification reads:

It is further certified that as far as this Petition is concerned, no action or proceeding

in the Supreme Court, the Court of Appeals or different divisions thereof, or any
tribunal or agency.

It is finally certified that if the affiant should learn that a similar action or proceeding
has been filed or is pending before the Supreme Court, the Court of Appeals, or
different divisions thereof, of any other tribunal or agency, it hereby undertakes to
notify this Honorable Court within five (5) days from such notice. 25

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the
petition should be accompanied by a sworn certification of non-forum shopping, as
provided in the third paragraph of Section 3, Rule 46 of said Rules. The latter
provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. —

The petition shall contain the full names and actual addresses of all the petitioners
and respondents, a concise statement of the matters involved, the factual
background of the case and the grounds relied upon for the relief prayed for.

xxx

The petitioner shall also submit together with the petition a sworn certification that
he has not theretofore commenced any other action involving the same issues in the
Supreme Court, the Court of Appeals or different divisions thereof, or any other
tribunal or agency; if there is such other action or proceeding, he must state the
status of the same; and if he should thereafter learn that a similar action or
proceeding has been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes
to promptly inform the aforesaid courts and other tribunal or agency thereof within
five (5) days therefrom. xxx

Compliance with the certification against forum shopping is separate from and
independent of the avoidance of forum shopping itself. The requirement is
mandatory. The failure of the petitioner to comply with the foregoing requirement
shall be sufficient ground for the dismissal of the petition without prejudice, unless
otherwise provided.26

Indubitably, the first paragraph of petitioner’s certification is incomplete and

unintelligible. Petitioner failed to certify that he "had not heretofore commenced any
other action involving the same issues in the Supreme Court, the Court of Appeals or
the different divisions thereof or any other tribunal or agency" as required by
paragraph 4, Section 3, Rule 46 of the Revised Rules of Court.

We agree with petitioner’s contention that the certification is designed to promote

and facilitate the orderly administration of justice, and therefore, should not be
interpreted with absolute literalness. In his works on the Revised Rules of Civil
Procedure, former Supreme Court Justice Florenz Regalado states that, with respect
to the contents of the certification which the pleader may prepare, the rule of
substantial compliance may be availed of. 27 However, there must be a special
circumstance or compelling reason which makes the strict application of the
requirement clearly unjustified. The instant petition has not alleged any such
extraneous circumstance. Moreover, as worded, the certification cannot even be
regarded as substantial compliance with the procedural requirement. Thus, the CA
was not informed whether, aside from the petition before it, petitioner had
commenced any other action involving the same issues in other tribunals.

On the merits of the petition, the CA ruled that the petitioner failed to establish that
the Secretary of Justice committed grave abuse of discretion in finding probable
cause against the petitioner for violation of estafa under Article 315, paragraph 1(b)
of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court
ratiocinated:

Be that as it may, even on the merits, the arguments advanced in support of the
petition are not persuasive enough to justify the desired conclusion that respondent
Secretary of Justice gravely abused its discretion in coming out with his assailed
Resolutions. Petitioner posits that, except for his being the Senior Vice-President of
the PBMI, there is no iota of evidence that he was a participes crimines in violating
the trust receipts sued upon; and that his liability, if at all, is purely civil because he
signed the said trust receipts merely as a xxx surety and not as the entrustee. These
assertions are, however, too dull that they cannot even just dent the findings of the
respondent Secretary, viz:

"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:

‘xxx If the violation or offense is committed by a corporation, partnership, association

or other judicial entities, the penalty provided for in this Decree shall be imposed
upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.’

"There is no dispute that it was the respondent, who as senior vice-president of PBM,
executed the thirteen (13) trust receipts. As such, the law points to him as the official
responsible for the offense. Since a corporation cannot be proceeded against
criminally because it cannot commit crime in which personal violence or malicious
intent is required, criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself (West Coast Life Ins.
Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution
by respondent of said receipts is enough to indict him as the official responsible for
violation of PD 115.

"Parenthetically, respondent is estopped to still contend that PD 115 covers only

goods which are ultimately destined for sale and not goods, like those imported by
PBM, for use in manufacture. This issue has already been settled in the Allied Banking
Corporation case, supra, where he was also a party, when the Supreme Court ruled
that PD 115 is ‘not limited to transactions in goods which are to be sold (retailed),
reshipped, stored or processed as a component or a product ultimately sold’ but
‘covers failure to turn over the proceeds of the sale of entrusted goods, or to return
said goods if unsold or disposed of in accordance with the terms of the trust receipts.’

"In regard to the other assigned errors, we note that the respondent bound himself
under the terms of the trust receipts not only as a corporate official of PBM but also
as its surety. It is evident that these are two (2) capacities which do not exclude the
other. Logically, he can be proceeded against in two (2) ways: first, as surety as
determined by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178
SCRA 739; and, secondly, as the corporate official responsible for the offense under
PD 115, the present case is an appropriate remedy under our penal law.

"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without

prejudice to the civil liabilities arising from the criminal offense’ thus, the civil liability
imposed on respondent in RCBC vs. Court of Appeals case is clearly separate and
distinct from his criminal liability under PD 115.’"28

Petitioner asserts that the appellate court’s ruling is erroneous because (a) the
transaction between PBMI and respondent bank is not a trust receipt transaction; (b)
he entered into the transaction and was sued in his capacity as PBMI Senior Vice-
President; (c) he never received the goods as an entrustee for PBMI, hence, could not
have committed any dishonesty or abused the confidence of respondent bank; and
(d) PBMI acquired the goods and used the same in operating its machineries and
equipment and not for resale.

The OSG, for its part, submits a contrary view, to wit:

34. Petitioner further claims that he is not a person responsible for the offense
allegedly because "[b]eing charged as the Senior Vice-President of Philippine
Blooming Mills (PBM), petitioner cannot be held criminally liable as the transactions
sued upon were clearly entered into in his capacity as an officer of the corporation"
and that [h]e never received the goods as an entrustee for PBM as he never had or
took possession of the goods nor did he commit dishonesty nor "abuse of confidence
in transacting with RCBC." Such argument is bereft of merit.

35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not
exculpate him from any liability. Petitioner’s responsibility as the corporate official of
PBM who received the goods in trust is premised on Section 13 of P.D. No. 115, which
provides:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having
received the goods for PBM, it was inevitable that the petitioner is the proper
corporate officer to be proceeded against by virtue of the PBM’s violation of P.D. No.
115.29

The ruling of the CA is correct.

In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts
of a quasi-judicial officer may be assailed by the aggrieved party via a petition for
certiorari and enjoined (a) when necessary to afford adequate protection to the
constitutional rights of the accused; (b) when necessary for the orderly
administration of justice; (c) when the acts of the officer are without or in excess of
authority; (d) where the charges are manifestly false and motivated by the lust for
vengeance; and (e) when there is clearly no prima facie case against the
accused.31 The Court also declared that, if the officer conducting a preliminary
investigation (in that case, the Office of the Ombudsman) acts without or in excess of
his authority and resolves to file an Information despite the absence of probable
cause, such act may be nullified by a writ of certiorari. 32

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure, 33 the
Information shall be prepared by the Investigating Prosecutor against the respondent
only if he or she finds probable cause to hold such respondent for trial. The
Investigating Prosecutor acts without or in excess of his authority under the Rule if
the Information is filed against the respondent despite absence of evidence showing
probable cause therefor.34 If the Secretary of Justice reverses the Resolution of the
Investigating Prosecutor who found no probable cause to hold the respondent for
trial, and orders such prosecutor to file the Information despite the absence of
probable cause, the Secretary of Justice acts contrary to law, without authority and/or
in excess of authority. Such resolution may likewise be nullified in a petition for
certiorari under Rule 65 of the Revised Rules of Civil Procedure. 35

A preliminary investigation, designed to secure the respondent against hasty,

malicious and oppressive prosecution, is an inquiry to determine whether (a) a crime
has been committed; and (b) whether there is probable cause to believe that the
accused is guilty thereof. It is a means of discovering the person or persons who may
be reasonably charged with a crime. Probable cause need not be based on clear and
convincing evidence of guilt, as the investigating officer acts upon probable cause of
reasonable belief. Probable cause implies probability of guilt and requires more than
bare suspicion but less than evidence which would justify a conviction. A finding of
probable cause needs only to rest on evidence showing that more likely than not, a
crime has been committed by the suspect.36

However, while probable cause should be determined in a summary manner, there is

a need to examine the evidence with care to prevent material damage to a potential
accused’s constitutional right to liberty and the guarantees of freedom and fair
play37 and to protect the State from the burden of unnecessary expenses in
prosecuting alleged offenses and holding trials arising from false, fraudulent or
groundless charges.38

In this case, petitioner failed to establish that the Secretary of Justice committed
grave abuse of discretion in issuing the assailed resolutions. Indeed, he acted in
accord with law and the evidence.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction,
within the meaning of this Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another person referred to in this
Decree as entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter’s execution and delivery
to the entruster of a signed document called a "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds thereof to the extent of
the amount owing to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not otherwise disposed
of, in accordance with the terms and conditions specified in the trust receipt, or for
other purposes substantially equivalent to any of the following:

1. In case of goods or documents, (a) to sell the goods or procure their sale; or
(b) to manufacture or process the goods with the purpose of ultimate sale;
Provided, That, in the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its ultimate sale, the entruster
shall retain its title over the goods whether in its original or processed form
until the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or otherwise deal with them in a manner
preliminary or necessary to their sale; or

2. In the case of instruments a) to sell or procure their sale or exchange; or b)

to deliver them to a principal; or c) to effect the consummation of some
transactions involving delivery to a depository or register; or d) to effect their
presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling

goods, documents or instruments for profit who, at the outset of the transaction, has,
as against the buyer, general property rights in such goods, documents or
instruments, or who sells the same to the buyer on credit, retaining title or other
interest as security for the payment of the purchase price, does not constitute a trust
receipt transaction and is outside the purview and coverage of this Decree.

An entrustee is one having or taking possession of goods, documents or instruments

under a trust receipt transaction, and any successor in interest of such person for the
purpose of payment specified in the trust receipt agreement. 39 The entrustee is
obliged to: (1) hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and conditions of the
trust receipt; (2) receive the proceeds in trust for the entruster and turn over the
same to the entruster to the extent of the amount owing to the entruster or as
appears on the trust receipt; (3) insure the goods for their total value against loss
from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof
whether in money or whatever form, separate and capable of identification as
property of the entruster; (5) return the goods, documents or instruments in the
event of non-sale or upon demand of the entruster; and (6) observe all other terms
and conditions of the trust receipt not contrary to the provisions of the decree. 40

The entruster shall be entitled to the proceeds from the sale of the goods, documents
or instruments released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, or to the return of
the goods, documents or instruments in case of non-sale, and to the enforcement of
all other rights conferred on him in the trust receipt; provided, such are not contrary
to the provisions of the document.41

In the case at bar, the transaction between petitioner and respondent bank falls
under the trust receipt transactions envisaged in P.D. No. 115. Respondent bank
imported the goods and entrusted the same to PBMI under the trust receipts signed
by petitioner, as entrustee, with the bank as entruster. The agreement was as
follows:

And in consideration thereof, I/we hereby agree to hold said goods in trust for the
said BANK as its property with liberty to sell the same within ____days from the date
of the execution of this Trust Receipt and for the Bank’s account, but without
authority to make any other disposition whatsoever of the said goods or any part
thereof (or the proceeds) either by way of conditional sale, pledge or otherwise.

I/we agree to keep the said goods insured to their full value against loss from fire,
theft, pilferage or other casualties as directed by the BANK, the sum insured to be
payable in case of loss to the BANK, with the understanding that the BANK is, not to
be chargeable with the storage premium or insurance or any other expenses incurred
on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as
received to the BANK, to apply against the relative acceptances (as described above)
and for the payment of any other indebtedness of mine/ours to the BANK. In case of
non-sale within the period specified herein, I/we agree to return the goods under this
Trust Receipt to the BANK without any need of demand.

I/we agree to keep the said goods, manufactured products or proceeds thereof,
whether in the form of money or bills, receivables, or accounts separate and capable
of identification as property of the BANK.42

It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as
a matter of public policy, the failure of person to turn over the proceeds of the sale of
the goods covered by a trust receipt or to return said goods, if not sold, is a public
nuisance to be abated by the imposition of penal sanctions. 43

The Court likewise rules that the issue of whether P.D. No. 115 encompasses
transactions involving goods procured as a component of a product ultimately sold
has been resolved in the affirmative in Allied Banking Corporation v. Ordoñez. 44 The
law applies to goods used by the entrustee in the operation of its machineries and
equipment. The non-payment of the amount covered by the trust receipts or the non-
return of the goods covered by the receipts, if not sold or otherwise not disposed of,
violate the entrustee’s obligation to pay the amount or to return the goods to the
entruster.

In Colinares v. Court of Appeals,45 the Court declared that there are two possible
situations in a trust receipt transaction. The first is covered by the provision which
refers to money received under the obligation involving the duty to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered by the
provision which refers to merchandise received under the obligation to return it
(devolvera) to the owner.46 Thus, failure of the entrustee to turn over the proceeds of
the sale of the goods covered by the trust receipts to the entruster or to return said
goods if they were not disposed of in accordance with the terms of the trust receipt is
a crime under P.D. No. 115, without need of proving intent to defraud. The law
punishes dishonesty and abuse of confidence in the handling of money or goods to
the prejudice of the entruster, regardless of whether the latter is the owner or not. A
mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a
criminal offense that causes prejudice, not only to another, but more to the public
interest.47

The Court rules that although petitioner signed the trust receipts merely as Senior
Vice-President of PBMI and had no physical possession of the goods, he cannot avoid
prosecution for violation of P.D. No. 115.

The penalty clause of the law, Section 13 of P.D. No. 115 reads:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code.1âwphi1 If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa
under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of
confidence. It may be committed by a corporation or other juridical entity or by
natural persons. However, the penalty for the crime is imprisonment for the periods
provided in said Article 315, which reads:

ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of
the means mentioned hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor
in its minimum period, if the amount of the fraud is over 12,000 pesos but
does not exceed 22,000 pesos; and if such amount exceeds the latter sum,
the penalty provided in this paragraph shall be imposed in its maximum
period, adding one year for each additional 10,000 pesos; but the total
penalty which may be imposed shall not exceed twenty years. In such cases,
and in connection with the accessory penalties which may be imposed and for
the purpose of the other provisions of this Code, the penalty shall be termed
prision mayor or reclusion temporal, as the case may be;

2nd. The penalty of prision correccional in its minimum and medium periods, if
the amount of the fraud is over 6,000 pesos but does not exceed 12,000
pesos;

3rd. The penalty of arresto mayor in its maximum period to prision

correccional in its minimum period, if such amount is over 200 pesos but does
not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not
exceed 200 pesos, provided that in the four cases mentioned, the fraud be
committed by any of the following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers,
or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise
means necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible share in the violations of the
law.48

If the crime is committed by a corporation or other juridical entity, the directors,

officers, employees or other officers thereof responsible for the offense shall be
charged and penalized for the crime, precisely because of the nature of the crime
and the penalty therefor. A corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by imprisonment. 49 However, a
corporation may be charged and prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined. 50

A crime is the doing of that which the penal code forbids to be done, or omitting to do
what it commands. A necessary part of the definition of every crime is the
designation of the author of the crime upon whom the penalty is to be inflicted. When
a criminal statute designates an act of a corporation or a crime and prescribes
punishment therefor, it creates a criminal offense which, otherwise, would not exist
and such can be committed only by the corporation. But when a penal statute does
not expressly apply to corporations, it does not create an offense for which a
corporation may be punished. On the other hand, if the State, by statute, defines a
crime that may be committed by a corporation but prescribes the penalty therefor to
be suffered by the officers, directors, or employees of such corporation or other
persons responsible for the offense, only such individuals will suffer such
penalty.51 Corporate officers or employees, through whose act, default or omission
the corporation commits a crime, are themselves individually guilty of the crime. 52

The principle applies whether or not the crime requires the consciousness of
wrongdoing. It applies to those corporate agents who themselves commit the crime
and to those, who, by virtue of their managerial positions or other similar relation to
the corporation, could be deemed responsible for its commission, if by virtue of their
relationship to the corporation, they had the power to prevent the act. 53 Moreover, all
parties active in promoting a crime, whether agents or not, are principals. 54 Whether
such officers or employees are benefited by their delictual acts is not a touchstone of
their criminal liability. Benefit is not an operative fact.

In this case, petitioner signed the trust receipts in question. He cannot, thus, hide
behind the cloak of the separate corporate personality of PBMI. In the words of Chief
Justice Earl Warren, a corporate officer cannot protect himself behind a corporation
where he is the actual, present and efficient actor.55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs
against the petitioner.

SO ORDERED.

[G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT
OF APPEALS and L.C. DIAZ and COMPANY, CPAs, respondents.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review of the Decision [1] of the Court of Appeals dated
27 October 1998 and its Resolution dated 11 May 1999. The assailed decision
reversed the Decision[2] of the Regional Trial Court of Manila, Branch 8, absolving
petitioner Consolidated Bank and Trust Corporation, now known as Solidbank
Corporation (Solidbank), of any liability. The questioned resolution of the appellate
court denied the motion for reconsideration of Solidbank but modified the decision by
deleting the award of exemplary damages, attorneys fees, expenses of litigation and
cost of suit.

The Facts

Solidbank is a domestic banking corporation organized and existing under

Philippine laws. Private respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a
professional partnership engaged in the practice of accounting.

Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank,
designated as Savings Account No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya

(Macaraya), filled up a savings (cash) deposit slip for P990 and a savings (checks)
deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre
(Calapre), to deposit the money with Solidbank. Macaraya also gave Calapre the
Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and
the passbook. The teller acknowledged receipt of the deposit by returning to Calapre
the duplicate copies of the two deposit slips. Teller No. 6 stamped the deposit slips
with the words DUPLICATE and SAVING TELLER 6 SOLIDBANK HEAD OFFICE. Since the
transaction took time and Calapre had to make another deposit for L.C. Diaz with
Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied
Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6
informed him that somebody got the passbook. [3] Calapre went back to L.C. Diaz and
reported the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check

of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to
Teller No. 6 the deposit slip and check. The teller stamped the words DUPLICATE and
SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the duplicate copy of the deposit slip.
When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got
the passbook but she could not remember to whom she gave the passbook. When
Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered that
someone shorter than Calapre got the passbook. Calapre was then standing beside
Macaraya.

Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the
deposit of a check for P90,000 drawn on Philippine Banking Corporation (PBC). This
PBC check of L.C. Diaz was a check that it had long closed. [4] PBC subsequently
dishonored the check because of insufficient funds and because the signature in the
check differed from PBCs specimen signature.Failing to get back the passbook,
Macaraya went back to her office and reported the matter to the Personnel Manager
of L.C. Diaz, Emmanuel Alvarez.

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer,
Luis C. Diaz (Diaz), called up Solidbank to stop any transaction using the same
passbook until L.C. Diaz could open a new account. [5] On the same day, Diaz formally
wrote Solidbank to make the same request. It was also on the same day that L.C.
Diaz learned of the unauthorized withdrawal the day before, 14 August 1991,
of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the
signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L.
Murillo. The signatories, however, denied signing the withdrawal slip. A certain Noel
Tamayo received the P300,000.

In an Information[6] dated 5 September 1991, L.C. Diaz charged its messenger,

Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa through Falsification of
Commercial Document. The Regional Trial Court of Manila dismissed the criminal case
after the City Prosecutor filed a Motion to Dismiss on 4 August 1992.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the
return of its money. Solidbank refused.

On 25 August 1992, L.C. Diaz filed a Complaint [7] for Recovery of a Sum of Money
against Solidbank with the Regional Trial Court of Manila, Branch 8. After trial, the
trial court rendered on 28 December 1994 a decision absolving Solidbank and
dismissing the complaint.

L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998, the Court
of Appeals issued its Decision reversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion
for reconsideration of Solidbank. The appellate court, however, modified its decision
by deleting the award of exemplary damages and attorneys fees.

The Ruling of the Trial Court

 In absolving Solidbank, the trial court applied the rules on savings account
written on the passbook. The rules state that possession of this book shall raise the
presumption of ownership and any payment or payments made by the bank upon the
production of the said book and entry therein of the withdrawal shall have the same
effect as if made to the depositor personally.[9]

At the time of the withdrawal, a certain Noel Tamayo was not only in possession
of the passbook, he also presented a withdrawal slip with the signatures of the
authorized signatories of L.C. Diaz. The specimen signatures of these persons were in
the signature cards. The teller stamped the withdrawal slip with the words Saving
Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel (Manuel)
for authentication. Manuel verified the signatures on the withdrawal slip. The
withdrawal slip was then given to another officer who compared the signatures on
the withdrawal slip with the specimen on the signature cards. The trial court
concluded that Solidbank acted with care and observed the rules on savings account
when it allowed the withdrawal of P300,000 from the savings account of L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz to
prove that the signatures on the withdrawal slip were forged. The trial court
admonished L.C. Diaz for not offering in evidence the National Bureau of Investigation
(NBI) report on the authenticity of the signatures on the withdrawal slip
for P300,000. The trial court believed that L.C. Diaz did not offer this evidence
because it is derogatory to its action.

Another provision of the rules on savings account states that the depositor must
keep the passbook under lock and key.[10] When another person presents the
passbook for withdrawal prior to Solidbanks receipt of the notice of loss of the
passbook, that person is considered as the owner of the passbook. The trial court
ruled that the passbook presented during the questioned transaction was now out of
the lock and key and presumptively ready for a business transaction. [11]

Solidbank did not have any participation in the custody and care of the passbook.
The trial court believed that Solidbanks act of allowing the withdrawal of P300,000
was not the direct and proximate cause of the loss. The trial court held that L.C. Diazs
negligence caused the unauthorized withdrawal. Three facts establish L.C. Diazs
negligence: (1) the possession of the passbook by a person other than the depositor
L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an unauthorized
person; and (3) the possession by an unauthorized person of a PBC check long closed
by L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diazs contention that Solidbank did not follow the
precautionary procedures observed by the two parties whenever L.C. Diaz withdrew
significant amounts from its account. L.C. Diaz claimed that a letter must accompany
withdrawals of more than P20,000. The letter must request Solidbank to allow the
withdrawal and convert the amount to a managers check. The bearer must also have
a letter authorizing him to withdraw the same amount. Another person driving a car
must accompany the bearer so that he would not walk from Solidbank to the office in
making the withdrawal. The trial court pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554
without any separate letter of authorization or any communication with Solidbank
that the money be converted into a managers check.
 The trial court further justified the dismissal of the complaint by holding that the
case was a last ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the
criminal case against Ilagan.

The dispositive portion of the decision of the trial court reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the

complaint.

The Court further renders judgment in favor of defendant bank pursuant to its
counterclaim the amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees.

With costs against plaintiff.

SO ORDERED.[12]

The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate cause
of the unauthorized withdrawal of P300,000 from the savings account of L.C.
Diaz. The appellate court reached this conclusion after applying the provision of the
Civil Code on quasi-delict, to wit:

Article 2176. Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such fault or negligence,
if there is no pre-existing contractual relation between the parties, is called a quasi-
delict and is governed by the provisions of this chapter.

The appellate court held that the three elements of a quasi-delict are present in this
case, namely: (a) damages suffered by the plaintiff; (b) fault or negligence of the
defendant, or some other person for whose acts he must respond; and (c) the
connection of cause and effect between the fault or negligence of the defendant and
the damage incurred by the plaintiff.

The Court of Appeals pointed out that the teller of Solidbank who received the
withdrawal slip for P300,000 allowed the withdrawal without making the necessary
inquiry. The appellate court stated that the teller, who was not presented by
Solidbank during trial, should have called up the depositor because the money to be
withdrawn was a significant amount. Had the teller called up L.C. Diaz, Solidbank
would have known that the withdrawal was unauthorized. The teller did not even
verify the identity of the impostor who made the withdrawal. Thus, the appellate
court found Solidbank liable for its negligence in the selection and supervision of its
employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its
deposits to its messenger and its messenger in leaving the passbook with the
teller, Solidbank could not escape liability because of the doctrine of last clear
chance. Solidbank could have averted the injury suffered by L.C. Diaz had it called up
L.C. Diaz to verify the withdrawal.
 The appellate court ruled that the degree of diligence required from Solidbank is
more than that of a good father of a family. The business and functions of banks are
affected with public interest. Banks are obligated to treat the accounts of their
depositors with meticulous care, always having in mind the fiduciary nature of their
relationship with their clients. The Court of Appeals found Solidbank remiss in its
duty, violating its fiduciary relationship with L.C. Diaz.

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED

and a new one entered.

1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to

pay plaintiff-appellant the sum of Three Hundred Thousand Pesos
(P300,000.00), with interest thereon at the rate of 12% per annum
from the date of filing of the complaint until paid, the sum
of P20,000.00 as exemplary damages, and P20,000.00 as attorneys
fees and expenses of litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellees counterclaim in the amount

of P30,000.00 as attorneys fees.

SO ORDERED.[13]

Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its
decision but modified the award of damages. The appellate court deleted the award
of exemplary damages and attorneys fees. Invoking Article 2231 [14] of the Civil Code,
the appellate court ruled that exemplary damages could be granted if the defendant
acted with gross negligence. Since Solidbank was guilty of simple negligence only,
the award of exemplary damages was not justified. Consequently, the award of
attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code.The
expenses of litigation and cost of suit were also not imposed on Solidbank.

The dispositive portion of the Resolution reads as follows:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed
with modification by deleting the award of exemplary damages and attorneys fees,
expenses of litigation and cost of suit.

SO ORDERED.[15]

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals
on these grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK

SHOULD SUFFER THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST
 CALLED PRIVATE RESPONDENT BY TELEPHONE BEFORE IT ALLOWED
THE WITHDRAWAL OF P300,000.00 TO RESPONDENTS MESSENGER
EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT BETWEEN THE
PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS THERE
ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD
FIRST CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF
A BIG AMOUNT IN A SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST

CLEAR CHANCE AND IN HOLDING THAT PETITIONER BANKS TELLER
HAD THE LAST OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN
IT IS UNDISPUTED THAT THE TWO SIGNATURES OF RESPONDENT ON
THE WITHDRAWAL SLIP ARE GENUINE AND PRIVATE RESPONDENTS
PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE RESPONDENT
WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS
CHECKS AND OTHER FINANCIAL DOCUMENTS.

III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE
IS A LAST DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER
ITS P300,000.00 AFTER FAILING IN ITS EFFORTS TO RECOVER THE
SAME FROM ITS EMPLOYEE EMERANO ILAGAN.

IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES

AWARDED AGAINST PETITIONER UNDER ARTICLE 2197 OF THE CIVIL
CODE, NOTWITHSTANDING ITS FINDING THAT PETITIONER BANKS
NEGLIGENCE WAS ONLY CONTRIBUTORY.[16]

The Ruling of the Court

The petition is partly meritorious.

Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application
of the law. The trial court pinned the liability on L.C. Diaz based on the provisions of
the rules on savings account, a recognition of the contractual relationship between
Solidbank and L.C. Diaz, the latter being a depositor of the former. On the other hand,
the Court of Appeals applied the law on quasi-delict to determine who between the
two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is
generally applicable when there is no pre-existing contractual relationship between
the parties.

We hold that Solidbank is liable for breach of contract due to negligence, or culpa
contractual.

The contract between the bank and its depositor is governed by the provisions of
the Civil Code on simple loan.[17] Article 1980 of the Civil Code expressly provides that
x x x savings x x x deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan. There is a debtor-creditor
relationship between the bank and its depositor. The bank is the debtor and the
depositor is the creditor. The depositor lends the bank money and the bank agrees to
pay the depositor on demand. The savings deposit agreement between the bank and
the depositor is the contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 (RA 8791), [18] which took effect on 13
June 2000, declares that the State recognizes the fiduciary nature of banking that
requires high standards of integrity and performance.[19] This new provision in the
general banking law, introduced in 2000, is a statutory affirmation of Supreme Court
decisions, starting with the 1990 case of Simex International v. Court of Appeals,
[20]
holding that the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their relationship.
[21]

This fiduciary relationship means that the banks obligation to observe high
standards of integrity and performance is deemed written into every deposit
agreement between a bank and its depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that of a good father of a
family. Article 1172 of the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such stipulation then the
diligence of a good father of a family. [22] Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must observe high standards of integrity
and performance in servicing their depositors. Although RA 8791 took effect almost
nine years after the unauthorized withdrawal of the P300,000 from L.C. Diazs savings
account, jurisprudence[23] at the time of the withdrawal already imposed on banks the
same high standard of diligence required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert

the contract between the bank and its depositors from a simple loan to a trust
agreement, whether express or implied. Failure by the bank to pay the depositor is
failure to pay a simple loan, and not a breach of trust. [24] The law simply imposes on
the bank a higher standard of integrity and performance in complying with its
obligations under the contract of simple loan, beyond those required of non-bank
debtors under a similar contract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trust
agreement because banks do not accept deposits to enrich depositors but to earn
money for themselves. The law allows banks to offer the lowest possible interest rate
to depositors while charging the highest possible interest rate on their own
borrowers. The interest spread or differential belongs to the bank and not to the
depositors who are not cestui que trust of banks. If depositors are cestui que trust of
banks, then the interest spread or income belongs to the depositors, a situation that
Congress certainly did not intend in enacting Section 2 of RA 8791.

Solidbanks Breach of its Contractual Obligation

 Article 1172 of the Civil Code provides that responsibility arising from negligence
in the performance of every kind of obligation is demandable. For breach of the
savings deposit agreement due to negligence, or culpa contractual, the bank is liable
to its depositor.

Calapre left the passbook with Solidbank because the transaction took time and
he had to go to Allied Bank for another transaction. The passbook was still in the
hands of the employees of Solidbank for the processing of the deposit when Calapre
left Solidbank. Solidbanks rules on savings account require that the deposit book
should be carefully guarded by the depositor and kept under lock and key, if possible.
When the passbook is in the possession of Solidbanks tellers during withdrawals, the
law imposes on Solidbank and its tellers an even higher degree of diligence in
safeguarding the passbook.

Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring

that they return the passbook only to the depositor or his authorized representative.
The tellers know, or should know, that the rules on savings account provide that any
person in possession of the passbook is presumptively its owner. If the tellers give the
passbook to the wrong person, they would be clothing that person presumptive
ownership of the passbook, facilitating unauthorized withdrawals by that person. For
failing to return the passbook to Calapre, the authorized representative of L.C. Diaz,
Solidbank and Teller No. 6 presumptively failed to observe such high degree of
diligence in safeguarding the passbook, and in insuring its return to the party
authorized to receive the same.

In culpa contractual, once the plaintiff proves a breach of contract, there is a

presumption that the defendant was at fault or negligent. The burden is on the
defendant to prove that he was not at fault or negligent. In contrast, in culpa
aquiliana the plaintiff has the burden of proving that the defendant was negligent. In
the present case, L.C. Diaz has established that Solidbank breached its contractual
obligation to return the passbook only to the authorized representative of L.C.
Diaz. There is thus a presumption that Solidbank was at fault and its teller was
negligent in not returning the passbook to Calapre. The burden was on Solidbank to
prove that there was no negligence on its part or its employees.

Solidbank failed to discharge its burden. Solidbank did not present to the trial
court Teller No. 6, the teller with whom Calapre left the passbook and who was
supposed to return the passbook to him. The record does not indicate that Teller No.
6 verified the identity of the person who retrieved the passbook. Solidbank also failed
to adduce in evidence its standard procedure in verifying the identity of the person
retrieving the passbook, if there is such a procedure, and that Teller No. 6
implemented this procedure in the present case.

Solidbank is bound by the negligence of its employees under the principle

of respondeat superior or command responsibility. The defense of exercising the
required diligence in the selection and supervision of employees is not a complete
defense in culpa contractual, unlike in culpa aquiliana.[25]

The bank must not only exercise high standards of integrity and performance, it
must also insure that its employees do likewise because this is the only way to insure
that the bank will comply with its fiduciary duty. Solidbank failed to present the teller
who had the duty to return to Calapre the passbook, and thus failed to prove that this
teller exercised the high standards of integrity and performance required of
Solidbanks employees.

Proximate Cause of the Unauthorized Withdrawal

Another point of disagreement between the trial and appellate courts is the
proximate cause of the unauthorized withdrawal. The trial court believed that L.C.
Diazs negligence in not securing its passbook under lock and key was the proximate
cause that allowed the impostor to withdraw the P300,000. For the appellate court,
the proximate cause was the tellers negligence in processing the withdrawal without
first verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence,

unbroken by any efficient intervening cause, produces the injury and without which
the result would not have occurred. [26] Proximate cause is determined by the facts of
each case upon mixed considerations of logic, common sense, policy and precedent.
[27]

L.C. Diaz was not at fault that the passbook landed in the hands of the
impostor. Solidbank was in possession of the passbook while it was processing the
deposit. After completion of the transaction, Solidbank had the contractual obligation
to return the passbook only to Calapre, the authorized representative of L.C.
Diaz. Solidbank failed to fulfill its contractual obligation because it gave the passbook
to another person.

Solidbanks failure to return the passbook to Calapre made possible the

withdrawal of the P300,000 by the impostor who took possession of the
passbook. Under Solidbanks rules on savings account, mere possession of the
passbook raises the presumption of ownership. It was the negligent act of Solidbanks
Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the
passbook not fallen into the hands of the impostor, the loss of P300,000 would not
have happened. Thus, the proximate cause of the unauthorized withdrawal was
Solidbanks negligence in not returning the passbook to Calapre.

We do not subscribe to the appellate courts theory that the proximate cause of
the unauthorized withdrawal was the tellers failure to call up L.C. Diaz to verify the
withdrawal. Solidbank did not have the duty to call up L.C. Diaz to confirm the
withdrawal. There is no arrangement between Solidbank and L.C. Diaz to this
effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures
that the parties must observe whenever withdrawals of large amounts are made does
not direct Solidbank to call up L.C. Diaz.

There is no law mandating banks to call up their clients whenever their

representatives withdraw significant amounts from their accounts. L.C. Diaz therefore
had the burden to prove that it is the usual practice of Solidbank to call up its clients
to verify a withdrawal of a large amount of money. L.C. Diaz failed to do so.

Teller No. 5 who processed the withdrawal could not have been put on guard to
verify the withdrawal. Prior to the withdrawal of P300,000, the impostor deposited
with Teller No. 6 the P90,000 PBC check, which later bounced. The impostor
apparently deposited a large amount of money to deflect suspicion from the
withdrawal of a much bigger amount of money. The appellate court thus erred when
it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when
no law requires this from banks and when the teller had no reason to be suspicious of
the transaction.

Solidbank continues to foist the defense that Ilagan made the

withdrawal. Solidbank claims that since Ilagan was also a messenger of L.C. Diaz, he
was familiar with its teller so that there was no more need for the teller to verify the
withdrawal. Solidbank relies on the following statements in the Booking and
Information Sheet of Emerano Ilagan:

xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and
indicated the amount of P90,000 which he deposited in favor of L.C. Diaz and
Company. After successfully withdrawing this large sum of money, accused Ilagan
gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then hired a taxicab in the
amount of P1,000 to transport him (Ilagan) to his home province at Bauan,
Batangas. Ilagan extravagantly and lavishly spent his money but a big part of his loot
was wasted in cockfight and horse racing. Ilagan was apprehended and meekly
admitted his guilt.[28] (Emphasis supplied.)

L.C. Diaz refutes Solidbanks contention by pointing out that the person who
withdrew the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts
stated that this Noel Tamayo presented the passbook with the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel Tamayo
withdrew the P300,000. The Court is not a trier of facts. We find no justifiable reason
to reverse the factual finding of the trial court and the Court of Appeals. The tellers
who processed the deposit of the P90,000 check and the withdrawal of the P300,000
were not presented during trial to substantiate Solidbanks claim that Ilagan
deposited the check and made the questioned withdrawal. Moreover, the entry
quoted by Solidbank does not categorically state that Ilagan presented the
withdrawal slip and the passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but
the negligent act of one is appreciably later than that of the other, or where it is
impossible to determine whose fault or negligence caused the loss, the one who had
the last clear opportunity to avoid the loss but failed to do so, is chargeable with the
loss.[29] Stated differently, the antecedent negligence of the plaintiff does not
preclude him from recovering damages caused by the supervening negligence of the
defendant, who had the last fair chance to prevent the impending harm by the
exercise of due diligence.[30]

We do not apply the doctrine of last clear chance to the present case. Solidbank
is liable for breach of contract due to negligence in the performance of its contractual
obligation to L.C. Diaz. This is a case of culpa contractual, where neither the
contributory negligence of the plaintiff nor his last clear chance to avoid the loss,
would exonerate the defendant from liability. [31] Such contributory negligence or last
clear chance by the plaintiff merely serves to reduce the recovery of damages by the
plaintiff but does not exculpate the defendant from his breach of contract. [32]

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by the
courts, according to the circumstances. This means that if the defendant exercised
the proper diligence in the selection and supervision of its employee, or if the plaintiff
was guilty of contributory negligence, then the courts may reduce the award of
damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to fall into the hands of an
impostor. Thus, the liability of Solidbank should be reduced.

In Philippine Bank of Commerce v. Court of Appeals,[33] where the Court

held the depositor guilty of contributory negligence, we allocated the damages
between the depositor and the bank on a 40-60 ratio. Applying the same ruling to
this case, we hold that L.C. Diaz must shoulder 40% of the actual damages awarded
by the appellate court. Solidbank must pay the other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals

is AFFIRMED with MODIFICATION. Petitioner Solidbank Corporation shall pay private
respondent L.C. Diaz and Company, CPAs only 60% of the actual damages awarded
by the Court of Appeals. The remaining 40% of the actual damages shall be borne by
private respondent L.C. Diaz and Company, CPAs. Proportionate costs.

SO ORDERED.

EN BANC

PROFESSIONAL SERVICES, G.R. No. 126297

INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.*
THE COURT OF APPEALS
and NATIVIDAD and ENRIQUE
AGANA,
Respondents.

x-------------------x
NATIVIDAD [substituted by her G.R. No. 126467
children Marcelino Agana III,
Enrique Agana, Jr.,
Emma Agana-Andaya,
Jesus Agana and Raymund
Agana] and ENRIQUE AGANA,
Petitioners,

- versus-

THE COURT OF APPEALS and JUAN

FUENTES,
Respondents.

x-------------------x
MIGUEL AMPIL, G.R. No. 127590
Petitioner,

-versus-

NATIVIDAD and ENRIQUE

AGANA,
Respondents.
Promulgated:
February 2, 2010
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

RESOLUTION
CORONA, J.:

With prior leave of court,[1] petitioner Professional Services, Inc. (PSI)

filed a second motion for reconsideration[2] urging referral thereof to the Court en

banc and seeking modification of the decision dated January 31, 2007 and resolution

dated February 11, 2008 which affirmed its vicarious and direct liability for damages

to respondents Enrique Agana and the heirs of Natividad Agana (Aganas).

Manila Medical Services, Inc. (MMSI), [3] Asian Hospital, Inc. (AHI),[4] and Private

Hospital Association of the Philippines (PHAP)[5] all sought to intervene in these

casesinvoking the common ground that, unless modified, the assailed decision and

resolution will jeopardize the financial viability of private hospitals and jack up the

cost of health care.

The Special First Division of the Court granted the motions for intervention of

MMSI, AHI and PHAP (hereafter intervenors), [6] and referred en consulta to the

Court en banc the motion for prior leave of court and the second motion for

reconsideration of PSI.[7]

Due to paramount public interest, the Court en banc accepted the

referral[8] and heard the parties on oral arguments on one particular issue: whether a

hospital may be held liable for the negligence of physicians-consultants allowed to

practice in its premises.[9]

To recall the salient facts, PSI, together with Dr. Miguel Ampil (Dr. Ampil) and

Dr. Juan Fuentes (Dr. Fuentes), was impleaded by Enrique Agana and Natividad Agana

(later substituted by her heirs), in a complaint [10] for damages filed in the Regional

Trial Court (RTC) of Quezon City, Branch 96, for the injuries suffered by

Natividad when Dr. Ampil and Dr. Fuentes neglected to remove from her body two

gauzes[11] which were used in the surgery they performed on her on April 11, 1984 at

the Medical City General Hospital. PSI was impleaded as owner, operator and

manager of the hospital.

In a decision[12] dated March 17, 1993, the RTC held PSI solidarily liable with Dr. Ampil

and Dr. Fuentes for damages.[13] On appeal, the Court of Appeals (CA), absolved Dr.

Fuentes but affirmed the liability of Dr. Ampil and PSI, subject to the right of PSI to

claim reimbursement from Dr. Ampil.[14]

On petition for review, this Court, in its January 31, 2007 decision, affirmed the CA

decision.[15] PSI filed a motion for reconsideration[16] but the Court denied it in a

resolution dated February 11, 2008.[17]

The Court premised the direct liability of PSI to the Aganas on the following

facts and law:

First, there existed between PSI and Dr. Ampil an employer-employee relationship as

contemplated in the December 29, 1999 decision in Ramos v. Court of Appeals[18] that

for purposes of allocating responsibility in medical negligence cases, an employer-

employee relationship exists between hospitals and their consultants. [19] Although the

Court in Ramos later issued a Resolution dated April 11, 2002 [20] reversing its earlier

finding on the existence of an employment relationship between hospital and doctor,

a similar reversal was not warranted in the present case because the defense raised

by PSI consisted of a mere general denial of control or responsibility over the actions

of Dr. Ampil.[21]

Second, by accrediting Dr. Ampil and advertising his qualifications, PSI created

the public impression that he was its agent. [22] Enrique testified that it was on account

of Dr. Ampil's accreditation with PSI that he conferred with said doctor about his

wife's (Natividad's) condition.[23] After his meeting with Dr. Ampil, Enrique asked

Natividad to personally consult Dr. Ampil. [24] In effect, when Enrigue and Natividad

engaged the services of Dr. Ampil, at the back of their minds was that the latter was

a staff member of a prestigious hospital. Thus, under the doctrine of apparent

authority applied in Nogales, et al. v. Capitol Medical Center, et al.,[25] PSI was liable
for the negligence of Dr. Ampil.

Finally, as owner and operator of Medical City General Hospital, PSI was bound

by its duty to provide comprehensive medical services to Natividad Agana, to

exercise reasonable care to protect her from harm, [26] to oversee or supervise all

persons who practiced medicine within its walls, and to take active steps in fixing any

form of negligence committed within its premises. [27] PSI committed a serious breach

of its corporate duty when it failed to conduct an immediate investigation into the

reported missing gauzes.[28]

PSI is now asking this Court to reconsider the foregoing rulings for these

reasons:
I

The declaration in the 31 January 2007 Decision vis-a-vis the 11

February 2009 Resolution that the ruling in Ramos vs. Court of Appeals
(G.R. No. 134354, December 29, 1999) that an employer-employee
relations exists between hospital and their consultants stays should be
set aside for being inconsistent with or contrary to the import of the
resolution granting the hospital's motion for reconsideration in Ramos
vs. Court of Appeals (G.R. No. 134354, April 11, 2002), which is
applicable to PSI since the Aganas failed to prove an employer-
employee relationship between PSI and Dr. Ampil and PSI proved that it
has no control over Dr. Ampil. In fact, the trial court has found that there
is no employer-employee relationship in this case and that the doctor's
are independent contractors.

II

Respondents Aganas engaged Dr. Miguel Ampil as their doctor and did
not primarily and specifically look to the Medical City Hospital (PSI) for
medical care and support; otherwise stated, respondents Aganas did not
select Medical City Hospital (PSI) to provide medical care because of any
apparent authority of Dr. Miguel Ampil as its agent since the latter was
chosen primarily and specifically based on his qualifications and being
friend and neighbor.

III

PSI cannot be liable under doctrine of corporate negligence since the

 proximate cause of Mrs. Agana's injury was the negligence of Dr. Ampil,
which is an element of the principle of corporate negligence. [29]

In their respective memoranda, intervenors raise parallel arguments that the

Court's ruling on the existence of an employer-employee relationship between private

hospitals and consultants will force a drastic and complex alteration in the long-

established and currently prevailing relationships among patient, physician and

hospital, with burdensome operational and financial consequences and adverse

effects on all three parties.[30]

The Aganas comment that the arguments of PSI need no longer be

entertained for they have all been traversed in the assailed decision and resolution.

[31]

After gathering its thoughts on the issues, this Court holds that PSI is liable to the

Aganas, not under the principle of respondeat superior for lack of evidence of an

employment relationship with Dr. Ampil but under the principle of ostensible agency

for the negligence of Dr. Ampil and, pro hac vice, under the principle of corporate

negligence for its failure to perform its duties as a hospital.

While in theory a hospital as a juridical entity cannot practice medicine, [32] in

reality it utilizes doctors, surgeons and medical practitioners in the conduct of its

business of facilitating medical and surgical treatment. [33] Within that reality, three

legal relationships crisscross: (1) between the hospital and the doctor practicing

within its premises; (2) between the hospital and the patient being treated or

examined within its premises and (3) between the patient and the doctor. The exact

nature of each relationship determines the basis and extent of the liability of the

hospital for the negligence of the doctor.

 Where an employment relationship exists, the hospital may be held

vicariously liable under Article 2176 [34] in relation to Article 2180 [35] of the Civil Code

or the principle of respondeat superior. Even when no employment relationship exists

but it is shown that the hospital holds out to the patient that the doctor is its agent,

the hospital may still be vicariously liable under Article 2176 in relation to Article

1431[36] and Article 1869[37] of the Civil Code or the principle of apparent authority.

[38]
Moreover, regardless of its relationship with the doctor, the hospital may be

held directly liable to the patient for its own negligence or failure to follow

established standard of conduct to which it should conform as a corporation. [39]

This Court still employs the control test to determine the existence of an

employer-employee relationship between hospital and doctor. In Calamba Medical

Center, Inc. v. National Labor Relations Commission, et al. [40] it held:

Under the "control test", an employment relationship exists between a

physician and a hospital if the hospital controls both the means and the
details of the process by which the physician is to accomplish his task.

xx xx xx
As priorly stated, private respondents maintained specific work-
schedules, as determined by petitioner through its medical director,
which consisted of 24-hour shifts totaling forty-eight hours each week
and which were strictly to be observed under pain of administrative
sanctions.

That petitioner exercised control over respondents gains

light from the undisputed fact that in the emergency room, the
operating room, or any department or ward for that matter,
respondents' work is monitored through its nursing
supervisors, charge nurses and orderlies. Without the approval
or consent of petitioner or its medical director, no operations
can be undertaken in those areas. For control test to apply, it is
not essential for the employer to actually supervise the
performance of duties of the employee, it being enough that it
has the right to wield the power. (emphasis supplied)
 Even in its December 29, 1999 decision[41] and April 11,

2002 resolution[42] in Ramos, the Court found the control test decisive.

In the present case, it appears to have escaped the Court's attention that both

the RTC and the CA found no employment relationship between PSI and Dr. Ampil,

and thatthe Aganas did not question such finding. In its March 17,

1993 decision, the RTC found that defendant doctors were not employees of PSI in its

hospital, they being merely consultants without any employer-employee relationship

and in the capacity of independent contractors. [43] The Aganas never questioned such

finding.

PSI, Dr. Ampil and Dr. Fuentes appealed[44] from the RTC decision but only on

the issues of negligence, agency and corporate liability. In its September 6,

1996 decision, the CA mistakenly referred to PSI and Dr. Ampil as employer-

employee, but it was clear in its discussion on the matter that it viewed their

relationship as one of mere apparent agency.[45]

The Aganas appealed from the CA decision, but only to question the exoneration of

Dr. Fuentes.[46] PSI also appealed from the CA decision, and it was then that the issue

of employment, though long settled, was unwittingly resurrected.

In fine, as there was no dispute over the RTC finding that PSI and Dr. Ampil

had no employer-employee relationship, such finding became final and conclusive

even to this Court. [47] There was no reason for PSI to have raised it as an issue in its

petition. Thus, whatever discussion on the matter that may have ensued was purely

academic.

Nonetheless, to allay the anxiety of the intervenors, the Court holds that, in this

particular instance, the concurrent finding of the RTC and the CA that PSI was not the
employer of Dr. Ampil is correct. Control as a determinative factor in testing the

employer-employee relationship between doctor and hospital under which the

hospital could be held vicariously liable to a patient in medical negligence cases is a

requisite fact to be established by preponderance of evidence. Here, there was

insufficient evidence that PSI exercised the power of control or wielded such power

over the means and the details of the specific process by which Dr. Ampil applied his

skills in the treatment of Natividad.Consequently, PSI cannot be held vicariously

liable for the negligence of Dr. Ampil under the principle of respondeat superior.

There is, however, ample evidence that the hospital (PSI) held out to the

patient (Natividad)[48] that the doctor (Dr. Ampil) was its agent. Present are the two

factors that determine apparent authority: first, the hospital's implied manifestation

to the patient which led the latter to conclude that the doctor was the hospital's

agent; and second, the patients reliance upon the conduct of the hospital and the

doctor, consistent with ordinary care and prudence.[49]

Enrique testified that on April 2, 1984, he consulted Dr. Ampil regarding the

condition of his wife; that after the meeting and as advised by Dr. Ampil,

he asked [his] wife to go to Medical City to be examined by [Dr. Ampil]; and that the

next day, April 3, he told his daughter to take her mother to Dr. Ampil.[50] This

timeline indicates that it was Enrique who actually made the decision on whom

Natividad should consult and where, and that the latter merely acceded to it. It

explains the testimony of Natividad that she consulted Dr. Ampil at the instigation of

her daughter.[51]

Moreover, when asked what impelled him to choose Dr. Ampil, Enrique testified:
Atty. Agcaoili

On that particular occasion, April 2, 1984, what was your reason for
choosing Dr. Ampil to contact with in connection with your wife's illness?

A. First, before that, I have known him to be a specialist on that part of

 the body as a surgeon, second, I have known him to be a staff
member of the Medical City which is a prominent and
knownhospital. And third, because he is a neighbor, I expect more than
the usual medical service to be given to us, than his ordinary patients.
[52]
(emphasis supplied)

Clearly, the decision made by Enrique for Natividad to consult Dr. Ampil was

significantly influenced by the impression that Dr. Ampil was a staff member

of Medical CityGeneral Hospital, and that said hospital was well known and

prominent. Enrique looked upon Dr. Ampil not as independent of but as integrally

related to Medical City.

PSI's acts tended to confirm and reinforce, rather than negate, Enrique's view. It is of

record that PSI required a consent for hospital care [53] to be signed preparatory to the

surgery of Natividad. The form reads:

Permission is hereby given to the medical, nursing and laboratory staff

of the Medical City General Hospital to perform such diagnostic
procedures and to administer such medications and treatments as may
be deemed necessary or advisable by the physicians of this
hospital for and during the confinement of xxx. (emphasis supplied)

By such statement, PSI virtually reinforced the public impression that Dr. Ampil was a

physician of its hospital, rather than one independently practicing in it; that the

medications and treatments he prescribed were necessary and desirable; and that

the hospital staff was prepared to carry them out.

PSI pointed out in its memorandum that Dr. Ampil's hospital affiliation was not

the exclusive basis of the Aganas decision to have Natividad treated

in Medical City GeneralHospital, meaning that, had Dr. Ampil been affiliated with

another hospital, he would still have been chosen by the Aganas as Natividad's

surgeon.[54]

The Court cannot speculate on what could have been behind the Aganas decision but

would rather adhere strictly to the fact that, under the circumstances at that time,
Enriquedecided to consult Dr. Ampil for he believed him to be a staff member of a

prominent and known hospital. After his meeting with Dr. Ampil, Enrique advised his

wife Natividad to go to the Medical City General Hospital to be examined by said

doctor, and the hospital acted in a way that fortified Enrique's belief.

This Court must therefore maintain the ruling that PSI is vicariously liable for

the negligence of Dr. Ampil as its ostensible agent.

Moving on to the next issue, the Court notes that PSI made the following admission in

its Motion for Reconsideration:

51. Clearly, not being an agent or employee of petitioner PSI, PSI [sic] is
not liable for Dr. Ampil's acts during the operation. Considering further
that Dr. Ampil was personally engaged as a doctor by Mrs. Agana, it is
incumbent upon Dr. Ampil, as Captain of the Ship, and as the Agana's
doctor to advise her on what to do with her situation vis-a-vis the two
missing gauzes. In addition to noting the missing gauzes, regular
check-ups were made and no signs of complications were
exhibited during her stay at the hospital, which could have
alerted petitioner PSI's hospital to render and provide post-
operation services to and tread on Dr. Ampil's role as the doctor
of Mrs. Agana. The absence of negligence of PSI from the
patient's admission up to her discharge is borne by the finding
of facts in this case. Likewise evident therefrom is the absence
of any complaint from Mrs. Agana after her discharge from the
hospital which had she brought to the hospital's attention,
could have alerted petitioner PSI to act accordingly and bring
the matter to Dr. Ampil's attention. But this was not the case.
Ms. Agana complained ONLY to Drs. Ampil and Fuentes, not the
hospital. How then could PSI possibly do something to fix the
negligence committed by Dr. Ampil when it was not informed
about it at all.[55] (emphasis supplied)

PSI reiterated its admission when it stated that had Natividad Agana informed

the hospital of her discomfort and pain, the hospital would have been obliged to act

on it.[56]

The significance of the foregoing statements is critical.

First, they constitute judicial admission by PSI that while it had no power to

control the means or method by which Dr. Ampil conducted the surgery on Natividad

Agana, it had the power to review or cause the review of what may have
irregularly transpired within its walls strictly for the purpose of determining whether

some form of negligence may have attended any procedure done inside its premises,

with the ultimate end of protecting its patients.

Second, it is a judicial admission that, by virtue of the nature of its business as

well as its prominence[57] in the hospital industry, it assumed a duty to tread on the

captain of the ship role of any doctor rendering services within its premises for the

purpose of ensuring the safety of the patients availing themselves of its services and

facilities.

Third, by such admission, PSI defined the standards of its corporate conduct

under the circumstances of this case, specifically: (a) that it had a corporate duty to

Natividad even after her operation to ensure her safety as a patient; (b) that its

corporate duty was not limited to having its nursing staff note or record the two

missing gauzes and (c) that its corporate duty extended to determining Dr. Ampil's

role in it, bringing the matter to his attention, and correcting his negligence.

And finally, by such admission, PSI barred itself from arguing in its second

motion for reconsideration that the concept of corporate responsibility was not yet in

existence at the time Natividad underwent treatment; [58] and that if it had any

corporate responsibility, the same was limited to reporting the missing gauzes and

did not include taking an active step in fixing the negligence committed.

[59]
An admission made in the pleading cannot be controverted by the party making

such admission and is conclusive as to him, and all proofs submitted by him contrary

thereto or inconsistent therewith should be ignored, whether or not objection is

interposed by a party.[60]

Given the standard of conduct that PSI defined for itself, the next relevant

inquiry is whether the hospital measured up to it.

PSI excuses itself from fulfilling its corporate duty on the ground that Dr. Ampil

assumed the personal responsibility of informing Natividad about the two missing

gauzes.[61] Dr. Ricardo Jocson, who was part of the group of doctors that attended to

Natividad, testified that toward the end of the surgery, their group talked about the

missing gauzes but Dr. Ampil assured them that he would personally notify the

patient about it.[62] Furthermore, PSI claimed that there was no reason for it to act on

the report on the two missing gauzes because Natividad Agana showed no signs of

complications. She did not even inform the hospital about her discomfort. [63]

The excuses proffered by PSI are totally unacceptable.

To begin with, PSI could not simply wave off the problem and nonchalantly

delegate to Dr. Ampil the duty to review what transpired during the operation. The

purpose of such review would have been to pinpoint when, how and by whom two

surgical gauzes were mislaid so that necessary remedial measures could be taken to

avert any jeopardy to Natividads recovery. Certainly, PSI could not have expected

that purpose to be achieved by merely hoping that the person likely to have mislaid

the gauzes might be able to retrace his own steps. By its own standard of corporate

conduct, PSI's duty to initiate the review was non-delegable.

While Dr. Ampil may have had the primary responsibility of notifying Natividad about

the missing gauzes, PSI imposed upon itself the separate and independent

responsibility of initiating the inquiry into the missing gauzes. The purpose of the first

would have been to apprise Natividad of what transpired during her surgery, while

the purpose of the second would have been to pinpoint any lapse in procedure that

led to the gauze count discrepancy, so as to prevent a recurrence thereof and to

determine corrective measures that would ensure the safety of Natividad. That Dr.

Ampil negligently failed to notify Natividad did not release PSI from its self-imposed
separate responsibility.

Corollary to its non-delegable undertaking to review potential incidents of

negligence committed within its premises, PSI had the duty to take notice of medical

records prepared by its own staff and submitted to its custody, especially when these

bear earmarks of a surgery gone awry. Thus, the record taken during the operation of

Natividad which reported a gauze count discrepancy should have given PSI sufficient

reason to initiate a review. It should not have waited for Natividad to complain.

As it happened, PSI took no heed of the record of operation and consequently

did not initiate a review of what transpired during Natividads operation. Rather, it

shirked its responsibility and passed it on to others to Dr. Ampil whom it expected to

inform Natividad, and to Natividad herself to complain before it took any meaningful

step. By its inaction, therefore, PSI failed its own standard of hospital care. It

committed corporate negligence.

It should be borne in mind that the corporate negligence ascribed to PSI is

different from the medical negligence attributed to Dr. Ampil. The duties of the

hospital are distinct from those of the doctor-consultant practicing within its premises

in relation to the patient; hence, the failure of PSI to fulfill its duties as a hospital

corporation gave rise to a direct liability to the Aganas distinct from that of Dr. Ampil.

All this notwithstanding, we make it clear that PSIs hospital liability based on

ostensible agency and corporate negligence applies only to this case, pro hac vice. It

is not intended to set a precedent and should not serve as a basis to hold hospitals

liable for every form of negligence of their doctors-consultants under any and all

circumstances. The ruling is unique to this case, for the liability of PSI arose from an

implied agency with Dr. Ampil and an admitted corporate duty to Natividad. [64]

Other circumstances peculiar to this case warrant this ruling, [65] not the least
of which being that the agony wrought upon the Aganas has gone on for 26 long

years, with Natividad coming to the end of her days racked in pain and

agony. Such wretchedness could have been avoided had PSI simply done what was

logical: heed the report of a guaze count discrepancy, initiate a review of what went

wrong and take corrective measures to ensure the safety of Nativad. Rather, for 26

years, PSI hemmed and hawed at every turn, disowning any such responsibility to its

patient. Meanwhile, the options left to the Aganas have all but dwindled, for the

status of Dr. Ampil can no longer be ascertained.[66]

Therefore, taking all the equities of this case into consideration, this Court

believes P15 million would be a fair and reasonable liability of PSI, subject to 12% p.a.

interest from the finality of this resolution to full satisfaction.

WHEREFORE, the second motion for reconsideration is DENIED and the motions for

intervention are NOTED.

Professional Services, Inc. is ORDERED pro hac vice to pay Natividad (substituted by

her children Marcelino Agana III, Enrique Agana, Jr., Emma Agana-Andaya, Jesus

Agana and Raymund Agana) and Enrique Agana the total amount of P15

million, subject to 12% p.a. interest from the finality of this resolution to full

satisfaction.

No further pleadings by any party shall be entertained in this case.

Let the long-delayed entry of judgment be made in this case upon receipt by all

concerned parties of this resolution.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
 Manila

EN BANC

G.R. No. 15574 September 17, 1919

SMITH, BELL & COMPANY (LTD.), petitioner,

vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of Cebu, respondent.

Ross and Lawrence for petitioner.

Attorney-General Paredes for respondent.

MALCOLM, J.:

A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin
Natividad, Collector of Customs of the port of Cebu, Philippine Islands, to compel him
to issue a certificate of Philippine registry to the petitioner for its motor vessel Bato.
The Attorney-General, acting as counsel for respondent, demurs to the petition on
the general ground that it does not state facts sufficient to constitute a cause of
action. While the facts are thus admitted, and while, moreover, the pertinent
provisions of law are clear and understandable, and interpretative American
jurisprudence is found in abundance, yet the issue submitted is not lightly to be
resolved. The question, flatly presented, is, whether Act. No. 2761 of the Philippine
Legislature is valid — or, more directly stated, whether the Government of the
Philippine Islands, through its Legislature, can deny the registry of vessels in its
coastwise trade to corporations having alien stockholders.

FACTS.

Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the
Philippine Islands. A majority of its stockholders are British subjects. It is the owner of
a motor vessel known as the Bato built for it in the Philippine Islands in 1916, of more
than fifteen tons gross The Bato was brought to Cebu in the present year for the
purpose of transporting plaintiff's merchandise between ports in the Islands.
Application was made at Cebu, the home port of the vessel, to the Collector of
Customs for a certificate of Philippine registry. The Collector refused to issue the
certificate, giving as his reason that all the stockholders of Smith, Bell & Co., Ltd.,
were not citizens either of the United States or of the Philippine Islands. The instant
action is the result.

LAW.

The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but
reenacting a portion of section 3 of this Law, and still in force, provides in its section
1:

That until Congress shall have authorized the registry as vessels of the United
States of vessels owned in the Philippine Islands, the Government of the
Philippine Islands is hereby authorized to adopt, from time to time, and
enforce regulations governing the transportation of merchandise and
passengers between ports or places in the Philippine Archipelago. (35 Stat. at
L., 70; Section 3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)

The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in
force, provides in section 3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as
follows.

SEC. 3. That no law shall be enacted in said Islands which shall deprive any
person of life, liberty, or property without due process of law, or deny to any
person therein the equal protection of the laws. . . .

SEC. 6. That the laws now in force in the Philippines shall continue in force and
effect, except as altered, amended, or modified herein, until altered,
amended, or repealed by the legislative authority herein provided or by Act of
Congress of the United States.

SEC. 7. That the legislative authority herein provided shall have power, when
not inconsistent with this Act, by due enactment to amend, alter modify, or
repeal any law, civil or criminal, continued in force by this Act as it may from
time to time see fit

This power shall specifically extend with the limitation herein provided as to
the tariff to all laws relating to revenue provided as to the tariff to all laws
relating to revenue and taxation in effect in the Philippines.

SEC. 8. That general legislative power, except as otherwise herein provided, is

hereby granted to the Philippine Legislature, authorized by this Act.

SEC. 10. That while this Act provides that the Philippine government shall
have the authority to enact a tariff law the trade relations between the islands
and the United States shall continue to be governed exclusively by laws of the
Congress of the United States: Provided, That tariff acts or acts amendatory to
the tariff of the Philippine Islands shall not become law until they shall receive
the approval of the President of the United States, nor shall any act of the
Philippine Legislature affecting immigration or the currency or coinage laws of
the Philippines become a law until it has been approved by the President of
the United States: Provided further, That the President shall approve or
disapprove any act mentioned in the foregoing proviso within six months from
and after its enactment and submission for his approval, and if not
disapproved within such time it shall become a law the same as if it had been
specifically approved.

SEC. 31. That all laws or parts of laws applicable to the Philippines not in
conflict with any of the provisions of this Act are hereby continued in force and
effect." (39 Stat at L., 546.)

On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first
section of this law amended section 1172 of the Administrative Code to read as
follows:

SEC. 1172. Certificate of Philippine register. — Upon registration of a vessel of

domestic ownership, and of more than fifteen tons gross, a certificate of
Philippine register shall be issued for it. If the vessel is of domestic ownership
and of fifteen tons gross or less, the taking of the certificate of Philippine
register shall be optional with the owner.

"Domestic ownership," as used in this section, means ownership vested in

some one or more of the following classes of persons: (a) Citizens or native
inhabitants of the Philippine Islands; (b) citizens of the United States residing
in the Philippine Islands; (c) any corporation or company composed wholly of
 citizens of the Philippine Islands or of the United States or of both, created
under the laws of the United States, or of any State thereof, or of thereof, or
the managing agent or master of the vessel resides in the Philippine Islands

Any vessel of more than fifteen gross tons which on February eighth, nineteen
hundred and eighteen, had a certificate of Philippine register under existing
law, shall likewise be deemed a vessel of domestic ownership so long as there
shall not be any change in the ownership thereof nor any transfer of stock of
the companies or corporations owning such vessel to person not included
under the last preceding paragraph.

Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the
Administrative Code to read as follows:

SEC. 1176. Investigation into character of vessel. — No application for a

certificate of Philippine register shall be approved until the collector of
customs is satisfied from an inspection of the vessel that it is engaged or
destined to be engaged in legitimate trade and that it is of domestic
ownership as such ownership is defined in section eleven hundred and
seventy-two of this Code.

The collector of customs may at any time inspect a vessel or examine its
owner, master, crew, or passengers in order to ascertain whether the vessel is
engaged in legitimate trade and is entitled to have or retain the certificate of
Philippine register.

SEC. 1202. Limiting number of foreign officers and engineers on board

vessels. — No Philippine vessel operating in the coastwise trade or on the high
seas shall be permitted to have on board more than one master or one mate
and one engineer who are not citizens of the United States or of the Philippine
Islands, even if they hold licenses under section one thousand one hundred
and ninety-nine hereof. No other person who is not a citizen of the United
States or of the Philippine Islands shall be an officer or a member of the crew
of such vessel. Any such vessel which fails to comply with the terms of this
section shall be required to pay an additional tonnage tax of fifty centavos per
net ton per month during the continuance of said failure.

ISSUES.

Predicated on these facts and provisions of law, the issues as above stated recur,
namely, whether Act No 2761 of the Philippine Legislature is valid in whole or in part
— whether the Government of the Philippine Islands, through its Legislature, can
deny the registry of vessel in its coastwise trade to corporations having alien
stockholders .

OPINION.

1. Considered from a positive standpoint, there can exist no measure of doubt as to

the power of the Philippine Legislature to enact Act No. 2761. The Act of Congress of
April 29, 1908, with its specific delegation of authority to the Government of the
Philippine Islands to regulate the transportation of merchandise and passengers
between ports or places therein, the liberal construction given to the provisions of the
Philippine Bill, the Act of Congress of July 1, 1902, by the courts, and the grant by the
Act of Congress of August 29, 1916, of general legislative power to the Philippine
Legislature, are certainly superabundant authority for such a law. While the Act of the
local legislature may in a way be inconsistent with the Act of Congress regulating the
coasting trade of the Continental United States, yet the general rule that only such
laws of the United States have force in the Philippines as are expressly extended
thereto, and the abnegation of power by Congress in favor of the Philippine Islands
would leave no starting point for convincing argument. As a matter of fact, counsel
for petitioner does not assail legislative action from this direction (See U. S. vs. Bull
[1910], 15 Phil., 7; Sinnot vs. Davenport [1859] 22 How., 227.)

2. It is from the negative, prohibitory standpoint that counsel argues against the
constitutionality of Act No. 2761. The first paragraph of the Philippine Bill of Rights of
the Philippine Bill, repeated again in the first paragraph of the Philippine Bill of Rights
as set forth in the Jones Law, provides "That no law shall be enacted in said Islands
which shall deprive any person of life, liberty, or property without due process of law,
or deny to any person therein the equal protection of the laws." Counsel says that Act
No. 2761 denies to Smith, Bell & Co., Ltd., the equal protection of the laws because it,
in effect, prohibits the corporation from owning vessels, and because classification of
corporations based on the citizenship of one or more of their stockholders is
capricious, and that Act No. 2761 deprives the corporation of its properly without due
process of law because by the passage of the law company was automatically
deprived of every beneficial attribute of ownership in the Bato and left with the naked
title to a boat it could not use .

The guaranties extended by the Congress of the United States to the Philippine
Islands have been used in the same sense as like provisions found in the United
States Constitution. While the "due process of law and equal protection of the laws"
clause of the Philippine Bill of Rights is couched in slightly different words than the
corresponding clause of the Fourteenth Amendment to the United States
Constitution, the first should be interpreted and given the same force and effect as
the latter. (Kepner vs. U.S. [1904], 195 U. S., 100; Sierra vs. Mortiga [1907], 204 U.
S.,.470; U. S. vs. Bull [1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment
has been announced in classic decisions of the United States Supreme Court. Even at
the expense of restating what is so well known, these basic principles must again be
set down in order to serve as the basis of this decision.

The guaranties of the Fourteenth Amendment and so of the first paragraph of the
Philippine Bill of Rights, are universal in their application to all person within the
territorial jurisdiction, without regard to any differences of race, color, or nationality.
The word "person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356;
Truax vs. Raich [1915], 239 U. S., 33.) Private corporations, likewise, are "persons"
within the scope of the guaranties in so far as their property is concerned. (Santa
Clara County vs. Southern Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining
Co. vs. Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike Road
Co. vs. Sandford [1896], 164 U. S., 578.) Classification with the end in view of
providing diversity of treatment may be made among corporations, but must be
based upon some reasonable ground and not be a mere arbitrary selection (Gulf,
Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws
held unconstitutional because of unlawful discrimination against aliens could be
cited. Generally, these decisions relate to statutes which had attempted arbitrarily to
forbid aliens to engage in ordinary kinds of business to earn their living.
(State vs.Montgomery [1900], 94 Maine, 192, peddling — but see.
Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs. Board of Examiners of
Barbers [1902], 131 Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356,
discrimination against Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott
[1880], 1 Fed , 481; Fraser vs.McConway & Torley Co. [1897], 82 Fed , 257; Juniata
Limestone Co. vs. Fagley [1898], 187 Penn., 193, all relating to the employment of
aliens by private corporations.)

A literal application of general principles to the facts before us would, of course,

cause the inevitable deduction that Act No. 2761 is unconstitutional by reason of its
denial to a corporation, some of whole members are foreigners, of the equal
protection of the laws. Like all beneficient propositions, deeper research discloses
provisos. Examples of a denial of rights to aliens notwithstanding the provisions of
the Fourteenth Amendment could be cited. (Tragesser vs. Gray [1890], 73 Md., 250,
licenses to sell spirituous liquors denied to persons not citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the right to
peddle; Patsone vs. Commonwealth of Pennsylvania [1914], 232 U. S. , 138,
prohibiting the killing of any wild bird or animal by any unnaturalized foreign-born
resident; Ex parte Gilleti [1915], 70 Fla., 442, discriminating in favor of citizens with
reference to the taking for private use of the common property in fish and oysters
found in the public waters of the State; Heim vs. McCall [1915], 239 U. S.,.175, and
Crane vs. New York [1915], 239 U. S., 195, limiting employment on public works by,
or for, the State or a municipality to citizens of the United States.)

One of the exceptions to the general rule, most persistent and far reaching in
influence is, that neither the Fourteenth Amendment to the United States
Constitution, broad and comprehensive as it is, nor any other amendment, "was
designed to interfere with the power of the State, sometimes termed its `police
power,' to prescribe regulations to promote the health, peace, morals, education, and
good order of the people, and legislate so as to increase the industries of the State,
develop its resources and add to its wealth and prosperity. From the very necessities
of society, legislation of a special character, having these objects in view, must often
be had in certain districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans
Gas Co. vs. Lousiana Light Co. [1885], 115 U.S., 650.) This is the same police power
which the United States Supreme Court say "extends to so dealing with the
conditions which exist in the state as to bring out of them the greatest welfare in of
its people." (Bacon vs.Walker [1907], 204 U.S., 311.) For quite similar reasons, none
of the provision of the Philippine Organic Law could could have had the effect of
denying to the Government of the Philippine Islands, acting through its Legislature,
the right to exercise that most essential, insistent, and illimitable of powers, the
sovereign police power, in the promotion of the general welfare and the public
interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs.Rafferty [1915], 32
Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.) Another notable
exception permits of the regulation or distribution of the public domain or the
common property or resources of the people of the State, so that use may be limited
to its citizens. (Ex parte Gilleti [1915], 70 Fla., 442; McCready vs.Virginia [1876], 94
U. S., 391; Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still
another exception permits of the limitation of employment in the construction of
public works by, or for, the State or a municipality to citizens of the United States or
of the State. (Atkin vs. Kansas [1903],191 U. S., 207; Heim vs.McCall [1915], 239
U.S., 175; Crane vs. New York [1915], 239 U. S., 195.) Even as to classification, it is
admitted that a State may classify with reference to the evil to be prevented; the
question is a practical one, dependent upon experience. (Patsone vs. Commonwealth
of Pennsylvania [1914], 232 U. S., 138.)

To justify that portion of Act no. 2761 which permits corporations or companies to
obtain a certificate of Philippine registry only on condition that they be composed
wholly of citizens of the Philippine Islands or of the United States or both, as not
infringing Philippine Organic Law, it must be done under some one of the exceptions
here mentioned This must be done, moreover, having particularly in mind what is so
often of controlling effect in this jurisdiction — our local experience and our peculiar
local conditions.

To recall a few facts in geography, within the confines of Philippine jurisdictional limits
are found more than three thousand islands. Literally, and absolutely, steamship lines
are, for an Insular territory thus situated, the arteries of commerce. If one be severed,
the life-blood of the nation is lost. If on the other hand these arteries are protected,
then the security of the country and the promotion of the general welfare is
sustained. Time and again, with such conditions confronting it, has the executive
branch of the Government of the Philippine Islands, always later with the sanction of
the judicial branch, taken a firm stand with reference to the presence of undesirable
foreigners. The Government has thus assumed to act for the all-sufficient and
primitive reason of the benefit and protection of its own citizens and of the self-
preservation and integrity of its dominion. (In re Patterson [1902], 1 Phil., 93;
Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16 Phil., 534;.228 U.S., 549; In
re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by foreigners, particularly by
such solid and reputable firms as the instant claimant, might indeed traverse the
waters of the Philippines for ages without doing any particular harm. Again, some
evilminded foreigner might very easily take advantage of such lavish hospitality to
chart Philippine waters, to obtain valuable information for unfriendly foreign powers,
to stir up insurrection, or to prejudice Filipino or American commerce. Moreover,
under the Spanish portion of Philippine law, the waters within the domestic
jurisdiction are deemed part of the national domain, open to public use. (Book II, Tit.
IV, Ch. I, Civil Code; Spanish Law of Waters of August 3, 1866, arts 1, 2, 3.) Common
carriers which in the Philippines as in the United States and other countries are, as
Lord Hale said, "affected with a public interest," can only be permitted to use these
public waters as a privilege and under such conditions as to the representatives of
the people may seem wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)

In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein
before mentioned, Justice Holmes delivering the opinion of the United States
Supreme Court said:

This statute makes it unlawful for any unnaturalized foreign-born resident to

kill any wild bird or animal except in defense of person or property, and `to
that end' makes it unlawful for such foreign-born person to own or be
possessed of a shotgun or rifle; with a penalty of $25 and a forfeiture of the
gun or guns. The plaintiff in error was found guilty and was sentenced to pay
the abovementioned fine. The judgment was affirmed on successive appeals.
(231 Pa., 46; 79 Atl., 928.) He brings the case to this court on the ground that
the statute is contrary to the 14th Amendment and also is in contravention of
the treaty between the United States and Italy, to which latter country the
plaintiff in error belongs .

Under the 14th Amendment the objection is twofold; unjustifiably depriving

the alien of property, and discrimination against such aliens as a class. But the
former really depends upon the latter, since it hardly can be disputed that if
the lawful object, the protection of wild life (Geer vs. Connecticut, 161 U.S.,
519; 40 L. ed., 793; 16 Sup. Ct. Rep., 600), warrants the discrimination, the,
means adopted for making it effective also might be adopted. . . .

The discrimination undoubtedly presents a more difficult question. But we

start with reference to the evil to be prevented, and that if the class
 discriminated against is or reasonably might be considered to define those
from whom the evil mainly is to be feared, it properly may be picked out. A
lack of abstract symmetry does not matter. The question is a practical one,
dependent upon experience. . . .

The question therefore narrows itself to whether this court can say that the
legislature of Pennsylvania was not warranted in assuming as its premise for
the law that resident unnaturalized aliens were the peculiar source of the evil
that it desired to prevent. (Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed.,
1050, 1052; 33 Sup. Ct. Rep., 692.)

Obviously the question, so stated, is one of local experience, on which this

court ought to be very slow to declare that the state legislature was wrong in
its facts (Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed., 971,.977; 33
Sup. Ct. Rep., 610.) If we might trust popular speech in some states it was
right; but it is enough that this court has no such knowledge of local
conditions as to be able to say that it was manifestly wrong. . . .

Judgment affirmed.

We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having
alien stockholders, is entitled to the protection afforded by the due-process of law
and equal protection of the laws clause of the Philippine Bill of Rights, nevertheless,
Act No. 2761 of the Philippine Legislature, in denying to corporations such as Smith,
Bell &. Co. Ltd., the right to register vessels in the Philippines coastwise trade, does
not belong to that vicious species of class legislation which must always be
condemned, but does fall within authorized exceptions, notably, within the purview of
the police power, and so does not offend against the constitutional provision.

This opinion might well be brought to a close at this point. It occurs to us, however,
that the legislative history of the United States and the Philippine Islands, and,
probably, the legislative history of other countries, if we were to take the time to
search it out, might disclose similar attempts at restriction on the right to enter the
coastwise trade, and might thus furnish valuable aid by which to ascertain and, if
possible, effectuate legislative intention.

3. The power to regulate commerce, expressly delegated to the Congress by

the Constitution, includes the power to nationalize ships built and owned in
the United States by registries and enrollments, and the recording of the
muniments of title of American vessels. The Congress "may encourage or it
may entirely prohibit such commerce, and it may regulate in any way it may
see fit between these two extremes." (U.S. vs.Craig [1886], 28 Fed., 795;
Gibbons vs. Ogden [1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How.,
283.)

Acting within the purview of such power, the first Congress of the United States had
not been long convened before it enacted on September 1, 1789, "An Act for
Registering and Clearing Vessels, Regulating the Coasting Trade, and for other
purposes." Section 1 of this law provided that for any ship or vessel to obtain the
benefits of American registry, it must belong wholly to a citizen or citizens of the
United States "and no other." (1 Stat. at L., 55.) That Act was shortly after repealed,
but the same idea was carried into the Acts of Congress of December 31, 1792 and
February 18, 1793. (1 Stat. at L., 287, 305.).Section 4 of the Act of 1792 provided that
in order to obtain the registry of any vessel, an oath shall be taken and subscribed by
the owner, or by one of the owners thereof, before the officer authorized to make
such registry, declaring, "that there is no subject or citizen of any foreign prince or
state, directly or indirectly, by way of trust, confidence, or otherwise, interested in
such vessel, or in the profits or issues thereof." Section 32 of the Act of 1793 even
went so far as to say "that if any licensed ship or vessel shall be transferred to any
person who is not at the time of such transfer a citizen of and resident within the
United States, ... every such vessel with her tackle, apparel, and furniture, and the
cargo found on board her, shall be forefeited." In case of alienation to a foreigner,
Chief Justice Marshall said that all the privileges of an American bottom were ipso
facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as late as
1873, the Attorney-General of the United States was of the opinion that under the
provisions of the Act of December 31, 1792, no vessel in which a foreigner is directly
or indirectly interested can lawfully be registered as a vessel of the United. States.
(14 Op. Atty.-Gen. [U.S.], 340.)

These laws continued in force without contest, although possibly the Act of March 3,
1825, may have affected them, until amended by the Act of May 28, 1896 (29 Stat.
at L., 188) which extended the privileges of registry from vessels wholly owned by a
citizen or citizens of the United States to corporations created under the laws of any
of the states thereof. The law, as amended, made possible the deduction that a
vessel belonging to a domestic corporation was entitled to registry or enrollment
even though some stock of the company be owned by aliens. The right of ownership
of stock in a corporation was thereafter distinct from the right to hold the property by
the corporation (Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud
[1846], 9 Q. B., 806; 29 Op. Atty.-Gen. [U.S.],188.)

On American occupation of the Philippines, the new government found a substantive

law in operation in the Islands with a civil law history which it wisely continued in
force Article fifteen of the Spanish Code of Commerce permitted any foreigner to
engage in Philippine trade if he had legal capacity to do so under the laws of his
nation. When the Philippine Commission came to enact the Customs Administrative
Act (No. 355) in 1902, it returned to the old American policy of limiting the protection
and flag of the United States to vessels owned by citizens of the United States or by
native inhabitants of the Philippine Islands (Sec. 117.) Two years later, the same body
reverted to the existing Congressional law by permitting certification to be issued to a
citizen of the United States or to a corporation or company created under the laws of
the United States or of any state thereof or of the Philippine Islands (Act No. 1235,
sec. 3.) The two administration codes repeated the same provisions with the
necessary amplification of inclusion of citizens or native inhabitants of the Philippine
Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172). And now Act
No. 2761 has returned to the restrictive idea of the original Customs Administrative
Act which in turn was merely a reflection of the statutory language of the first
American Congress.

Provisions such as those in Act No. 2761, which deny to foreigners the right to a
certificate of Philippine registry, are thus found not to be as radical as a first reading
would make them appear.

Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to
be to enact an anti-alien shipping act. The ultimate purpose of the Legislature is to
encourage Philippine ship-building. This, without doubt, has, likewise, been the
intention of the United States Congress in passing navigation or tariff laws on
different occasions. The object of such a law, the United States Supreme Court once
said, was to encourage American trade, navigation, and ship-building by giving
American ship-owners exclusive privileges. (Old Dominion Steamship Co. vs. Virginia
[1905], 198 U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)

In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat.,
1) is found the following:

Licensing acts, in fact, in legislation, are universally restraining acts; as, for
example, acts licensing gaming houses, retailers of spirituous liquors, etc. The
act, in this instance, is distinctly of that character, and forms part of an
extensive system, the object of which is to encourage American shipping, and
place them on an equal footing with the shipping of other nations. Almost
every commercial nation reserves to its own subjects a monopoly of its
coasting trade; and a countervailing privilege in favor of American shipping is
contemplated, in the whole legislation of the United States on this subject. It is
not to give the vessel an American character, that the license is granted; that
effect has been correctly attributed to the act of her enrollment. But it is to
confer on her American privileges, as contradistinguished from foreign; and to
preserve the. Government from fraud by foreigners, in surreptitiously
intruding themselves into the American commercial marine, as well as frauds
upon the revenue in the trade coastwise, that this whole system is projected.

The United States Congress in assuming its grave responsibility of legislating wisely
for a new country did so imbued with a spirit of Americanism. Domestic navigation
and trade, it decreed, could only be carried on by citizens of the United States. If the
representatives of the American people acted in this patriotic manner to advance the
national policy, and if their action was accepted without protest in the courts, who
can say that they did not enact such beneficial laws under the all-pervading police
power, with the prime motive of safeguarding the country and of promoting its
prosperity? Quite similarly, the Philippine Legislature made up entirely of Filipinos,
representing the mandate of the Filipino people and the guardian of their rights,
acting under practically autonomous powers, and imbued with a strong sense of
Philippinism, has desired for these Islands safety from foreign interlopers, the use of
the common property exclusively by its citizens and the citizens of the United States,
and protection for the common good of the people. Who can say, therefore,
especially can a court, that with all the facts and circumstances affecting the Filipino
people before it, the Philippine Legislature has erred in the enactment of Act No.
2761?

Surely, the members of the judiciary are not expected to live apart from active life, in
monastic seclusion amidst dusty tomes and ancient records, but, as keen spectators
of passing events and alive to the dictates of the general — the national — welfare,
can incline the scales of their decisions in favor of that solution which will most
effectively promote the public policy. All the presumption is in favor of the
constitutionally of the law and without good and strong reasons, courts should not
attempt to nullify the action of the Legislature. "In construing a statute enacted by
the Philippine Commission (Legislature), we deem it our duty not to give it a
construction which would be repugnant to an Act of Congress, if the language of the
statute is fairly susceptible of another construction not in conflict with the higher
law." (In re Guariña [1913], 24. Phil., 36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is
the true construction which will best carry legislative intention into effect.

With full consciousness of the importance of the question, we nevertheless are

clearly of the opinion that the limitation of domestic ownership for purposes of
obtaining a certificate of Philippine registry in the coastwise trade to citizens of the
Philippine Islands, and to citizens of the United States, does not violate the provisions
of paragraph 1 of section 3 of the Act of Congress of August 29, 1916 No treaty right
relied upon Act No. 2761 of the Philippine Legislature is held valid and constitutional .

The petition for a writ of mandamus is denied, with costs against the petitioner. So
ordered.

Arellano, C.J., Torres, Johnson, Araullo, Street, Avanceña and Moir, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 75885 May 27, 1987

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

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

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private

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

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

a. The Basic Sequestration Order

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

RE: SEQUESTRATION ORDER

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

Government, by authority of the President of the Philippines, you are
hereby directed to sequester the following companies.
 1. Bataan Shipyard and Engineering Co., Inc.
(Engineering Island Shipyard and Mariveles Shipyard)

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo"

Romualdez

You are hereby ordered:

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

these companies' business activities.

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

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

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

Further, you are authorized to request for Military/Security Support

from the Military/Police authorities, and such other acts essential to the
achievement of this sequestration order. 1

b. Order for Production of Documents

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

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from

1973 to 1986

2.4. Minutes of the Regular and Special Meetings of the

Board of Directors from 1973 to 1986
 2.5. Minutes of the Executive Committee Meetings from
1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding

share/stockholdings from 1973 to 1986 duly certified by the Corporate
Secretary.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss

and others from 1973 to December 31, 1985.

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

1986.

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

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

8. Updated schedule of Accounts Receivable and Accounts Payable.

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

10. Schedule of company investments and placements. 2

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

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

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

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

(2) Change of Mode of Payment of Entry Charges

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

d. Aborted Contract for Improvement of Wharf at Engineer Island

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

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

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

f. Order to Dispose of Scrap, etc.

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

g. The TAKEOVER Order

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

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

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

A management team was designated to implement the order, headed by Capt.

Siacunco, and was given the following powers:

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

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

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

companies;

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

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

may be necessary, that will ensure compliance to this order;

6. Holds itself fully accountable to the Presidential Commission on

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

h. Termination of Services of BASECO Officers

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

2. Petitioner's Plea and Postulates

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

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

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

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

Takeover Orders

While BASECO concedes that "sequestration without resorting to judicial action,

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

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

b. Re Order to Produce Documents

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

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

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

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

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract"

with Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO
premises; 16

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

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

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

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP

Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal
Dept. Mgr. Benito R. Cuesta I; 19

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

8) allowing willingly or unwillingly its personnel to take, steal, carry away from
petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May
11, 1986; 21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars

supposed to have been buried therein. 22

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

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

4. The Governing Law

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

b. Executive Order No. 1

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

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

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

In relation to the takeover or sequestration that it was authorized to undertake in the

fulfillment of its mission, the PCGG was granted "power and authority" to do the
following particular acts, to wit:

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

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

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

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

3. To enjoin or restrain any actual or threatened commission of acts by

any person or entity that may render moot and academic, or frustrate
or otherwise make ineffectual the efforts of the Commission to carry
out its task under this order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to
conduct investigations; require submission of evidence by subpoenae ad
testificandum and duces tecum; administer oaths; punish for contempt. 29 It was
given power also to promulgate such rules and regulations as may be necessary to
carry out the purposes of * * (its creation). 30
 c. Executive Order No. 2

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

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

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

2) * * said assets and properties are in the form of bank accounts,

deposits, trust accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real
and personal properties in the Philippines and in various countries of
the world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former

President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their
close relatives, subordinates, business associates, dummies, agents, or
nominees have any interest or participation;

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

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

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

or otherwise depleting or concealing such assets and properties or
from assisting or taking part in their transfer, encumbrance,
concealment or dissipation under pain of such penalties as are
prescribed by law;" and

4) required "all persons in the Philippines holding such assets or

properties, whether located in the Philippines or abroad, in their names
as nominees, agents or trustees, to make full disclosure of the same to
 the Commission on Good Government within thirty (30) days from
publication of * (the) Executive Order, * *. 32

d. Executive Order No. 14

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

5. Contemplated Situations

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

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

supporters of the previous regime"; 37

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

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

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

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

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

2) that certain "business enterprises and properties (were) taken over

 by the government of the Marcos Administration or by entities or
persons close to former President Marcos. 41

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

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

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

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

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

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

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be

assumed. They will have to be duly established by adequate proof in each case, in a
proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly
and properly adjudged and consummated; although there are some who maintain
that the fact-that an immense fortune, and "vast resources of the government have
been amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad," and they have resorted to all
sorts of clever schemes and manipulations to disguise and hide their illicit
acquisitions-is within the realm of judicial notice, being of so extensive notoriety as to
dispense with proof thereof, Be this as it may, the requirement of evidentiary
substantiation has been expressly acknowledged, and the procedure to be followed
explicitly laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets

Pending Suits

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

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These
are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances

of "ill-gotten wealth." The remedy of "provisional takeover" is peculiar to cases where
"business enterprises and properties (were) taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos." 43

a. Sequestration

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

b. "Freeze Order"

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

c. Provisional Takeover

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

d. No Divestment of Title Over Property Seized

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

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

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

Constitutional Command

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

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

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

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

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

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

The sequestration or freeze order is deemed automatically lifted if no

judicial action or proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

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

g. Remedies, Non-Judicial

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

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of

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

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership,

there exist a prima facie factual foundation, at least, for the sequestration, freeze or
takeover order, and adequate and fair opportunity to contest it and endeavor to
cause its negation or nullification. 61

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

a. Prima Facie Evidence as Basis for Orders

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

b. Opportunity to Contest

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

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

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

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

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

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

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

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

10. PCGG not a "Judge"; General Functions

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

11. Facts Preclude Grant of Relief to Petitioner

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

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

12. Organization and Stock Distribution of BASECO

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

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

1. Jose A. Rojas 1,248 shares

2. Severino G. de 1,248 shares

la Cruz

3. Emilio T. Yap 2,508 shares

4. Jose Fernandez 1,248 shares

5. Jose Francisco 128 shares

6. Manuel S. 96 shares
Mendoza

7. Anthony P. Lee 1,248 shares

8. Hilario M. Ruiz 32 shares

9. Constante L. 8 shares
Fariñas

10. Fidelity 65,882 shares

Management, Inc.

11. Trident 7,412 shares

Management

12. United Phil. 1,240 shares

Lines

13. Renato M. 8 shares

Tanseco

14. Fidel Ventura 8 shares

 15. Metro Bay 136,370
Drydock shares

16. Manuel Jacela 1 share

17. Jonathan G. Lu 1 share

18. Jose J. 1 share

Tanchanco

19. Dioscoro Papa 128 shares

20. Edward T. 4 shares

Marcelo

TOTAL 218,819
shares.

13 Acquisition of NASSCO by BASECO

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

14. Subsequent Reduction of Price; Intervention of Marcos

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

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

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in

Mariveles from the Export Processing Zone Authority for the price of P10,047,940.00
of which, as set out in the document of sale, P2,000.000.00 was paid upon its
execution, and the balance stipulated to be payable in installments. 78
16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

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

17. Loans Obtained

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

18. Reports to President Marcos

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

a. BASECO President's Report

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

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

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

b. Romualdez' Report

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

MEMORANDUM:

FOR : The President

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

Mission

FROM: Capt. A.T. Romualdez.

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

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

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

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

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

on; and

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

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

1. Stock certificates indorsed and assigned in blank with assignments

and waivers; 89

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

of BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of

land in "Engineer Island", Port Area, Manila;

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

covering "Engineer Island";
 5. Contract dated October 9, 1973, between NASSCO and BASECO re-
structure and equipment at Mariveles, Bataan;

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

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

hectares of land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

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

of P30,000,000.00;

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

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

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

An LOI may be issued to government agencies using floating

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

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or

officer of BASECO, yet he has presented a report on BASECO to President Marcos, and
his report demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

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

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

a. Instructions re "Spin-Off"

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

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

a. Equity participation of government shall be through LUSTEVECO and

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

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

Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

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

For immediate compliance. 92

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

b. Letter of Instructions No. 670

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

* * 1) the shipbuilding equipment procured by BASECO through

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

xxx xxx xxx

And so, through a simple letter of instruction and memorandum,

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

20. Evidence of Marcos'

Ownership of BASECO

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

Other evidence submitted to the Court by the Solicitor General proves that President
Marcos not only exercised control over BASECO, but also that he actually owns well
nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were
218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay
Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882
shares; (3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240
shares. The first three corporations, among themselves, own an aggregate of
209,664 shares of BASECO stock, or 95.82% of the outstanding stock.

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

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

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

Management Inc. — which supposedly owns as aforesaid 65,882 shares
of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding

shares of Metro Bay Drydock Corporation — which allegedly owns
136,370 shares of BASECO stock;

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

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

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

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

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

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

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

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

21. Facts Justify Issuance of Sequestration and Takeover Orders

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

From the standpoint of the PCGG, the facts herein stated at some length do indeed
show that the private corporation known as BASECO was "owned or controlled by
former President Ferdinand E. Marcos * * during his administration, * * through
nominees, by taking advantage of * * (his) public office and/or using * * (his) powers,
authority, influence * *," and that NASSCO and other property of the government had
been taken over by BASECO; and the situation justified the sequestration as well as
the provisional takeover of the corporation in the public interest, in accordance with
the terms of Executive Orders No. 1 and 2, pending the filing of the requisite actions
with the Sandiganbayan to cause divestment of title thereto from Marcos, and its
adjudication in favor of the Republic pursuant to Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is
correct; accordingly, it sustains the acts of sequestration and takeover by the PCGG
as being in accord with the law, and, in view of what has thus far been set out in this
opinion, pronounces to be without merit the theory that said acts, and the executive
orders pursuant to which they were done, are fatally defective in not according to the
parties affected prior notice and hearing, or an adequate remedy to impugn, set
aside or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor
and judge at the same time.

22. Executive Orders Not a Bill of Attainder

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

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

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

Seizures

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

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

persons.

While an individual may lawfully refuse to answer incriminating

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

Relevant jurisprudence is also cited by the Solicitor General. 114

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

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

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

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

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

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his
privilege against self-incrimination; but no testimony or other
information compelled under the order (or any information directly or
indirectly derived from such testimony, or other information) may be
used against the witness in any criminal case, except a prosecution for
perjury, giving a false statement, or otherwise failing to comply with
the order.

The constitutional safeguard against unreasonable searches and seizures finds no

application to the case at bar either. There has been no search undertaken by any
agent or representative of the PCGG, and of course no seizure on the occasion
thereof.

24. Scope and Extent of Powers of the PCGG

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

a. PCGG May Not Exercise Acts of Ownership

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

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

b. PCGG Has Only Powers of Administration

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

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

or Persons Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have

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

d. Voting of Sequestered Stock; Conditions Therefor

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

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

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

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

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

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or

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

WHEREFORE, the petition is dismissed. The temporary restraining order issued on

October 14, 1986 is lifted.

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.