G.R. Nos.

L-48195 and 48196 May 1, 1942

SOFRONIO T. BAYLA, ET AL., petitioners,

vs.
SILANG TRAFFIC CO., INC., respondent.
SILANG TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, ET AL., respondents.

E. A. Beltran for petitioners.

Conrado V. Sanchez, Melchor C. Benitez, and Enrique M. Fernando for respondent.

OZAETA, J.:

Petitioners in G.R. No. 48195 instituted this action in the Court of First Instance of Cavite against the
respondent Silang Traffic Co., Inc. (cross-petitioner in G.R. No. 48196), to recover certain sums of
money which they had paid severally to the corporation on account of shares of stock they
individually agreed to take and pay for under certain specified terms and conditions, of which the
following referring to the petitioner Josefa Naval, is typical:

AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE "SILANG TRAFFIC

COMPANY, INC.,"

Silang, Cavite, P. I.

THIS AGREEMENT, made and entered into between Mrs. Josefa Naval, of legal age, married
and resident of the Municipality of Silang, Province of Cavite, Philippine Islands, party of the
First Part, hereinafter called the subscriber, and the "Silang Traffic Company, Inc.," a
corporation duly organized and existing by virtue of and under the laws of the Philippine
Islands, with its principal office in the Municipality of Silang, Province of Cavite, Philippine
Islands, party of the Second Part, hereinafter called the seller,

WITNESSETH:

That the subscriber promises to pay personally or by his duly authorized agent to the seller at
the Municipality of Silang, Province of Cavite, Philippine Islands, the sum of one thousand five
hundred pesos (P1,500), Philippine currency, as purchase price of FIFTEEN (15) shares of
capital stock, said purchase price to be paid as follows, to wit: five (5%) per cent upon the
execution of the contract, the receipt whereof is hereby acknowledged and confessed, and the
remainder in installments of five per cent, payable within the first month of each and every
quarter thereafter, commencing on the 1st day of July, 1935, with interest on deferred
payments at the rate of SIX (6%) per cent per annum until paid.

That the said subscriber further agrees that if he fails to pay any of said installment when due,
or to perform any of the aforesaid conditions, or if said shares shall be attached or levied upon
by creditors of the said subscriber, then the said shares are to revert to the seller and the
payments already made are to be forfeited in favor of said seller, and the latter may then take
possession, without resorting to court proceedings.

The said seller upon receiving full payment, at the time and manner hereinbefore specified,
agrees to execute and deliver to said subscriber, or to his heirs and assigns, the certificate of
title of said shares, free and clear of all encumbrances.

In testimony whereof, the parties have hereunto set their hands in the Municipality of Silang,
Province of Cavite, Philippine Islands, this 30th day of March, 1935.

(Sgd.) JOSEFA NAVAL

SILANG TRAFFIC COMPANY, INC.
Subscriber

By (Sgd.) LINO GOMEZ

President.

(Exhibit 1. Notarial acknowledgment omitted.)

The agreements signed by the other petitioners were of the same date (March 30, 1935) and in
identical terms as the foregoing except as to the number of shares and the corresponding purchase
price. The petitioners agreed to purchase the following number of shares and, up to April 30, 1937,
had paid the following sums on account thereof:

Sofronio T. 8 P360
Bayla....... shares

Venancio 8 375
Toledo........ shares

Josefa 15 675
Naval.............. shares

Paz 15 675
Toledo................ shares

Petitioners' action for the recovery of the sums above mentioned is based on a resolution by the
board of directors of the respondent corporation on August 1, 1937, of the following tenor:

A mocion sel Sr. Marcos Caparas y secundado por el Sr. Alejandro Bayla, que para el bien de
la corporacion y la pronta terminacion del asunto civil No. 3125 titulado "Vicente F. Villanueva
et al. vs. Lino Gomez et al.," en el Juzgado de Primera Instancia de Cavite, donde se gasto y
se gastara no poca cantidad de la Corporacion, se resolvio y se aprobo por la Junta Directiva
los siguientes:

(a) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3 de marzo, 1935, art. 11,
sec. 162, sobre las cobranzas que se haran por el Secretario Tesorero de la Corporacion a los
accionistas que habian tomado o suscrito nuevas acciones y que se permitia a estos pagar
20% del valor de las acciones suscritas en un año, con interes de 6% y el pago o jornal que se
hara por trimestre.

(b) Se dejara sin efecto, en vista de que aun no esta pagado todo el valor de las 123 acciones,
tomadas de las acciones no expedidas (unissued stock) de la Corporacion y que fueron
suscritas por los siguienes:

Lino 10
Gomez..................... Acciones

Venancio 8
Toledo............. Acciones

Melchor P. 17
Benitez........ Acciones

Isaias 14
Videña................. Acciones

Esteban 10
Velasco............ Acciones

Numeriano S. 15
Aldaba.... Acciones

Inocencio 8
Cruz................. Acciones

Josefa Naval 15
.................. Acciones

Sofronio 8
Bayla................. Acciones

Dionisio 3
Dungca............. Acciones

y devolver a las personas arriba descritas toda la cantidad que estas habian pagado por las 123
acciones.

(c) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3 marzo, 1935, art. V. sec.
165, sobre el cambio o trueque de las 31 acciones del Treasury Stock, contra las 32 acciones
 del Sr. Numeriano Aldaba, en la corporacion Northern Luzon Transportation Co. y que se
devuelva al Sr. Numeriano Aldaba las 32 acciones mencionadas despues que el haya
devuelto el certificado de las 31 acciones de la Silang Traffic Co., Inc.

(d) Permitir al Tesorero de la Corporacion para que devuelva a las personas arriba indicadas,
las cantidades pagadas por las 123 acciones. (Exhibit A-1.)

The respondent corporation set up the following defenses: (1) That the above-quoted resolution is not
applicable to the petitioners Sofronio T. Bayla, Josefa Naval, and Paz Toledo because on the date
thereof "their subscribed shares of stock had already automatically reverted to the defendant, and the
installments paid by them had already been forfeited"; and (2) that said resolution of August 1, 1937,
was revoked and cancelled by a subsequent resolution of the board of directors of the defendant
corporation dated August 22, 1937.

The trial court absolved the defendant from the complaint and declared canceled (forfeited) in favor of
the defendant the shares of stock in question. It held that the resolution of August 1, 1937, was null
and void, citing Velasco vs. Poizat (37 Phil., 802), wherein this Court held that "a corporation has no
legal capacity to release an original subscriber to its capital stock from the obligation to pay for
shares; and any agreement to this effect is invalid" Plaintiffs below appealed to the Court of Appeals,
which modified of the trial court as follows:

That part of the judgment dismissing plaintiff's complaint is affirmed, but that part thereof
declaring their subscription canceled is reversed. Defendant is directed to grant plaintiffs 30
days after final judgment within which to pay the arrears on their subscription. Without
pronouncement as to costs.

Both parties appealed to this Court by petition and cross-petition for certiorari. Petitioners insist that
they have the right to recover the amounts involved under the resolution of August 1, 1937, while the
respondent and cross-petitioner on its part contends that said amounts have been automatically
forfeited and the shares of stock have reverted to the corporation under the agreement hereinabove
quoted.

The parties litigant, the trial court, and the Court of Appeals have interpreted or considered the said
agreement as a contract of subscription to the capital stock of the respondent corporation. It should
be noted, however, that said agreement is entitled "Agreement for Installment Sale of Shares in the
Silang Traffic Company, Inc.,"; that while the purchaser is designated as "subscriber," the corporation
is described as "seller"; that the agreement was entered into on March 30, 1935, long after the
incorporation and organization of the corporation, which took place in 1927; and that the price of the
stock was payable in quarterly installments spread over a period of five years. It also appears that in
civil case No. 3125 of the Court of First Instance of Cavite mentioned in the resolution of August 1,
1937, the right of the corporation to sell the shares of stock to the person named in said resolution
(including herein petitioners) was impugned by the plaintiffs in said case, who claimed a preferred
right to buy said shares.

Whether a particular contract is a subscription or a sale of stock is a matter of construction and

depends upon its terms and the intention of the parties (4 Fletcher, Cyclopedia of Corporation
[permanent edition], 29, cited in Salmon, Dexter & Co. vs. Unson (47 Phil. 649, 652). In the Unson
case just cited, this Court held that a subscription to stock in an existing corporation is, as between
the subscriber and the corporation, simply a contract of purchase and sale.

It seems clear from the terms of the contracts in question that they are contracts of sale and not of
subscription. The lower courts erred in overlooking the distinction between subscription and purchase
"A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the
stock of a corporation, while a purchase is an independent agreement between the individual and the
corporation to buy shares of stock from it at stipulated price." (18 C. J. S., 760.) In some particulars
the rules governing subscriptions and sales of shares are different. For instance, the provisions of our
Corporation Law regarding calls for unpaid subscription and assessment of stock (sections 37-50) do
not apply to a purchase of stock. Likewise the rule that corporation has no legal capacity to release
an original subscriber to its capital stock from the obligation to pay for his shares, is inapplicable to a
contract of purchase of shares.

The next question to determine is whether under the contract between the parties the failure of the
purchaser to pay any of the quarterly installments on the purchase price automatically gave rise to the
forfeiture of the amounts already paid and the reversion of the shares to the corporation. The contract
provides for interest of the rate of six per centum per annum on deferred payments. It is also provides
that if the purchaser fails to pay any of said installments when due, the said shares are to revert to the
seller and the payments already made are to be forfeited in favor of said seller. The respondent
corporation contends that when the petitioners failed to pay the installment which fell due on or before
July 31, 1937, forfeiture automatically took place, that is to say, without the necessity of any demand
from the corporation, and that therefore the resolution of August 1, 1937, authorizing the refund of the
installments already paid was inapplicable to the petitioners, who had already lost any and all rights
under said contract. The contention is, we think, untenable. The provision regarding interest on
deferred payments would not have been inserted if it had been the intention of the parties to provide
for automatic forfeiture and cancelation of the contract. Moreover, the contract did not expressly
provide that the failure of the purchaser to pay any installment would give rise to forfeiture and
cancelation without the necessity of any demand from the seller; and under article 1100 of the Civil
Code persons obliged to deliver or do something are not in default until the moment the creditor
demands of them judicially or extrajudicially the fulfillment of their obligation, unless (1) the obligation
or the law expressly provides that demand shall not be necessary in order that default may arise, (2)
by reason of the nature and circumstances of the obligation it shall appear that the designation of the
time at which that thing was to be delivered or the service rendered was the principal inducement to
the creation of the obligation.

Is the resolution of August 1, 1937, valid? The contract in question being one of purchase and not
subscription as we have heretofore pointed out, we see no legal impediment to its rescission by
agreement of the parties. According to the resolution of August 1, 1937, the recission was made for
the good of the corporation and in order to terminate the then pending civil case involving the validity
of the sale of the shares in question among others. To that rescission the herein petitioners
apparently agreed, as shown by their demand for the refund of the amounts they had paid as
provided in said resolution. It appears from the record that said civil case was subsequently
dismissed, and that the purchasers of shares of stock, other than the herein petitioners, who were
mentioned in said resolution were able to benefit by said resolution. It would be an unjust
discrimination to deny the same benefit to the herein petitioners.

We may add that there is no intimation in this case that the corporation was insolvent, or that the right
of any creditor of the same was in any way prejudiced by the rescission.

The attempted revocation of said rescission by the resolution of August 22, 1937, was invalid, it not
having been agreed to by the petitioners.

Wherefore, the judgment of the court of appeals is hereby reversed and another judgment will be
entered against the defendant Silang Traffic Co., Inc., ordering it to pay to the plaintiffs Sofronio T.
Bayla, Venancio Toledo, Josefa Naval, and Paz Toledo, the sums of P360, P375, P675, and P675,
respectively, with legal interest on each of said sums from May 28, 1938, the date of the filing of the
complaint, until the date of payment, and with costs in the three instances. So ordered.

Yulo, C.J., Moran, Paras and Bocobo, JJ., concur.

G.R. No. L-43350 December 23, 1937

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,

vs.
TEODORO SANDIKO, defendant-appellee.

Arsenio P. Dizon for appellant.

Sumulong, Lavides and Sumulong for appellee.

LAUREL, J.:

This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant
from the plaintiff's complaint.

Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of
Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of
Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment of a loan in the sum
of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a
first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same
bank was in April of 1930 executed by Tabora over the same lands to guarantee the payment of
another loan amounting to P7,000. A third mortgage on the same lands was executed on April 16,
1930 in favor of Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These
mortgages were registered and annotations thereof appear at the back of transfer certificate of title
No. 217.

On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad
Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff
company, said to under process of incorporation, in consideration of one peso (P1) subject to the
mortgages in favor of the Philippine National Bank and Severina Buzon and, to the condition that the
certificate of title to said lands shall not be transferred to the name of the plaintiff company until the
latter has fully and completely paid Tabora's indebtedness to the Philippine National Bank.

The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on
October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said
company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four
parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter
made and executed. Exhibit B is a deed of sale executed before a notary public by the terms of which
the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the
four parcels of land described in transfer certificate in turn obligated himself to shoulder the three
mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by the
defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of
mortgage executed before a notary public in accordance with which the four parcels of land were
given a security for the payment of the promissory note, Exhibit C. All these three instrument were
dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25,
1934, brought this action in the Court of First Instance of Manila praying that judgment be rendered
against the defendant for the sum of P25,300, with interest at legal rate from the date of the filing of
the complaint, and the costs of the suits. After trial, the court below, on December 18, 1934, rendered
judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion for new
trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year.
After due exception and notice, plaintiff has appealed to this court and makes an assignment of
various errors.

In dismissing the complaint against the defendant, the court below, reached the conclusion that
Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree with this
conclusion, we have however voted to affirm the judgment appealed from the reasons which we shall
presently state.

The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was
affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected later
on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the
incorporation of the company. Unquestionably, a duly organized corporation has the power to
purchase and hold such real property as the purposes for which such corporation was formed may
permit and for this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and
9, and sec. 14, Act No. 1459). But before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of articles of incorporation
(secs. 6 et seq., Act. No. 1459). Although there is a presumption that all the requirements of law have
been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it can not be
denied that the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. The
contract itself referred to the plaintiff as "una sociedad en vias de incorporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not possess juridical capacity to
enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially before
legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as an entity
before it can enter into any kind of a contract or transact any business, would seem to be self
evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless so authorized by
the charter there is not a corporation nor does it possess franchise or faculties for it or others
to exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's
Mutual Insurance Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel
Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels
of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a
corporations on the other hand. For reasons that are self-evident, these promoters could not have
acted as agent for a projected corporation since that which no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa
mere. This is not saying that under no circumstances may the acts of promoters of a corporation be
ratified by the corporation if and when subsequently organized. There are, of course, exceptions
(Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar
facts and circumstances of the present case we decline to extend the doctrine of ratification which
would result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule,
Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing
English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke
Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that
Manuel Tabora was the registered owner of the four parcels of land, which he succeeded in
mortgaging to the Philippine National Bank so that he might have the necessary funds with which to
convert and develop them into fishery. He appeared to have met with financial reverses. He formed a
corporation composed of himself, his wife, and a few others. From the articles of incorporation,
Exhibit 2, it appears that out of the P48,700, amount of capital stock subscribed, P45,000 was
subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the
P43,300, amount paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by
his wife. Both Tabora and His wife were directors and the latter was treasurer as well. In fact, to this
day, the lands remain inscribed in Tabora's name. The defendant always regarded Tabora as the
owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff corporation,
intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National
Bank, mortgagee of the four parcels of land, always treated Tabora as the owner of the same.
(See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against Tabora in the
Court of First Instance of Manila and in both cases a writ of attachment against the four parcels of
land was issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora
approached the defendant Sandiko and succeeded in the making him sign Exhibits B, C, and D and
in making him, among other things, assume the payment of Tabora's indebtedness to the Philippine
National Bank. The promisory note, Exhibit C, was made payable to the plaintiff company so that it
may not attached by Tabora's creditors, two of whom had obtained writs of attachment against the
four parcels of land.

If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it
follows that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro
Sandiko.

Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the
Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject
to a condition precedent (condicion suspensiva), namely, the payment of the mortgage debt of said
Tabora to the Philippine National Bank, and that this condition not having been complied with by the
Cagayan Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code;
Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the
conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc.
was null because at the time it was affected the corporation was non-existent, we deem it
unnecessary to discuss this point.lawphil.net

The decision of the lower court is accordingly affirmed, with costs against the appellant. So Ordered.

Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

G.R. No. L-20993 September 28, 1968

RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION, respondents.

----------------------------

G.R. No. L-21221 September 28, 1968

RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO., INC., respondents.

Amado A. Amador, Jr. for petitioner.

Atilano C. Bautista and Pompeyo F. Olivas for respondents.

ZALDIVAR, J.:

These two cases, being interrelated, are decided together.

Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review and set aside the
orders of respondent Public Service Commission, 1 dated August 20, 1962, and February 15, 1963, in
PSC Case No. 39716, cancelling and revoking the certificate of public convenience and necessity
and forfeiting the franchise of said petitioner. In the same petition, the petitioner prayed for the
issuance of a writ of preliminary injunction ex partesuspending the effectivity of said orders and/or
enjoining respondents Commission and/or Municipality of Morong, Rizal, from enforcing in any way
the cancellation and revocation of petitioner's franchise and certificate of public convenience during
the pendency of this appeal. By resolution of March 12, 1963, this Court denied the petition for
injunction, for lack of merit.

Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review and set aside the
decision of the Commission dated March 13, 1963 in PSC Case No. 62-5143 granting a certificate of
public convenience and necessity to respondent Morong Electric Co., Inc. 2 to operate an electric light,
heat and power service in the municipality of Morong, Rizal. In the petition Rizal Light & Ice Co., Inc.
also prayed for the issuance of a writ of preliminary injunction ex parte suspending the effectivity of
said decision. Per resolution of this Court, dated May 6, 1963, said petition for injunction was denied.

The facts, as they appear in the records of both cases, are as follows:

Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business address at Morong,
Rizal. On August 15, 1949, it was granted by the Commission a certificate of public convenience and
necessity for the installation, operation and maintenance of an electric light, heat and power service in
the municipality of Morong, Rizal.

In an order dated December 19, 1956, the Commission required the petitioner to appear before it on
February 18, 1957 to show cause why it should not be penalized for violation of the conditions of its
certificate of public convenience and the regulations of the Commission, and for failure to comply with
the directives to raise its service voltage and maintain them within the limits prescribed in the Revised
Order No. 1 of the Commission, and to acquire and install a kilowattmeter to indcate the load in
kilowatts at any particular time of the generating unit. 3

For failure of the petitioner to appear at the hearing on February 18, 1957, the Commission ordered
the cancellation and revocation of petitioner's certificate of public convenience and necessity and the
forfeiture of its franchise. Petitioner moved for reconsideration of said order on the ground that its
manager, Juan D. Francisco, was not aware of said hearing. Respondent municipality opposed the
motion alleging that petitioner has not rendered efficient and satisfactory service and has not
complied with the requirements of the Commission for the improvement of its service. The motion
was set for hearing and Mr. Pedro S. Talavera, Chief, Industrial Division of the Commission, was
authorized to conduct the hearing for the reception of the evidence of the parties. 4

Finding that the failure of the petitioner to appear at the hearing set for February 18, 1957 — the sole
basis of the revocation of petitioner's certificate — was really due to the illness of its manager, Juan
D. Francisco, the Commission set aside its order of revocation. Respondent municipality moved for
reconsideration of this order of reinstatement of the certificate, but the motion was denied.

In a petition dated June 25, 1958, filed in the same case, respondent municipality formally asked the
Commission to revoke petitioner's certificate of public convenience and to forfeit its franchise on the
ground, among other things, that it failed to comply with the conditions of said certificate and
franchise. Said petition was set for hearing jointly with the order to show cause. The hearings had
been postponed several times.

Meanwhile, inspections had been made of petitioner's electric plant and installations by the engineers
of the Commission, as follows: April 15, 1958 by Engineer Antonio M. Alli; September 18, 1959, July
12-13, 1960, and June 21-24, 1961, by Engineer Meliton S. Martinez. The inspection on June 21-24,
1961 was made upon the request of the petitioner who manifested during the hearing on December
15, 1960 that improvements have been made on its service since the inspection on July 12-13, 1960,
and that, on the basis of the inspection report to be submitted, it would agree to the submission of the
case for decision without further hearing.

When the case was called for hearing on July 5, 1961, petitioner failed to appear. Respondent
municipality was then allowed to present its documentary evidence, and thereafter the case was
submitted for decision.

On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that it had not been
furnished with a copy of the report of the June 21-24, 1961 inspection for it to reply as previously
agreed. In an order dated August 25, 1961, petitioner was granted a period of ten (10) days within
which to submit its written reply to said inspection report, on condition that should it fail to do so within
the said period the case would be considered submitted for decision. Petitioner failed to file the reply.
In consonance with the order of August 25, 1961, therefore, the Commission proceeded to decide the
case. On July 29, 1962 petitioner's electric plant was burned.

In its decision, dated August 20, 1962, the Commission, on the basis of the inspection reports of its
aforenamed engineers, found that the petitioner had failed to comply with the directives contained in
its letters dated May 21, 1954 and September 4, 1954, and had violated the conditions of its
certificate of public convenience as well as the rules and regulations of the Commission. The
Commission concluded that the petitioner "cannot render the efficient, adequate and satisfactory
electric service required by its certificate and that it is against public interest to allow it to continue its
operation." Accordingly, it ordered the cancellation and revocation of petitioner's certificate of public
convenience and the forfeiture of its franchise.

On September 18, 1962, petitioner moved for reconsideration of the decision, alleging that before its
electric plant was burned on July 29, 1962, its service was greatly improved and that it had still
existing investment which the Commission should protect. But eight days before said motion for
reconsideration was filed, or on September 10, 1962, Morong Electric, having been granted a
municipal franchise on May 6, 1962 by respondent municipality to install, operate and maintain an
electric heat, light and power service in said municipality — approved by the Provincial Board of Rizal
on August 31, 1962 — filed with the Commission an application for a certificate of public convenience
and necessity for said service. Said application was entitled "Morong Electric Co., Inc., Applicant",
and docketed as Case No. 62-5143.

Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is
a holder of a certificate of public convenience to operate an electric light, heat and power service in
the same municipality of Morong, Rizal, and that the approval of said application would not promote
public convenience, but would only cause ruinous and wasteful competition. Although the opposition
is dated October 6, 1962, it was actually received by the Commission on November 8, 1962, or
twenty four days after the order of general default was issued in open court when the application was
first called for hearing on October 15, 1962. On November 12, 1962, however, the petitioner filed a
motion to lift said order of default. But before said motion could be resolved, petitioner filed another
motion, dated January 4, 1963, this time asking for the dismissal of the application upon the ground
that applicant Morong Electric had no legal personality when it filed its application on September 10,
1962, because its certificate of incorporation was issued by the Securities and Exchange Commission
only on October 17, 1962. This motion to dismiss was denied by the Commission in a formal order
issued on January 17, 1963 on the premise that applicant Morong Electric was a de facto corporation.
Consequently, the case was heard on the merits and both parties presented their respective
evidence. On the basis of the evidence adduced, the Commission, in its decision dated March 13,
1963, found that there was an absence of electric service in the municipality of Morong and that
applicant Morong Electric, a Filipino-owned corporation duly organized and existing under the laws of
the Philippines, has the financial capacity to maintain said service. These circumstances, considered
together with the denial of the motion for reconsideration filed by petitioner in Case No. 39715 on
February, 15, 1963, such that as far as the Commission was concerned the certificate of the
petitioner was already declared revoked and cancelled, the Commission approved the application of
Morong Electric and ordered the issuance in its favor of the corresponding certificate of public
convenience and necessity.1awphîl.nèt

On March 8, 1963, petitioner filed with this Court a petition to review the decision in Case No. 39715
(now G. R. No. L-20993). Then on April 26, 1963, petitioner also filed a petition to review the decision
in Case No. 62-5143 (now G. R. No. L-21221).

In questioning the decision of the Commission in Case No. 39715, petitioner contends: (1) that the
Commission acted without or in excess of its jurisdiction when it delegated the hearing of the case
and the reception of evidence to Mr. Pedro S. Talavera who is not allowed by law to hear the same;
(2) that the cancellation of petitioner's certificate of public convenience was unwarranted because no
sufficient evidence was adduced against the petitioner and that petitioner was not able to present
evidence in its defense; (3) that the Commission failed to give protection to petitioner's investment;
and (4) that the Commission erred in imposing the extreme penalty of revocation of the certificate.

In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the Commission erred
in denying petitioner's motion to dismiss and proceeding with the hearing of the application of the
Morong Electric; (2) that the Commission erred in granting Morong Electric a certificate of public
convenience and necessity since it is not financially capable to render the service; (3) that the
Commission erred when it made findings of facts that are not supported by the evidence adduced by
the parties at the trial; and (4) that the Commission erred when it did not give to petitioner protection
to its investment — a reiteration of the third assignment of error in the other case.1awphîl.nèt

We shall now discuss the appeals in these two cases separately.

G.R. No. L-20993

1. Under the first assignment of error, petitioner contends that while Mr. Pedro S. Talavera, who
conducted the hearings of the case below, is a division chief, he is not a lawyer. As such, under
Section 32 of Commonwealth Act No. 146, as amended, the Commission should not have delegated
to him the authority to conduct the hearings for the reception of evidence of the parties.

We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of Section 32 of
Commonwealth Act No. 146, as amended, 6 the Commission can only authorize a division chief to
hear and investigate a case filed before it if he is a lawyer. However, the petitioner is raising this
question for the first time in this appeal. The record discloses that petitioner never made any objection
to the authority of Mr. Talavera to hear the case and to receive the evidence of the parties. On the
contrary, we find that petitioner had appeared and submitted evidence at the hearings conducted by
Mr. Talavera, particularly the hearings relative to the motion for reconsideration of the order of
February 18, 1957 cancelling and revoking its certificate. We also find that, through counsel,
petitioner had entered into agreements with Mr. Talavera, as hearing officer, and the counsel for
respondent municipality, regarding procedure in order to abbreviate the proceedings. 7 It is only after
the decision in the case turned out to be adverse to it that petitioner questioned the proceedings held
before Mr. Talavera.

This Court in several cases has ruled that objection to the delegation of authority to hear a case filed
before the Commission and to receive the evidence in connection therewith is a procedural, not a
jurisdictional point, and is waived by failure to interpose timely the objection and the case had been
decided by the Commission. 8 Since petitioner has never raised any objection to the authority of Mr.
Talavera before the Commission, it should be deemed to have waived such procedural defect, and
consonant with the precedents on the matter, petitioner's claim that the Commission acted without or
in excess of jurisdiction in so authorizing Mr. Talavera should be dismissed. 9

2. Anent the second assigned error, the gist of petitioner's contention is that the evidence —
consisting of inspection reports — upon which the Commission based its decision is insufficient and
untrustworthy in that (1) the authors of said reports had not been put to test by way of cross-
examination; (2) the reports constitute only one side of the picture as petitioner was not able to
present evidence in its defense; (3) judicial notice was not taken of the testimony of Mr. Harry B.
Bernardino, former mayor of respondent municipality, in PSC Case No. 625143 (the other case, G. R.
No. L-21221) to the effect that the petitioner had improved its service before its electric power plant
was burned on July 29, 1962 — which testimony contradicts the inspection reports; and (4) the
Commission acted both as prosecutor and judge — passing judgment over the very same evidence
presented by it as prosecutor — a situation "not conducive to the arrival at just and equitable
decisions."
Settled is the rule that in reviewing the decision of the Public Service Commission this Court is not
required to examine the proof de novo and determine for itself whether or not the preponderance of
evidence really justifies the decision. The only function of this Court is to determine whether or not
there is evidence before the Commission upon which its decision might reasonably be based. This
Court will not substitute its discretion for that of the Commission on questions of fact and will not
interfere in the latter's decision unless it clearly appears that there is no evidence to support
it. 10 Inasmuch as the only function of this Court in reviewing the decision of the Commission is to
determine whether there is sufficient evidence before the Commission upon which its decision can
reasonably be based, as it is not required to examine the proof de novo, the evidence that should be
made the basis of this Court's determination should be only those presented in this case before the
Commission. What then was the evidence presented before the Commission and made the basis of
its decision subject of the present appeal? As stated earlier, the Commission based its decision on
the inspection reports submitted by its engineers who conducted the inspection of petitioner's electric
service upon orders of the Commission. 11 Said inspection reports specify in detail the deficiencies
incurred, and violations committed, by the petitioner resulting in the inadequacy of its service. We
consider that said reports are sufficient to serve reasonably as bases of the decision in question. It
should be emphasized, in this connection that said reports, are not mere documentary proofs
presented for the consideration of the Commission, but are the results of the Commission's own
observations and investigations which it can rightfully take into consideration, 12 particularly in this
case where the petitioner had not presented any evidence in its defense, and speaking of petitioner's
failure to present evidence, as well as its failure to cross-examine the authors of the inspection
reports, petitioner should not complain because it had waived not only its right to cross-examine but
also its right to present evidence. Quoted hereunder are the pertinent portions of the transcripts of the
proceedings where the petitioner, through counsel, manifested in clear language said waiver and its
decision to abide by the last inspection report of Engineer Martinez:

Proceedings of December 15, 1960

COMMISSION:

It appears at the last hearing of this case on September 23, 1960, that an engineer of this
Commission has been ordered to make an inspection of all electric services in the province of Rizal
and on that date the engineer of this Commission is still undertaking that inspection and it appears
that the said engineer had actually made that inspection on July 12 and 13, 1960. The engineer has
submitted his report on November 18, 1960 which is attached to the records of this case.

ATTY. LUQUE (Councel for Petitioner):

... (W)e respectfully state that while the report is, as I see it attached to the records, clear and very
thorough, it was made sometime July of this year and I understand from the respondent that there is
some improvement since this report was made ... we respectfully request that an up-to-date
inspection be made ... . An inspector of this Commission can be sent to the plant and considering that
the engineer of this Commission, Engineer Meliton Martinez, is very acquainted to the points involved
we pray that his report will be used by us for the reason that he is a technical man and he knows well
as he has done a good job and I think our proposition would expedite the matter. We sincerely
believe that the inspection report will be the best evidence to decide this matter.

xxx xxx xxx

ATTY. LUQUE:

... This is a very important matter and to show the good faith of respondent in this case we will not
even cross-examine the engineer when he makes a new report. We will agree to the findings and,
your honor please, considering as we have manifested before that Engineer Martinez is an
experienced engineer of this Commission and the points reported by Engineer Martinez on the
situation of the plant now will prevent the necessity of having a hearing, of us bringing new evidence
and complainant bringing new evidence. ... .

xxx xxx xxx

COMMISSION (to Atty. Luque):

Q Does the Commission understand from the counsel for applicant that if the motion is
granted he will submit this order to show cause for decision without any further hearing and the
decision will be based on the report of the engineer of this Commission?
 A We respectfully reply in this manner that we be allowed or be given an opportunity just
to read the report and 99%, we will agree that the report will be the basis of that decision. We
just want to find out the contents of the report, however, we request that we be furnished with a
copy of the report before the hearing so that we will just make a manifestation that we will
agree.

COMMISSION (to Atty. Luque):

Q In order to prevent the delay of the disposition of this case the Commission will allow
counsel for the applicant to submit his written reply to the report that the engineer of this
Commission. Will he submit this case without further hearing upon the receipt of that written
reply?

A Yes, your honor.

Proceedings of August 25, 1961

ATTY. LUQUE (Counsel for petitioner):

In order to avoid any delay in the consideration of this case we are respectfully move (sic) that
instead of our witnesses testifying under oath that we will submit a written reply under oath together
with the memorandum within fifteen (15) days and we will furnish a copy and upon our submission of
said written reply under oath and memorandum we consider this case submitted. This suggestion is
to abbreviate the necessity of presenting witnesses here which may prolong the resolution of this
case.

ATTY. OLIVAS (Counsel for respondent municipality):

I object on the ground that there is no resolution by this Commission on the action to reopen the case
and second this case has been closed.

ATTY. LUQUE:

With regard to the testimony on the ground for opposition we respectfully submit to this Commission
our motion to submit a written reply together with a memorandum. Also as stated to expedite the case
and to avoid further hearing we will just submit our written reply. According to our records we are
furnished with a copy of the report of July 17, 1961. We submit your honor.

xxx xxx xxx

COMMISSION:

To give applicant a chance to have a day in court the Commission grants the request of applicant that
it be given 10 days within which to submit a written reply on the report of the engineer of the
Commission who inspected the electric service, in the municipality of Morong, Rizal, and after the
submission of the said written reply within 10 days from today this case will be considered submitted
for decision.

The above-quoted manifestation of counsel for the petitioner, specifically the statement referring to
the inspection report of Engineer Martinez as the "best evidence to decide this matter," can serve as
an argument against petitioner's claim that the Commision should have taken into consideration the
testimony of Mr. Bernardino. But the primary reasons why the Commission could not have taken
judicial cognizance of said testimony are: first, it is not a proper subject of judicial notice, as it is not a
"known" fact — that is, well established and authoritatively settled, without qualification and
contention; 13 second, it was given in a subsequent and distinct case after the petitioner's motion for
reconsideration was heard by the Commission en banc and submitted for decision, 14 and third, it was
not brought to the attention of the Commission in this case through an appropriate pleading. 15

Regarding the contention of petitioner that the Commission had acted both as prosecutor and judge,
it should be considered that there are two matters that had to be decided in this case, namely, the
order to show cause dated December 19, 1956, and the petition or complaint by respondent
municipality dated June 25, 1958. Both matters were heard jointly, and the record shows that
respondent municipality had been allowed to present its evidence to substantiate its complaint. It can
not be said, therefore, that in this case the Commission had acted as prosecutor and judge. But even
assuming, for the sake of argument, that there was a commingling of the prosecuting and
investigating functions, this exercise of dual function is authorized by Section 17(a) of Commonwealth
Act No. 146, as amended, under which the Commission has power "to investigate, upon its own
initiative or upon complaint in writing, any matter concerning any public service as regards matters
under its jurisdiction; to, require any public service to furnish safe, adequate, and proper service as
the public interest may require and warrant; to enforce compliance with any standard, rule, regulation,
order or other requirement of this Act or of the Commission ... ." Thus, in the case of Collector of
Internal Revenue vs. Estate of F. P. Buan, L-11438, July 31, 1958, this Court held that the power of
the Commission to cancel and revoke a certificate of public convenience and necessity may be
exercised by it even without a formal charge filed by any interested party, with the only limitation that
the holder of the certificate should be given his day in court.

It may not be amiss to add that when prosecuting and investigating duties are delegated by statute to
an administrative body, as in the case of the Public Service Commission, said body may take steps it
believes appropriate for the proper exercise of said duties, particularly in the manner of informing
itself whether there is probable violation of the law and/or its rules and regulations. It may initiate an
investigation, file a complaint, and then try the charge as preferred. So long as the respondent is
given a day in court, there can be no denial of due process, and objections to said procedure cannot
be sustained.

3. In its third assignment of error, petitioner invokes the "protection-of-investment rule" enunciated by
this Court in Batangas Transportation Co. vs. Orlanes 16 in this wise:

The Government having taken over the control and supervision of all public utilities, so long as
an operator under a prior license complies with the terms and conditions of his license and
reasonable rules and regulations for its operation and meets the reasonable demands of the
public, it is the duty of the Commission to protect rather than to destroy his investment by the
granting of the second license to another person for the same thing over the same route of
travel. The granting of such a license does not serve its convenience or promote the interests
of the public.

The above-quoted rule, however, is not absolute, for nobody has exclusive right to secure a franchise
or a certificate of public convenience. 17 Where, as in the present case, it has been shown by ample
evidence that the petitioner, despite ample time and opportunity given to it by the Commission, had
failed to render adequate, sufficient and satisfactory service and had violated the important conditions
of its certificate as well as the directives and the rules and regulations of the Commission, the rule
cannot apply. To apply that rule unqualifiedly is to encourage violation or disregard of the terms and
conditions of the certificate and the Commission's directives and regulations, and would close the
door to other applicants who could establish, operate and provide adequate, efficient and satisfactory
service for the benefit and convenience of the inhabitants. It should be emphasized that the
paramount consideration should always be the public interest and public convenience. The duty of
the Commission to protect investment of a public utility operator refers only to operators of good
standing — those who comply with the laws, rules and regulations — and not to operators who are
unconcerned with the public interest and whose investments have failed or deteriorated because of
their own fault. 18

4. The last assignment of error assails the propriety of the penalty imposed by the Commission on the
petitioner — that is, the revocation of the certificate and the forfeiture of the franchise. Petitioner
contends that the imposition of a fine would have been sufficient, as had been done by the
Commission in cases of a similar nature.

It should be observed that Section 16(n) of Commonwealth Act No. 146, as amended, confers upon
the Commission ample power and discretion to order the cancellation and revocation of any
certificate of public convenience issued to an operator who has violated, or has willfully and
contumaciously refused to comply with, any order, rule or regulation of the Commission or any
provision of law. What matters is that there is evidence to support the action of the Commission. In
the instant case, as shown by the evidence, the contumacious refusal of the petitioner since 1954 to
comply with the directives, rules and regulations of the Commission, its violation of the conditions of
its certificate and its incapability to comply with its commitment as shown by its inadequate service,
were the circumstances that warranted the action of the Commission in not merely imposing a fine
but in revoking altogether petitioner's certificate. To allow petitioner to continue its operation would be
to sacrifice public interest and convenience in favor of private interest.

A grant of a certificate of public convenience confers no property rights but is a mere license or
privilege, and such privilege is forfeited when the grantee fails to comply with his commitments
behind which lies the paramount interest of the public, for public necessity cannot be made to
wait, nor sacrificed for private convenience. (Collector of Internal Revenue v. Estate of F. P.
Buan, et al., L-11438 and Santiago Sambrano, et al. v. PSC, et al., L-11439 & L-11542-46,
July 31, 1958)
 (T)he Public Service Commission, ... has the power to specify and define the terms and
conditions upon which the public utility shall be operated, and to make reasonable rules and
regulations for its operation and the compensation which the utility shall receive for its services
to the public, and for any failure to comply with such rules and regulations or the violation of
any of the terms and conditions for which the license was granted, the Commission has ample
power to enforce the provisions of the license or even to revoke it, for any failure or neglect to
comply with any of its terms and provisions. (Batangas Trans. Co. v. Orlanes, 52 Phil. 455,
460; emphasis supplied)

Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146, as amended,
which provides that a public utility operator violating or failing to comply with the terms and conditions
of any certificate, or any orders, decisions or regulations of the Commission, shall be subject to a fine
and that the Commission is authorized and empowered to impose such fine, after due notice and
hearing. It should be noted, however, that the last sentence of said section states that the remedy
provided therein "shall not be a bar to, or affect any other remedy provided in this Act but shall be
cumulative and additional to such remedy or remedies." In other words, the imposition of a fine may
only be one of the remedies which the Commission may resort to, in its discretion. But that remedy is
not exclusive of, or has preference over, the other remedies. And this Court will not substitute its
discretion for that of the Commission, as long as there is evidence to support the exercise of that
discretion by the Commission.

G. R. No. L-21221

Coming now to the other case, let it be stated at the outset that before any certificate may be granted,
authorizing the operation of a public service, three requisites must be complied with, namely: (1) the
applicant must be a citizen of the Philippines or of the United States, or a corporation or co-
partnership, association or joint-stock company constituted and organized under the laws of the
Philippines, sixty per centum at least of the stock or paid-up capital of which belongs entirely to
citizens of the Philippines or of the United States; 19 (2) the applicant must be financially capable of
undertaking the proposed service and meeting the responsibilities incident to its operation; 20 and (3)
the applicant must prove that the operation of the public service proposed and the authorization to do
business will promote the public interest in a proper and suitable manner. 21

As stated earlier, in the decision appealed from, the Commission found that Morong Electric is a
corporation duly organized and existing under the laws of the Philippines, the stockholders of which
are Filipino citizens, that it is financially capable of operating an electric light, heat and power service,
and that at the time the decision was rendered there was absence of electric service in Morong, Rizal.
While the petitioner does not dispute the need of an electric service in Morong, Rizal, 22 it claims, in
effect, that Morong Electric should not have been granted the certificate of public convenience and
necessity because (1) it did not have a corporate personality at the time it was granted a franchise
and when it applied for said certificate; (2) it is not financially capable of undertaking an electric
service, and (3) petitioner was rendering efficient service before its electric plant was burned, and
therefore, being a prior operator its investment should be protected and no new party should be
granted a franchise and certificate of public convenience and necessity to operate an electric service
in the same locality.

1. The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the
proposition that since a franchise is a contract, 23 at least two competent parties are necessary to the
execution thereof, and parties are not competent except when they are in being. Hence, it is
contended that until a corporation has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any
contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the
SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and
legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962
when it was not yet in esse is null and void and cannot be the subject of the Commission's
consideration. On the other hand, Morong Electric argues, and to which argument the Commission
agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was
not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been
incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or
disapproval thereof can be properly determined by the Commission.

Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when
a municipal franchise was granted to it is correct. The juridical personality and legal existence of
Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by
the SEC. 24 Before that date, or pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation. 25 But the fact that Morong Electric had
no corporate existence on the day the franchise was granted in its name does not render the
franchise invalid, because later Morong Electric obtained its certificate of incorporation and then
accepted the franchise in accordance with the terms and conditions thereof. This view is sustained by
eminent American authorities. Thus, McQuiuin says:

The fact that a company is not completely incorporated at the time the grant is made to it by a
municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But
such grant cannot take effect until the corporation is organized. And in Illinois it has been
decided that the ordinance granting the franchise may be presented before the corporation
grantee is fully organized, where the organization is completed before the passage and
acceptance. (McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)

Fletcher says:

While a franchise cannot take effect until the grantee corporation is organized, the franchise
may, nevertheless, be applied for before the company is fully organized.

A grant of a street franchise is valid although the corporation is not created until afterwards.
(Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)

And Thompson gives the reason for the rule:

(I)n the matter of the secondary franchise the authorities are numerous in support of the
proposition that an ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the introduction of the
ordinance. It is enough that organization is complete prior to the passage and acceptance of
the ordinance. The reason is that a privilege of this character is a mere license to the
corporation until it accepts the grant and complies with its terms and conditions. (Thompson on
Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26

The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as
shown by its action in prosecuting the application filed with the Commission for the approval of said
franchise, not only perfected a contract between the respondent municipality and Morong Electric but
also cured the deficiency pointed out by the petitioner in the application of Morong EIectric. Thus, the
Commission did not err in denying petitioner's motion to dismiss said application and in proceeding to
hear the same. The efficacy of the franchise, however, arose only upon its approval by the
Commission on March 13, 1963. The reason is that —

Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to grant
electric franchises, subject to the approval of the provincial board and the President. However,
under Section 16(b) of Commonwealth Act No. 146, as amended, the Public Service
Commission is empowered "to approve, subject to constitutional limitations any franchise or
privilege granted under the provisions of Act No. 667, as amended by Act No. 1022, by any
political subdivision of the Philippines when, in the judgment of the Commission, such
franchise or privilege will properly conserve the public interests and the Commission shall in so
approving impose such conditions as to construction, equipment, maintenance, service, or
operation as the public interests and convenience may reasonably require, and to issue
certificates of public convenience and necessity when such is required or provided by any law
or franchise." Thus, the efficacy of a municipal electric franchise arises, therefore, only after
the approval of the Public Service Commission. (Almendras vs. Ramos, 90 Phil. 231) .

The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not
incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro
Sandiko 27 upon which the petitioner leans heavily in support of its position. In said case this Court
held that a corporation should have a full and complete organization and existence as an entity before
it can enter into any kind of a contract or transact any business. It should be pointed out, however,
that this Court did not say in that case that the rule is absolute or that under no circumstances may
the acts of promoters of a corporation be ratified or accepted by the corporation if and when
subsequently organized. Of course, there are exceptions. It will be noted that American courts
generally hold that a contract made by the promoters of a corporation on its behalf may be adopted,
accepted or ratified by the corporation when organized. 28

2. The validity of the franchise and the corporate personality of Morong Electric to accept the same
having been shown, the next question to be resolved is whether said company has the financial
qualification to operate an electric light, heat and power service. Petitioner challenges the financial
capability of Morong Electric, by pointing out the inconsistencies in the testimony of Mr. Jose P. Ingal,
president of said company, regarding its assets and the amount of its initial investment for the electric
plant. In this connection it should be stated that on the basis of the evidence presented on the matter,
the Commission has found the Morong Electric to be "financially qualified to install, maintain and
operate the proposed electric light, heat and power service." This is essentially a factual
determination which, in a number of cases, this Court has said it will not disturb unless patently
unsupported by evidence. An examination of the record of this case readily shows that the testimony
of Mr. Ingal and the documents he presented to establish the financial capability of Morong Electric
provide reasonable grounds for the above finding of the Commission.

It is now a very well-settled rule in this jurisdiction that the findings and conclusions of fact
made by the Public Service Commission, after weighing the evidence adduced by the parties
in a public service case, will not be disturbed by the Supreme Court unless those findings and
conclusions appear not to be reasonably supported by evidence. (La Mallorca and Pampanga
Bus Co. vs. Mercado, L-19120, November 29, 1965)

For purposes of appeal, what is decisive is that said testimonial evidence provides reasonable
support for the Public Service Commission's findings of financial capacity on the part of
applicants, rendering such findings beyond our power to disturb. (Del Pilar Transit vs. Silva, L-
21547, July 15, 1966)

It may be worthwhile to mention in this connection that per inspection report dated January 20,
1964 29 of Mr. Meliton Martinez of the Commission, who inspected the electric service of Morong on
January 15-16, 1964, Morong Electric "is serving electric service to the entire area covered by its
approved plan and has constructed its line in accordance with the plans and specifications approved
by the Commission." By reason thereof, it was recommended that the requests of Morong Electric (1)
for the withdrawal of its deposit in the amount of P1,000.00 with the Treasurer of the Philippines, and
(2) for the approval of Resolution No. 160 of the Municipal Council of Morong, Rizal, exempting the
operator from making the additional P9,000.00 deposit mentioned in its petition, dated September 16,
1963, be granted. This report removes any doubt as to the financial capability of Morong Electric to
operate and maintain an electric light, heat and power service.

3. With the financial qualification of Morong Electric beyond doubt, the remaining question to be
resolved is whether, or not, the findings of fact of the Commission regarding petitioner's service are
supported by evidence. It is the contention of the petitioner that the Commission made some findings
of fact prejudicial to its position but which do not find support from the evidence presented in this
case. Specifically, petitioner refers to the statements or findings that its service had "turned from bad
to worse," that it miserably failed to comply with the oft-repeated promises to bring about the needed
improvement, that its equipment is unserviceable, and that it has no longer any plant site and,
therefore, has discredited itself. Petitioner further states that such statements are not only devoid of
evidentiary support but contrary to the testimony of its witness, Mr. Harry Bernardino, who testified
that petitioner was rendering efficient and satisfactory service before its electric plant was burned on
July 29, 1962.

On the face of the decision appealed from, it is obvious that the Commission in describing the kind of
service petitioner was rendering before its certificate was ordered revoked and cancelled, took judicial
notice of the records of the previous case (PSC Case No. 39715) where the quality of petitioner's
service had been squarely put in issue. It will be noted that the findings of the Commission were
made notwithstanding the fact that the aforementioned testimony of Mr. Bernardino had been
emphasized and pointed out in petitioner's Memorandum to the Commission. 30 The implication is
simple: that as between the testimony of Mr. Bernardino and the inspection reports of the engineers
of the Commission, which served as the basis of the revocation order, the Commission gave
credence to the latter. Naturally, whatever conclusion or finding of fact that the Commission arrived at
regarding the quality of petitioner's service are not borne out by the evidence presented in this case
but by evidence in the previous case. 31In this connection, we repeat, the conclusion, arrived at by the
Commission after weighing the conflicting evidence in the two related cases, is a conclusion of fact
which this Court will not disturb.

And it has been held time and again that where the Commission has reached a conclusion of
fact after weighing the conflicting evidence, that conclusion must be respected, and the
Supreme Court will not interfere unless it clearly appears that there is no evidence to support
the decision of the Commission. (La Mallorca and Pampanga Bus Co., Inc. vs. Mercado, L-
19120, November 29, 1965 citing Pangasinan Trans. Co., Inc. vs. Dela Cruz, 96 Phil. 278)

For that matter, petitioner's pretension that it has a prior right to the operation of an electric service in
Morong, Rizal, is not tenable; and its plea for protection of its investment, as in the previous case,
cannot be entertained.
WHEREFORE, the two decisions of the Public Service Commission, appealed from, should be, as
they are hereby affirmed, with costs in the two cases against petitioner Rizal Light & Ice Co., Inc. It is
so ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.

Footnotes
1Hereinafter referred to as "Commission".
2Hereinafter referred to as "Morong Electric".
3Order dated December 19, 1956.
4Not"Pedro G. Talavera" as appearing in petitioner's Brief. Mr. Pedro S. Talavera also
conducted the hearings in the main case.
5Law List 1961, First Edition, does not contain the name "Pedro S. Talavera."
6As amended by R.A. No. 723 which took effect on June 6, 1962, it reads: "The Commission
may also, by proper order, authorize any of the attorneys of the legal division or division
chiefs of the Commission, if they be lawyers, to hear and investigate any case filed with the
Commission and in connection therewith to receive such evidence as may be material thereto."
(Emphasis supplied.)
7Sessions of September 23, 1960, December 15, 1960, February 24, 1961 and August 25,
1961.
8EverettSteamship Corp. vs. Chuahiong, L-2933, September 26, 1951; Raymundo Trans. vs.
Cervo, L-3899, May 21, 1952; Enriquez & Co. vs. Ortega, L-4865, December 22, 1952; and
Luzon Stevedoring Co. vs. PSC, L-5458, September 16, 1953.
9In Raymundo Trans. vs. Cervo, supra, it was held: "As provided for in Rule 43, section 2 of
the Rules of Court an appellant can only raise in a petition for review questions that had been
raised before the Public Service Commission."
10A. L. Ammen Transportation Co. vs. Froilan Japa, L-19643, July 26, 1966; Del Pilar Transit,
Inc. vs. Jose M. Silva, L-21547, July 15, 1966; Pineda vs. Carandang, L-13270-71, March 24,
1960; and Ramos vs. Lat, et al., L-14476 & L-15773, May 23, 1960.
11Admitted by the petitioner in its Brief, pp. 3 & 11.
12"The Public Service Commission in the exercise of its quasi-judicial and administrative
functions has the power to take into consideration the result of its own observation and
investigation of the matter submitted to it for consideration and decision, in connection with
other evidence presented at the hearing of a case." (Cebu Transit Co. vs. PSC, 79 Phil. 386;
Sambrano vs. Northern Luzon Trans. Co., 63 Phil. 554; Manila Yellow Taxicab Co., Inc. vs.
Araullo, et al., 60 Phil. 833; and Manila Yellow Taxicab Co., Inc. vs. B. Stables Co., 60 Phil.
851.)

"The Commission can take cognizance of the facts disclosed by its own records." (Dagupan
Ice Plant Co., Inc. vs. Lucero, et al., 66 Phil. 120, 123.)
13"Mattersof which the Court will take notice are necessarily uniform or fixed, and do not
depend upon uncertain testimony, for as soon as a matter becomes disputable, it ceases to fall
under the head of common knowledge and will not be judicially recognized." (29 Am Jur 2d 61-
62)
14Petitioner's
motion for reconsideration was heard on Jan. 11, 1963 and on that date said
motion was considered submitted for decision, while the testimony of Bernardino was given on
January 24, 1963.
15"Judicialnonce is not judicial knowledge; and one having the burden of establishing a fact of
which a court may take judicial notice is not in consequence relieved of the necessity of
bringing the fact to the knowledge of the Court." (Francisco, Evidence, pp. 51- 52 citing
Shapleigh, et al. v. Mier, No. 125 [U.S.] Jan. 1937.)
1652Phil. 455, 472; see also Javier v. Orlanes, 53 Phil. 468 and Bohol Trans. Co. vs. Jureidini,
53 Phil. 560.
17See Teresa Electric & Power Co., Inc. vs. PSC, L-21804, Sept. 25, 1967; Manila Taxicab, et
al. vs. PSC, et al., 90 Phil. 301.
18Paredes vs. PSC, et al., L-7111, May 30, 1955.
19Ishi v. PSC, 63 Phil. 428.
20Manila Yellow Taxicab v. Austin Taxicab Co., 59 Phil. 771.
21Sec. 15, Com. Act No. 146; Batangas Trans. Co. v. Orlanes, 52 Phil. 455. See also Martin,
Phil. Commercial Laws, Vol. 3, pp. 1195-1196; Almario, Transportation and Public Service
Law, pp. 300-301; Agbayani, Commercial Laws of the Phil., Vol. 4 (1964 Ed.), pp. 2363-2364.
22T.s.n., p. 89 (Session on January 11, 1963).
23City of Manila vs. PSC, 52 Phil. 515.
24Hall vs. Judge Piccio, 86 Phil. 603, 605; See also Fisher, The Phil. Law of Stock Corp., p. 36.
25Tolentino,Commercial Laws of the Philippines, Vol. II, 8th Ed., p. 723; See also Guevara,
The Phil. Corp. Law, New Ed., p. 18.
26McQuillin,Fletcher and Thompson cite as authorities the cases of Clarksburg Electric Light
Co. vs. Clarksburg, 47 W. Va. 739, 35 S. E. 994, 50 L.R.A. 142 and Chicago Telephone Co.
vs. Northwestern Tel. Co, 199 Ill. 324, 65 N. E. 329.
2765 Phil. 223.
28Fletcher, Cyclopedia Corporation, Permanent Ed., Vol. I, Chap. 9, Sec. 207, p. 681.
29Marked Annex "A" of the memorandum of Morong Electric in lieu of oral arguments.
30P. 16, Memorandum of Oppositor (herein petitioner).
31The close connection of the matter in controversy in the two cases warranted the
Commission to take judicial notice of the records of the previous case, the findings of fact
therein and the ruling of the Commission. (See also 5 Moran, 1963 Ed., p. 42.)
G.R. No. L-48627

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners

vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO, respondents.

CRUZ, J.:

We gave limited due course to this petition on the question of the solidary liability of the petitioners
with their co-defendants in the lower court 1 because of the challenge to the following paragraph in
the dispositive portion of the decision of the respondent court: *

1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of
P50,000.00 for the preparation of the project study and his technical services that led to the
organization of the defendant corporation, plus P10,000.00 attorney's fees; 2

The petitioners claim that this order has no support in fact and law because they had no contract
whatsoever with the private respondent regarding the above-mentioned services. Their position is
that as mere subsequent investors in the corporation that was later created, they should not be held
solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and
Garcia, their co-defendants in the lower court, ** who were the ones who requested the said services
from the private respondent. 3

We are not concerned here with the petitioners' co-defendants, who have not appealed the decision
of the respondent court and may, for this reason, be presumed to have accepted the same. For
purposes of resolving this case before us, it is not necessary to determine whether it is the promoters
of the proposed corporation, or the corporation itself after its organization, that shall be responsible
for the expenses incurred in connection with such organization.

The only question we have to decide now is whether or not the petitioners themselves
are also and personally liable for such expenses and, if so, to what extent.

The reasons for the said order are given by the respondent court in its decision in this wise:

As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the
preparation of the project study and the pre-organizational services in the amount of
P50,000.00, not only the defendant corporation but the other defendants including defendants
Caram should be jointly and severally liable for this amount. As we above related it was upon
the request of defendants Barretto and Garcia that plaintiff handled the preparation of the
project study which project study was presented to defendant Caram so the latter was
convinced to invest in the proposed airlines. The project study was revised for purposes of
presentation to financiers and the banks. It was on the basis of this study that defendant
corporation was actually organized and rendered operational. Defendants Garcia and Caram,
and Barretto became members of the Board and/or officers of defendant corporation. Thus, not
only the defendant corporation but all the other defendants who were involved in the
preparatory stages of the incorporation, who caused the preparation and/or benefited from the
project study and the technical services of plaintiff must be liable. 4

It would appear from the above justification that the petitioners were not really involved in the initial
steps that finally led to the incorporation of the Filipinas Orient Airways. Elsewhere in the decision,
Barretto was described as "the moving spirit." The finding of the respondent court is that the project
study was undertaken by the private respondent at the request of Barretto and Garcia who, upon its
completion, presented it to the petitioners to induce them to invest in the proposed airline. The study
could have been presented to other prospective investors. At any rate, the airline was eventually
organized on the basis of the project study with the petitioners as major stockholders and, together
with Barretto and Garcia, as principal officers.

The following portion of the decision in question is also worth considering:

... Since defendant Barretto was the moving spirit in the pre-organization work of defendant
corporation based on his experience and expertise, hence he was logically compensated in the
amount of P200,000.00 shares of stock not as industrial partner but more for his technical
services that brought to fruition the defendant corporation. By the same token, We find no
reason why the plaintiff should not be similarly compensated not only for having actively
 participated in the preparation of the project study for several months and its subsequent
revision but also in his having been involved in the pre-organization of the defendant
corporation, in the preparation of the franchise, in inviting the interest of the financiers and in
the training and screening of personnel. We agree that for these special services of the plaintiff
the amount of P50,000.00 as compensation is reasonable. 5

The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of
the organization of the airline, which were being directed by Barretto as the main promoter. It was he
who was putting all the pieces together, so to speak. The petitioners were merely among the
financiers whose interest was to be invited and who were in fact persuaded, on the strength of the
project study, to invest in the proposed airline.

Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and
did not have a separate juridical personality, to justify making the petitioners, as principal
stockholders thereof, responsible for its obligations. As a bona fide corporation, the Filipinas Orient
Airways should alone be liable for its corporate acts as duly authorized by its officers and directors.

In the light of these circumstances, we hold that the petitioners cannot be held personally liable for
the compensation claimed by the private respondent for the services performed by him in the
organization of the corporation. To repeat, the petitioners did not contract such services. It was only
the results of such services that Barretto and Garcia presented to them and which persuaded them to
invest in the proposed airline. The most that can be said is that they benefited from such services, but
that surely is no justification to hold them personally liable therefor. Otherwise, all the other
stockholders of the corporation, including those who came in later, and regardless of the amount of
their share holdings, would be equally and personally liable also with the petitioners for the claims of
the private respondent.

The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our impression is
that it is opposed to the imposition of solidary responsibility upon the Carams but seems to be willing,
in a vague, unexpressed offer of compromise, to accept joint liability. While it is true that it does here
and there disclaim total liability, the thrust of the petition seems to be against the imposition of
solidary liability only rather than against any liability at all, which is what it should have categorically
argued.

Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and severally,
under the first paragraph of the dispositive portion of the challenged decision. So holding, we find it
unnecessary to examine at this time the rules on solidary obligations, which the parties-needlessly, as
it turns out have belabored unto death.

WHEREFORE, the petition is granted. The petitioners are declared not liable under the challenged
decision, which is hereby modified accordingly. It is so ordered.

Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.

Gancayco, J., took no part.

Footnotes
1 Rollo, p. 66.
* Gancayco, J., ponente, with Relova and Sison, JJ.
2 Decision, p. 16.
** Judge Pedro C. Navarro, presiding.
3 Rollo, pp. 10, 97.
4 Decision, pp. 14-15.
5 Ibid., p.11.
G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,

vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc.,respondents.

Claro M. Recto for petitioners.

Ramon Diokno and Jose W. Diokno for respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance
of Leyte and to enjoin the respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in
Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to
engage in a general lumber business to carry on as general contractors, operators and managers,
etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred to the corporation described in a list
appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities
and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental
office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed
before the Court of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al. vs.
Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber and Commercial Co.
was an unregistered partnership; that they wished to have it dissolved because of bitter dissension
among the members, mismanagement and fraud by the managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and
at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the
receiver, but the respondent judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this court. It is based upon two main
propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company,
because it being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation
but only a partnership.

Discussion: The second proposition may at once be dismissed. All the parties are informed that the
Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to
exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law). The
complaining associates have not represented to the others that they were incorporated any more than
the latter had made similar representations to them. And as nobody was led to believe anything to his
prejudice and damage, the principle of estoppel does not apply. Obviously this is not an instance
requiring the enforcement of contracts with the corporation through the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies,
and therefore the court had not jurisdiction to take cognizance of said civil case number 381. Section
19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation under
this Act and its right to exercise corporate powers shall not be inquired into collaterally in any
private suit to which the corporation may be a party, but such inquiry may be had at the suit of
the Insular Government on information of the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having obtained the
certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders —
may not probably claim "in good faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry which calls
a corporation into being. The immunity if collateral attack is granted to corporations "claiming in
good faith to be a corporation under this act." Such a claim is compatible with the existence of
errors and irregularities; but not with a total or substantial disregard of the law. Unless there
has been an evident attempt to comply with the law the claim to be a corporation "under this
act" could not be made "in good faith." (Fisher on the Philippine Law of Stock Corporations, p.
75. See also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders
of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its dissolution between stockholders, without
the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for dissolution; 1 but
that question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject
to review on appeal. Whkch brings us to one principal reason why this petition may not prosper,
namely: the petitioners have their remedy by appealing the order of dissolution at the proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be admitted
that receivership is proper in proceedings for dissolution of a company or corporation, and it was no
error to reject the counter-bond, the court having declared the dissolution. As to the amount of the
bond to be demanded of the receiver, much depends upon the discretion of the trial court, which in
this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore
issued will be dissolved.

Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

Footnotes
1Cf. Thompson on Corporations, 3rd. ed., secs. 6455-6457. But the suit might be viewed as
one of the rescission of contract, the agreement between incorporators being contractual in
nature. Fisher op. cit., p. 14.
G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
Branch II, and SEGUNDINO REFUERZO, respondents.

Jimenez, Tantuico, Jr. and Tolete for petitioner.

Francisco Astilla for respondent Segundino Refuerzo.

FELIX, J.:

This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of
the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between the former and the Philippine
Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas,
Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease with
the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing under
the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business address
therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was provided in
said contract, among other things, that the lifetime of the lease would be for a period of 10 years; that
the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor would be
entitled to 30 per cent of the net income accruing from the harvest of any, crop without being
responsible for the cost of production thereof; and that after every harvest, the lessee was bound to
declare at the earliest possible time the income derived therefrom and to deliver the corresponding
share due the lessor.

Apparently, the aforementioned obligations imposed on the alleged corporation were not complied
with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of
Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for
accounting, rescission and damages (Civil Case No. 1912). She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of the
commencement of the action, already harvested, processed and sold by defendants; that
notwithstanding that fact, defendants refused to render an accounting of the income derived
therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the
deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was in
violation of the terms of the covenant entered into between the plaintiff and defendant corporation, a
rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were allegedly
notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June 8,
1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to
render a complete accounting of the harvest of the land subject of the proceeding within 15 days from
receipt of the decision and to deliver 30 per cent of the net income realized from the last harvest to
plaintiff, with legal interest from the date defendants received payment for said crop. It was further
provide that upon defendants' failure to abide by the said requirement, the gross income would be
fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30 per cent of
which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of lease,
which was declared rescinded.

No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of
plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the
attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the
Philippine Fibers Producers Co., Inc., was found available for attachment. On January 31, 1956,
defendant Segundino Refuerzo filed a motion claiming that the decision rendered in said Civil Case
No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to
his personal liability and thus prayed that an order be issued limiting such liability to defendant
corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered the Provincial
Sheriff of Leyte to release all properties belonging to the movant that might have already been
attached, after finding that the evidence on record made no mention or referred to any fact which
might hold movant personally liable therein. As plaintiff's petition for relief from said order was denied,
Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the
order complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile
respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of
Court. Section 3 of said Rule, however, in providing for the period within which such a motion may be
filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided

for in either of the preceding sections of this rule must be verified, filed within sixty days after
the petitioner learns of the judgment, order, or other proceeding to be set aside, and not more
than six months after such judgment or order was entered, or such proceeding was taken; and
must be must be accompanied with affidavit showing the fraud, accident, mistake, or
excusable negligence relied upon, and the facts constituting the petitioner is good and
substantial cause of action or defense, as the case may be, which he may prove if his petition
be granted". (Rule 38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and
not more than 6 months after the judgment or order was rendered, both of which must be satisfied. As
the decision in the case at bar was under date of June 8, 1955, whereas the motion filed by
respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23 days, the
filing of the aforementioned motion was clearly made beyond the prescriptive period provided for by
the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision or order is
certainly an alert of grace or benevolence intended to afford said litigant a penultimate opportunity to
protect his interest. Considering the nature of such relief and the purpose behind it, the periods fixed
by said rule are non-extendible and never interrupted; nor could it be subjected to any condition or
contingency because it is of itself devised to meet a condition or contingency (Palomares vs.
Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition for a writ
of certiorari filed herein may be granted. However, taking note of the question presented by the
motion for relief involved herein, We deem it wise to delve in and pass upon the merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that
the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so in
his capacity as president of the corporation. And this allegation was found by the Court a quo to be
supported by the records. Plaintiff on the other hand tried to refute this averment by contending that
her failure to specify defendant's personal liability was due to the fact that all the time she was under
the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly
registered corporation as appearing in the contract, but a subsequent inquiry from the Securities and
Exchange Commission yielded otherwise. While as a general rule a person who has contracted or
dealt with an association in such a way as to recognize its existence as a corporate body is estopped
from denying the same in an action arising out of such transaction or dealing, (Asia Banking
Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4
Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be
held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's
charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no
juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances
surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T.
Vda. de Salvatierra was really made to believe that such corporation was duly organized in
accordance with law.

There can be no question that a corporation with registered has a juridical personality separate and
distinct from its component members or stockholders and officers such that a corporation cannot be
held liable for the personal indebtedness of a stockholder even if he should be its president (Walter A.
Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or member cannot be held
personally liable for any financial obligation be, the corporation in excess of his unpaid subscription.
But this rule is understood to refer merely to registered corporations and cannot be made applicable
to the liability of members of an unincorporated association. The reason behind this doctrine is
obvious-since an organization which before the law is non-existent has no personality and would be
incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by
law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at their own risk. And as it
is an elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and comes personally liable for contracts
entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited
in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that
defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co.,
Inc., was the moving spirit behind the consummation of the lease agreement by acting as its
representative, his liability cannot be limited or restricted that imposed upon corporate shareholders.
In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping
the consequential damages or resultant rights, if any, arising out of such transaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this
matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein
which might have been attached in the execution of such judgment, is hereby set aside and nullified
as if it had never been issued. With costs against respondent Segundino Refuerzo. It is so ordered.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
G.R. No. L-19118 January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,

vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.

Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.

Aruego, Mamaril & Associates for defendant-appellees.

BENGZON, J.P., J.:

No less than three times have the parties here appealed to this Court.

In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff entitled to
damages (for breach of contract) but reduced the amount from P23,000.00 to P15,000.00.

Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held that the
judgment for P15,000.00 which had become final and executory, should be executed to its full
amount, since in fixing it, payment already made had been considered.

Now we are asked whether the judgment may be executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as the real defendant.

Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University Publishing Co., Inc.
Plaintiff alleged inter alia that defendant was a corporation duly organized and existing under the laws
of the Philippines; that on July 19, 1948, defendant, through Jose M. Aruego, its President, entered
into a contract with plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for the
exclusive right to publish his revised Commentaries on the Revised Penal Code and for his share in
previous sales of the book's first edition; that defendant had undertaken to pay in eight quarterly
installments of P3,750.00 starting July 15, 1948; that per contract failure to pay one installment would
render the rest due; and that defendant had failed to pay the second installment.

Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted the execution
and terms of the contract dated July 19, 1948; but alleged that it was plaintiff who breached their
contract by failing to deliver his manuscript. Furthermore, defendant counterclaimed for
damages.1äwphï1.ñët

Plaintiff died before trial and Justo R. Albert, his estate's administrator, was substituted for him.

The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954, stating in the
dispositive portion —

IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the plaintiff and
against the defendant the University Publishing Co., Inc., ordering the defendant to pay the
administrator Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest from the date
of the filing of this complaint until the whole amount shall have been fully paid. The defendant
shall also pay the costs. The counterclaim of the defendant is hereby dismissed for lack of
evidence.

As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full. Thereafter,

on July 22, 1961, the court a quo ordered issuance of an execution writ against University Publishing
Co., Inc. Plaintiff, however, on August 10, 1961, petitioned for a writ of execution against Jose M.
Aruego, as the real defendant, stating, "plaintiff's counsel and the Sheriff of Manila discovered
that there is no such entity as University Publishing Co., Inc." Plaintiff annexed to his petition a
certification from the securities and Exchange Commission dated July 31, 1961, attesting: "The
records of this Commission do not show the registration of UNIVERSITY PUBLISHING CO., INC.,
either as a corporation or partnership." "University Publishing Co., Inc." countered by filing, through
counsel (Jose M. Aruego's own law firm), a "manifestation" stating that "Jose M. Aruego is not a party
to this case," and that, therefore, plaintiff's petition should be denied.

Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through counsel, would
not want Jose M. Aruego to be considered a party to the present case: should a separate action be
now instituted against Jose M. Aruego, the plaintiff will have to reckon with the statute of limitations.

The court a quo denied the petition by order of September 9, 1961, and from this, plaintiff has
appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange
Commission has not been disputed. Defendant would only raise the point that "University Publishing
Co., Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming that "University
Publishing Co., Inc." is an existing corporation with an independent juridical personality. Precisely,
however, on account of the non-registration it cannot be considered a corporation, not even a
corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose
M. Aruego; it cannot be sued independently.

The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable
here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to
believe in such representation. He signed the contract as "President" of "University Publishing Co.,
Inc.," stating that this was "a corporation duly organized and existing under the laws of the
Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has
induced another to act upon his wilful misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his victim the principle of corporation by
estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).

"University Publishing Co., Inc." purported to come to court, answering the complaint and litigating
upon the merits. But as stated, "University Publishing Co., Inc." has no independent personality; it is
just a name. Jose M. Aruego was, in reality, the one who answered and litigated, through his own law
firm as counsel. He was in fact, if not, in name, the defendant.

Even with regard to corporations duly organized and existing under the law, we have in many a case
pierced the veil of corporate fiction to administer the ends of justice. * And in Salvatiera vs.
Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and becomes personally
liable for contracts entered into or for other acts performed as such agent." Had Jose M. Aruego been
named as party defendant instead of, or together with, "University Publishing Co., Inc.," there would
be no room for debate as to his personal liability. Since he was not so named, the matters of "day in
court" and "due process" have arisen.

In this connection, it must be realized that parties to a suit are "persons who have a right to control
the proceedings, to make defense, to adduce and cross-examine witnesses, and to appeal from a
decision" (67 C.J.S. 887) — and Aruego was, in reality, the person who had and exercised these
rights. Clearly, then, Aruego had his day in court as the real defendant; and due process of law has
been substantially observed.

By "due process of law" we mean " "a law which hears before it condemns; which proceeds upon
inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this Court has
said, " "Due process of law" contemplates notice and opportunity to be heard before judgment is
rendered, affecting one's person or property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat vs.
Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention here also that the "due process"
clause of the Constitution is designed to secure justice as a living reality; not to sacrifice it by paying
undue homage to formality. For substance must prevail over form. It may now be trite, but none the
less apt, to quote what long ago we said in Alonso vs. Villamor, 16 Phil. 315, 321-322:

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the
subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in
which each contending party fully and fairly lays before the court the facts in issue and then,
brushing side as wholly trivial and indecisive all imperfections of form and technicalities of
procedure, asks that Justice be done upon the merits. Lawsuits, unlike duels, are not to be
won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant consideration from courts.
There should be no vested rights in technicalities.

The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent
principal, was the real party to the contract sued upon; that he was the one who reaped the benefits
resulting from it, so much so that partial payments of the consideration were made by him; that he
violated its terms, thereby precipitating the suit in question; and that in the litigation he was the real
defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on him.

We need hardly state that should there be persons who under the law are liable to Aruego for
reimbursement or contribution with respect to the payment he makes under the judgment in question,
he may, of course, proceed against them through proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded
ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment
into effect against University Publishing Co., Inc. and/or Jose M. Aruego. So ordered.

Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal and Zaldivar,
JJ., concur.
Bautista Angelo, J., took no part.

Footnotes
*Arnold vs. Willits & Patterson, Ltd., 44 Phil. 634; Koppel (Phil.), Inc. vs. Yatco, 77 Phil. 496: La
Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La Campana, 93 Phil.
160: Marvel Building Corporation vs. David, 94 Phil. 376: Madrigal Shipping Co., Inc. vs.
Ogilvie, L-8431, Oct. 30, 1958: Laguna Transportation Co., Inc. vs. S.S.S., L-14606, April 28,
1960: McConnel vs. C.A., L-10510, March 17, 1961; Liddell & Co., Inc. vs. Collector of Internal
Revenue, L-9687, June 30, 1961: Palacio vs. Fely Transportation Co., L-15121, August 31,
1962.
G.R. No. 119002 October 19, 2000

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

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

DECISION

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel agency to
the latter.1 The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the
South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of
China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received,
the Federation made two partial payments, both in September of 1989, in the total amount of
P176,467.50.2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter
requesting for the amount of P265,894.33.3 On 30 October 1989, the Federation, through the Project
Gintong Alay, paid the amount of P31,603.00.4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation. 5 Thereafter, no further payments were made
despite repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued
Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation
as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the
tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said
obligation.6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation
owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that
the petitioner has no cause of action against him either in his personal capacity or in his official
capacity as president of the Federation. He maintained that he did not guarantee payment but merely
acted as an agent of the Federation which has a separate and distinct juridical personality.7

On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial
court.8

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri
Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial
court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the
defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his
Answer. Being the President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the
plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to
ratify, a contract. The contract entered into by its officers or agents on behalf of such association is
not binding on, or enforceable against it. The officers or agents are themselves personally liable.

x x x9

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal
sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date
the complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00
for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the trial court, the decretal portion of said decision
reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET
ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn. 11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It
rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same as said entity has a separate and distinct
personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation
be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution
of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation,
it should be remembered that the trial court dismissed the complaint against the Philippine Football
Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football
Federation is not a party to this appeal and consequently, no judgment may be pronounced by this
Court against the PFF without violating the due process clause, let alone the fact that the judgment
dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to
appeal therefrom. The alternative prayer is therefore similarly DENIED.12

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors:13

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

DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE
ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE
ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE

RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED
THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED
PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY

LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY
DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as
the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604
as the laws from which said Federation derives its existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have
the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;
 2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation with the
executive committee;

xxx

13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which shall
be submitted to the Department and any amendment thereto shall take effect upon approval by
the Department: Provided, however, That no team, school, club, organization, or entity shall be
admitted as a voting member of an association unless 60 per cent of the athletes composing
said team, school, club, organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the
approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the
Department;

xxx

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these
entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property
are acts which may only be done by persons, whether natural or artificial, with juridical capacity.
However, while we agree with the appellate court that national sports associations may be accorded
corporate status, such does not automatically take place by the mere passage of these laws.

It is a basic postulate that before a corporation may acquire juridical personality, the State must give
its consent either in the form of a special law or a general enabling act. We cannot agree with the
view of the appellate court and the private respondent that the Philippine Football Federation came
into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any
provision creating the Philippine Football Federation. These laws merely recognized the existence of
national sports associations and provided the manner by which these entities may acquire juridical
personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be
organized for each individual sports in the Philippines in the manner hereinafter provided to constitute
the Philippine Amateur Athletic Federation. Applications for recognition as a National Sports'
Association shall be filed with the executive committee together with, among others, a copy of the
constitution and by-laws and a list of the members of the proposed association, and a filing fee of ten
pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association
will promote the purposes of this Act and particularly section three thereof. No application shall be
held pending for more than three months after the filing thereof without any action having been taken
thereon by the executive committee. Should the application be rejected, the reasons for such
rejection shall be clearly stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be considered as unacted upon:
Provided, however, That until the executive committee herein provided shall have been formed,
applications for recognition shall be passed upon by the duly elected members of the present
executive committee of the Philippine Amateur Athletic Federation. The said executive committee
shall be dissolved upon the organization of the executive committee herein provided: Provided,
further, That the functioning executive committee is charged with the responsibility of seeing to it that
the National Sports' Associations are formed and organized within six months from and after the
passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national

sports association for each individual sport in the Philippines shall be filed with the Department
together with, among others, a copy of the Constitution and By-Laws and a list of the members of the
proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially complied
with the rules and regulations of the Department: Provided, That the Department may withdraw
accreditation or recognition for violation of this Decree and such rules and regulations formulated by
it.

The Department shall supervise the national sports association: Provided, That the latter shall have
exclusive technical control over the development and promotion of the particular sport for which they
are organized.

Clearly the above cited provisions require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the Philippine
Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development
under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to
prove the juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration
before the trial court a copy of the constitution and by-laws of the Philippine Football Federation.
Unfortunately, the same does not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and
Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national
sports association within the purview of the aforementioned laws and does not have corporate
existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation
law that any person acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract entered into or for other acts
performed as such agent.14 As president of the Federation, Henri Kahn is presumed to have known
about the corporate existence or non-existence of the Federation. We cannot subscribe to the
position taken by the appellate court that even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate existence of the Federation because it had
contracted and dealt with the Federation in such a manner as to recognize and in effect admit its
existence.15 The doctrine of corporation by estoppel is mistakenly applied by the respondent court to
the petitioner. The application of the doctrine applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the irrelevant ground of defective
incorporation.16 In the case at bar, the petitioner is not trying to escape liability from the contract but
rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

Footnotes
1 Records, p. 10
2 Id., at 12-13.
3 Id., at 14.
4 Id., at 15.
5 Id., at 18.
6 Id., at 1-9.
7 Id., at 29-34.
8 Id., at 40.
9 Rollo, pp. 195-196.
10 Id., at 196.
11 Id., at 48.
12 Id., at 50.
13 Id., at 16-17.
14 Albertvs. University Publishing Co. Inc.., 13 SCRA 84, 87 (1965) citing Salvatierra vs.
Garlitos, 56 O.G. 3069.
15 CA Decision, p. 11, Rollo, p 46.
16 Campos, p. 107, citing Lowell-Woodward Hardware vs. Woods, et al., Partners As The
Superior Leasing Company, Supreme Court of Kansas, 1919, 104 Kan. 729, 180 p. 734.
G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a
business and to divide the profits or losses that may arise therefrom, even if it is shown that they have
not contributed any capital of their own to a "common fund." Their contribution may be in the form of
credit or industry, not necessarily cash or fixed assets. Being partner, they are all liable for debts
incurred by or on behalf of the partnership. The liability for a contract entered into on behalf of an
unincorporated association or ostensible corporation may lie in a person who may not have directly
transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same is
hereby affirmed. 2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the
CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing

nets covered by the Agreement plus P68,000.00 representing the unpaid
price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices and
computed on their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for

P385,377.80 dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No. 14413 for

P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for

P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing

P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges

on the nets counted from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for
the unpaid price of nets and floats in the amount of P532,045.00 and
P68,000.00, respectively, or for the total amount P600,045.00, this Court noted
 that these items were attached to guarantee any judgment that may be rendered
in favor of the plaintiff but, upon agreement of the parties, and, to avoid further
deterioration of the nets during the pendency of this case, it was ordered sold at
public auction for not less than P900,000.00 for which the plaintiff was the sole
and winning bidder. The proceeds of the sale paid for by plaintiff was deposited
in court. In effect, the amount of P900,000.00 replaced the attached property as
a guaranty for any judgment that plaintiff may be able to secure in this case with
the ownership and possession of the nets and floats awarded and delivered by
the sheriff to plaintiff as the highest bidder in the public auction sale. It has also
been noted that ownership of the nets [was] retained by the plaintiff until full
payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason also that this Court earlier
ordered the attachment bond filed by plaintiff to guaranty damages to defendants
to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to
serve as its bond in favor of defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess
to the defendants who are not entitled to damages and who did not put up a
single centavo to raise the amount of P900,000.00 aside from the fact that they
are not the owners of the nets and floats. For this reason, the defendants are
hereby relieved from any and all liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to retain possession and ownership
of the nets and floats and for the reimbursement of the P900,000.00 deposited by
it with the Clerk of Court.

SO ORDERED. 3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business
venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total
price of the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold
to the Corporation. 4

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed
a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission. 5 On September 20, 1990, the lower
court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets
on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to respondent some of the nets which were
in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to
cross-examine witnesses and to present evidence on his behalf, because of his failure to appear in
subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and
Crossclaim and moved for the lifting of the Writ of Attachment. 6 The trial court maintained the Writ,
and upon motion of private respondent, ordered the sale of the fishing nets at a public auction.
Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales
proceeds of P900,000. 7

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners,
were jointly liable to pay respondent. 8

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three 9 in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of
contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages. 10 The
Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4)
vessels sold in the amount of P5,750,000.00 including the fishing net. This
P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor
of JL Holdings Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3
Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations,
but that joint liability could be presumed from the equal distribution of the profit and loss. 21

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing
business and may thus be held liable as a such for the fishing nets and floats purchased by and for
the use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong
Lim undertook a partnership for a specific undertaking, that is for commercial fishing . . .
. Oviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is . . . . By a contract of partnership,
two or more persons bind themselves to contribute money, property or industry to a
common fund with the intention of dividing the profits among themselves (Article 1767,
New Civil Code). 13

Hence, petitioner brought this recourse before this Court. 14

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE

AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT
OF PETITIONER LIM'S GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats from respondent,
the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to
have entered into a partnership.

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership

and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he
disclaims any direct participation in the purchase of the nets, alleging that the negotiations were
conducted by Chua and Yao only, and that he has not even met the representatives of the
respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao,
for the "Contract of Lease " dated February 1, 1990, showed that he had merely leased to the two the
main asset of the purported partnership — the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts
clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767
of the Civil Code which provides:

Art. 1767 — By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the following
factual findings: 15

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was already Yao's partner;

(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire
two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed
of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as
security for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats, Chua's FB Lady Anne
Mel and Yao's FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch
72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c) declaration of ownership of
fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to
engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a
loan secured from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to
divide equally among them the excess or loss. These boats, the purchase and the repair of which
were financed with borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or profit from the sale and operation of the boats would
be divided equally among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to
that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously
acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself
so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the
business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and operations thereof would be
divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions
of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent
any cogent proof that the present action is embraced by one of the exceptions to the rule. 16 In
assailing the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of
a petition for review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was
the Compromise Agreement. He also claims that the settlement was entered into only to end the
dispute among them, but not to adjudicate their preexisting rights and obligations. His arguments are
baseless. The Agreement was but an embodiment of the relationship extant among the parties prior
to its execution.

A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise
all relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on the basis of one piece of
document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the
document and explored all the possible consequential combinations in harmony with law, logic and
fairness. Verily, the two lower courts' factual findings mentioned above nullified petitioner's argument
that the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner,

Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua
and Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of
Lease and the registration papers showing that he was the owner of the boats, including F/B
Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale
of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among
the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that
there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao,
in which debts were undertaken in order to finance the acquisition and the upgrading of the vessels
which would be used in their fishing business. The sale of the boats, as well as the division among
the three of the balance remaining after the payment of their loans, proves beyond cavil that F/B
Lourdes, though registered in his name, was not his own property but an asset of the partnership. It is
not uncommon to register the properties acquired from a loan in the name of the person the lender
trusts, who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a
debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee,
instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to
Chua and Yao, and not to him. Again, we disagree.

Sec. 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
 debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction entered
by it as a corporation or on any tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives or
agents do so without authority and at their own risk. And as it is an elementary principle of law that a
person who acts as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other acts performed as
such agent. 17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility
for a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited from
the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be
held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for
the nets it sold. The only question here is whether petitioner should be held jointly 18 liable with Chua
and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Since his name does not appear on any of the contracts
and since he never directly transacted with the respondent corporation, ergo, he cannot be held
liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. He in fact questions the attachment
of the nets, because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law
on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without
valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine
of corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor: 19

A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position, entraps and destroys the other. It is,
rather, a contest in which each contending party fully and fairly lays before the court the
facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections
of form and technicalities of procedure, asks that justice be done upon the merits.
Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it
deserts its proper office as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts. There should be no vested rights in
technicalities.

Third Issue:

Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We
agree with the Court of Appeals that this issue is now moot and academic. As previously
discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of
petitioner, only to assure payment of the debt he and his partners owed. The nets and the floats were
specifically manufactured and tailor-made according to their own design, and were bought and used
in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the
price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the nets
remained with Respondent Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

SO ORDERED.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

Vitug, J., pls. see concurring opinion.

Separate Opinions

VITUG, J., concurring opinion;

I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V.
Panganiban, particularly the finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim have
incurred the liabilities of general partners. I merely would wish to elucidate a bit, albeit briefly, the
liability of partners in a general partnership.

When a person by his act or deed represents himself as a partner in an existing partnership or with
one or more persons not actual partners, he is deemed an agent of such persons consenting to such
representation and in the same manner, if he were a partner, with respect to persons who rely upon
the representation. 1 The association formed by Chua, Yao and Lim, should be, as it has been
deemed, a de facto partnership with all the consequent obligations for the purpose of enforcing the
rights of third persons. The liability of general partners (in a general partnership as so opposed to a
limited partnership) is laid down in Article 1816 2 which posits that all partners shall be liable pro
rata beyond the partnership assets for all the contracts which may have been entered into in its
name, under its signature, and by a person authorized to act for the partnership. This rule is to be
construed along with other provisions of the Civil Code which postulate that the partners can be
held solidarily liable with the partnership specifically in these instances — (1) where, by any wrongful
act or omission of any partner acting in the ordinary course of the business of the partnership or with
the authority of his co-partners, loss or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the
partner so acting or omitting to act; (2) where one partner acting within the scope of his apparent
authority receives money or property of a third person and misapplies it; and (3) where the
partnership in the course of its business receives money or property of a third person and the money
or property so received is misapplied by any partner while it is in the custody of the partnership 3 —
consistently with the rules on the nature of civil liability in delicts and quasi-delicts.

Footnotes

1 Penned by J. Portia Alino-Hormachuelos; with the concurrence of JJ.

Buenaventura J. Guerrero, Division chairman, and Presbitero J. Velasco Jr.,
member.

2 CA Decision, p. 12; rollo, p. 36.

3 RTC Decision penned by Judge Maximiano C. Asuncion. pp. 11-12; rollo, pp.
48-49.

4 CA Decision, pp. 1-2; rollo, pp. 25-26.

5 Ibid., p. 2; rollo, p. 26.

6 RTC Decision, p. 2; Rollo, p. 39.

7 Petition, p. 4; rollo, p. 11.

8 Ibid.
9 RTC Decision, pp. 6-7; rollo, pp. 43-44.

10 Respondent's Memorandum, pp. 5, 8; rollo, pp. 107, 109.

11 CA Decision, pp. 9-10; rollo, pp. 33-34.

12 RTC Decision, p. 10; rollo, p. 47.

13 Ibid.

14 This case was deemed submitted for resolution on August 10, 1999, when
this Court received petitioner's Memorandum signed by Atty. Roberto A. Abad.
Respondent's Memorandum signed by Atty. Benjamin S. Benito was filed earlier
on July 27, 1999.

15 Nos. 1-7 are from CA Decision p. 9 (rollo, p. 33); No. 8 is from RTC Decision,
p. 5 (rollo, p. 42); and No. 9 is from CA Decision, pp. 9-10 (rollo, pp. 33-34).

16 See Fuentes v. Court of Appeals, 268 SCRA 703, February 26, 1997.

17 Salvatierra v. Garlitos, 103 SCRA 757, May 23, 1958, per Felix J.; citing Fay
v. Noble, 7 Cushing [Mass.] 188.

18 The liability is joint if it is not specifically stated that it is solidary," Maramba v.

Lozano, 126 Phil 833, June 29, 1967, per Makalintal, J. See also Article 1207 of
the Civil Code, which provides: "The concurrence of two or more creditors or of
two or more debtors in one [and] the same obligation does not imply that each
one of the former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation. There is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.

19 16 Phil. 315, July 26, 1910, per Moreland, J.

VITUG, J., concurring opinion;

1 Art. 1825. When a person, by words spoken or written or by conduct,

represents himself, or consents to another representing him to anyone, as a
partner in an existing partnership or with one or more persons not actual
partners, he is liable to any such persons to whom such representation has been
made, who has, on the faith of such representation, given credit to the actual or
apparent partnership, and if he has made such representation or consented to its
being made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such person so
giving credit by or with the knowledge of the apparent partner making the
representation or consenting to its being made:

(1) When a partnership liability results, he is liable as though he were an actual

member of the partnership;

(2) When no partnership liability results, he is liable pro rata with the other
persons, if any, so consenting to the contract or representation as to incur
liability, otherwise separately.

When a person has been thus represented to be a partner in an existing

partnership, or with one or more persons not actual partners, he is an agent of
the persons consenting to such representation to bind them to the same extent
and in the same manner as though he were a partner in fact, with respect to
persons who rely upon the representation. When all the members of the existing
partnership consent to the representation, a partnership act or obligation results;
but in all other cases it is the joint act or obligation of the person acting and the
persons consenting to the representation.

2 All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the
contracts which may be entered into in the name and for the account of the
partnership, under its signature and by a person authorized to act for the
partnership. However, any partner may enter into a separate obligation to
perform a partnership contract.

3 Art. 1824 in relation to Article 1822 and Article 1823, New Civil Code.