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G.R. No.

122452 January 29, 2001 On June 27, 1994, petitioner's counsel was able to secure a copy of the resolution
dismissing I.S. No. 93-15886. Counting his 15-day appeal period from said date, petitioner
TAM WING TAK, petitioner, moved for reconsideration on July 7, 1994.
vs.
HON. RAMON P. MAKASIAR (in his Capacity as Presiding Judge of the Regional Trial On October 21, 1994, the City Prosecutor denied petitioner's motion for reconsideration.
Court of Manila, Branch 35) and ZENON DE GUIA (in his capacity as Chief State Petitioner's counsel received a copy of the denial order on November 3, 1994.
Prosecutor), respondents.
On November 7, 1994, petitioner's lawyer filed a motion to extend the period to appeal by an
QUISUMBING, J.: additional 15 days counted from November 3, 1994 with the Chief State Prosecutor. He
manifested that it would take time to communicate with petitioner who is a Hong Kong
This is a petition for review on certiorari of the decision of the Regional Trial Court of Manila, resident and enable the latter to verify the appeal as procedurally required.
Branch 35, dated September 14, 1995, which dismissed herein petitioner's special civil
action for mandamus and sustained the Letter-Order of respondent Chief State Prosecutor. On November 8, 1994, petitioner appealed the dismissal of his complaint by the City
The latter dismissed petitioner's appeal from the resolution of the City Prosecutor of Quezon Prosecutor to the Chief State Prosecutor. The appeal was signed by petitioner's attorney
City, which, in turn, dismissed petitioner's complaint against Vic Ang Siong for violation of only and was not verified by petitioner until November 23, 1994.
the Bouncing Checks Law or B.P. Blg. 22.
On December 8, 1994, the Chief State Prosecutor dismissed the appeal for having been
The factual background of this case is as follows: filed out of time. Petitioner's lawyer received a copy of the letter-resolution dismissing the
appeal on January 20, 1995.
On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties,
Inc., (Concord for brevity), a domestic corporation, filed an affidavit-complaint with the On January 30, 1995, petitioner moved for reconsideration.
Quezon City Prosecutor's Office, charging Vic Ang Siong with violation of B.P. Blg. 22.
Docketed by the Prosecutor as I.S. No. 93-15886, the complaint alleged that a check for the On March 9, 1995, respondent Chief State Prosecutor denied the motion for
amount of P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored reconsideration.
when presented for encashment.
Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional Trial Court of
Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no Quezon City to compel the Chief State Prosecutor to file or cause the filing of an information
authority to file the case on behalf of Concord, the payee of the dishonored check, since the charging Vic Ang Siong with violation of B.P. Blg. 22.
firm's board of directors had not empowered him to act on its behalf. Second, he and
Concord had already agreed to amicably settle the issue after he made a partial payment of On September 14, 1995, the trial court disposed of the action as follows:
P19,000,000.00 on the dishonored check. 1âwphi1.nêt

WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is
On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following DENIED and DISMISSED.
grounds: (1) that petitioner lacked the requisite authority to initiate the criminal complaint for
and on Concord's behalf; and (2) that Concord and Vic Ang Siong had already agreed upon SO ORDERED.1
the payment of the latter's balance on the dishonored check.
Petitioner moved for reconsideration, but the trial court denied this motion in its order dated
A copy of the City Prosecutor's resolution was sent by registered mail to petitioner in the October 24, 1995.
address he indicated in his complaint-affidavit. Notwithstanding that petitioner was
represented by counsel, the latter was not furnished a copy of the resolution. Hence, the instant petition.
Before this Court, petitioner claims respondent judge committed grave errors of law in relies upon Rule 13, Section 2 of the Rules of Court4 and our ruling in J.M. Javier Logging
sustaining respondent Chief State Prosecutor whose action flagrantly contravenes: (1) the Corp. v. Mardo, 24 SCRA 776 (1968) to support his stand. In the J.M. Javier case, we held:
established rule on service of pleadings and orders upon parties represented by counsel; (b)
the basic principle that except in private crimes, any competent person may initiate a [W]here a party appears by attorney, notice to the former is not a notice in law,
criminal case; and (3) the B.P. Blg. 22 requirement that arrangement for full payment of a unless service upon the party himself is ordered by the court…5
bounced check must be made by the drawer with the drawee within five (5) banking days
from notification of the check's dishonor.2 The Solicitor General, for respondents, contends that the applicable rule on service in the
present case is Section 2 of the Department of Justice (DOJ) Order No. 223,6 which allows
We find pertinent for our resolution the following issues: service to be made upon either party or his counsel. Respondents argue that while a
preliminary investigation has been considered as partaking of the nature of a judicial
(1) Was there valid service of the City Prosecutor's resolution upon petitioner? proceeding,7 nonetheless, it is not a court proceeding and hence, falls outside of the ambit
of the Rules of Court.
(2) Will mandamus lie to compel the City Prosecutor to file the necessary information
in court? We agree with petitioner that there is no "generally accepted practice" in the service of
orders, resolutions, and processes, which allows service upon either the litigant or his
In upholding respondent Chief State Prosecutor, the court a quo held: lawyer. As a rule, notice or service made upon a party who is represented by counsel is a
nullity,8 However, said rule admits of exceptions, as when the court or tribunal order service
It is generally accepted principle in the service of orders, resolutions, processes and upon the party9 or when the technical defect is waived.10
other papers to serve them on the party or his counsel, either in his office, if known,
or else in the residence, also if known. As the party or his counsel is not expected to To resolve the issue on validity of service, we must make a determination as to which is the
be present at all times in his office or residence, service is allowed to be made with a applicable rule – the on service in the Rules of Court, as petitioner insists or the rule on
person in charge of the office, or with a person of sufficient discretion to receive the service in DOJ Order No. 223?
same in the residence.
The Rules of Court were promulgated by this Court pursuant to Section 13, Article VII of the
In the case under consideration, it is not disputed that the controverted Resolution 1935 Constitution11(now Section 5 [5], Article VIII of the Constitution)12 to govern "pleadings,
dismissing the complaint of the petitioner against Vic Ang Siong was served on the practice and procedure in all courts of the Philippines." The purpose of the Rules is clear
former by registered mail and was actually delivered by the postmaster on April 9, and does not need any interpretation. The Rules were meant to govern court (stress
1994 at said petitioner's given address in the record at No. 5 Kayumanggi Street, supplied) procedures and pleadings. As correctly pointed out by the Solicitor General, a
West Triangle, Quezon City. The registered mail was in fact received by S. Ferraro. preliminary investigation, notwithstanding its judicial nature, is not a court proceeding. The
The service then was complete and the period for filing a motion for reconsideration holding of a preliminary investigation is a function of the Executive Department and not of
or appeal began to toll from that date. It expired on April 24, 1994. Considering that the Judiciary.13 Thus, the rule on service provided for in the Rules of Court cannot be made
his motion for reconsideration was filed only on July 7, 1994, the same was filed to apply to the service of resolutions by public prosecutors, especially as the agency
beyond the prescribed period, thereby precluding further appeal to the Office of the concerned, in this case, the Department of Justice, has its own procedural rules governing
respondent.3 said service.

Petitioner, before us, submits that there is no such "generally accepted practice" which gives A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in preliminary
a tribunal the option of serving pleadings, orders, resolutions, and other papers to either the investigation, service can be made upon the party himself or through his counsel. It must be
opposing party himself or his counsel. Petitioner insists that the fundamental rule in this assumed that when the Justice Department crafted the said section, it was done with
jurisdiction is that if a party appears by counsel, then service can only be validly made upon knowledge of the pertinent rule in the Rules of Court and of jurisprudence interpreting it. The
counsel and service upon the party himself becomes invalid and without effect. Petitioner DOJ could have just adopted the rule on service provided for in the Rules of Court, but did
not. Instead, it opted to word Section 2 of DOJ Order No. 223 in such a way as to leave no
doubt that in preliminary investigations, service of resolutions of public prosecutors could be Siong. Under Section 36 of the Corporation Code18, read in relation to Section 23,19 it is clear
made upon either the party or his counsel. that where a corporation is an injured party, its power to sue is lodged with its board of
directors or turstees.20 Note that petitioner failed to show any proof that he was authorized or
Moreover, the Constitution provides that "Rules of procedure of special courts and quasi- deputized or granted specific powers by Concord's board of director to sue Victor And Siong
judicial bodies shall remain effective unless disapproved by the Supreme Court."14 There is for and on behalf of the firm. Clearly, petitioner as a minority stockholder and member of the
naught in the records to show that we have disapproved and nullified Section 2 of DOJ board of directors had no such power or authority to sue on Concord's behalf. Nor can we
Order No. 223 and since its validity is not an issue in the instant case, we shall refrain from uphold his act as a derivative suit. For a derivative suit to prosper, it is required that the
ruling upon its validity. minority stockholder suing for and on behalf of the corporation must allege in his complaint
that he is suing on a derivative cause of action on behalf of the corporation and all other
We hold that there was valid service upon petitioner pursuant to Section 2 of DOJ Order No. stockholders similarly situated who may wish to join him in the suit.21 There is no showing
223. that petitioner has complied with the foregoing requisites. It is obvious that petitioner has not
shown any clear legal right which would warrant the overturning of the decision of public
On the issue of whether mandamus will lie. In general, mandamus may be resorted to only respondents to dismiss the complaint against Vic Ang Siong. A public prosecutor, by the
where one's right is founded clearly in law and not when it is doubtful.15 The exception is to nature of his office, is under no compulsion to file a criminal information where no clear legal
be found in criminal cases where mandamus is available to compel the performance by the justification has been shown, and no sufficient evidence of guilt nor prima faciecase has
public prosecutor of an ostensibly discretionary function, where by reason of grave abuse of been presented by the petitioner.22 No reversible error may be attributed to the court a
discretion on his part, he willfully refuses to perform a duty mandated by law.16Thus, quo when it dismissed petitioner's special civil action for mandamus. 1âwphi1.nêt

mandamus may issue to compel a prosecutor to file an information when he refused to do


so in spite of the prima facie evidence of guilt.17 WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against petitioner.

Petitioner takes the stance that it was grave abuse for discretion on the part of respondent SO ORDERED.
Chief State Prosecutor to sustain the dismissal of I.S. No. 93-15886 on the grounds that: (1)
Vic Ang Siong's obligation which gave rise to the bounced check had already been
extinguished by partial payment and agreement to amicably settle balance, and (2)
petitioner had no standing to file the criminal complaint since he was neither the payee nor
holder of the bad check. Petitioner opines that neither ground justifies dismissal of his
complaint. G.R. No. L-15092 May 18, 1962
Petitioner's stand is unavailing. Respondent Chief State Prosecutor in refusing to order the ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
filing of an information for violation of B.P. Blg. 22 against Vic Ang Siong did not act without vs.
or in excess of jurisdiction or with grave abuse of discretion. BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
First, with respect to the agreement between Concord and Victor Ang Siong to amicably Tañada, Teehankee and Carreon for plaintiffs-appellants.
settle their difference, we find this resort to an alternative dispute settlement mechanism as Hilado and Hilado for defendant-appellee.
not contrary to law, public policy, or public order. Efforts of parties to solve their disputes
outside of the courts are looked on with favor, in view of the clogged dockets of the judiciary.
REYES, J.B.L., J.:
Second, it is not disputed in the instant case that Concord, a domestic corporation, was the
Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros,
payee of the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced
in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel the
check, which is the injured party. Since petitioner was neither a payee nor a holder of the
defendant Milling Company to increase plaintiff's share in the sugar produced from their
bad check, he had neither the personality to sue nor a cause of action against Vic Ang
cane, from 60% to 62.33%, starting from the 1951-1952 crop year. 1äwphï1.ñët
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado,
the Limited co-partnership Gonzaga and Company, had been and are sugar planters otorgado por — y la Bacolod-Murcia Milling Co., Inc.
adhered to the defendant-appellee's sugar central mill under identical milling contracts.
Originally executed in 1919, said contracts were stipulated to be in force for 30 years In 1953, the appellants initiated the present action, contending that three Negros sugar
starting with the 1920-21 crop, and provided that the resulting product should be divided in centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was proposed to exceeding one-third of the production of all the sugar central mills in the province, had
execute amended milling contracts, increasing the planters' share to 60% of the already granted increased participation (of 62.5%) to their planters, and that under
manufactured sugar and resulting molasses, besides other concessions, but extending the paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had
operation of the milling contract from the original 30 years to 45 years. To this effect, a become obligated to grant similar concessions to the plaintiffs (appellants herein). The
printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that
Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11, the stipulations contained in the resolution were made without consideration; that the
Acuerdo No. 1) granting further concessions to the planters over and above those contained resolution in question was, therefore, null and void ab initio, being in effect a donation that
in the printed Amended Milling Contract. The bone of contention is paragraph 9 of this was ultra viresand beyond the powers of the corporate directors to adopt.
resolution, that reads as follows:
After trial, the court below rendered judgment upholding the stand of the defendant Milling
ACTA No. 11 company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936 We agree with appellants that the appealed decisions can not stand. It must be remembered
that the controverted resolution was adopted by appellee corporation as a supplement to, or
xxx xxx xxx further amendment of, the proposed milling contract, and that it was approved on August 20,
1936, twenty-one days prior to the signing by appellants on September 10, of the Amended
Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta en Milling Contract itself; so that when the Milling Contract was executed, the concessions
consideracion a una peticion de los plantadores hecha por un comite granted by the disputed resolution had been already incorporated into its terms. No reason
nombrado por los mismos, acuerda enmendar el contrato de molienda appears of record why, in the face of such concessions, the appellants should reject them or
enmendado medientelas siguentes: consider them as separate and apart from the main amended milling contract, specially
taking into account that appellant Alfredo Montelibano was, at the time, the President of the
xxx xxx xxx Planters Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the
resolution of August 20, 1936. That the resolution formed an integral part of the amended
9.a Que si durante la vigencia de este contrato de Molienda Enmendado, milling contract, signed on September 10, and not a separate bargain, is further shown by
lascentrales azucareras, de Negros Occidental, cuya produccion anual de the fact that a copy of the resolution was simply attached to the printed contract without
azucar centrifugado sea mas de una tercera parte de la produccion total de special negotiations or agreement between the parties.
todas lascentrales azucareras de Negros Occidental, concedieren a sus
plantadores mejores condiciones que la estipuladas en el presente contrato, It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
entonces esas mejores condiciones se concederan y por el presente se were supported by the same causa or consideration underlying the main amended milling
entenderan concedidas a los platadores que hayan otorgado este Contrato contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
de Molienda Enmendado. particularly, the extension of its operative period for an additional 15 years over and beyond
the 30 years stipulated in the original contract. Hence, the conclusion of the court below that
Appellants signed and executed the printed Amended Milling Contract on September 10, the resolution constituted gratuitous concessions not supported by any consideration is
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General legally untenable.
Manager, was not attached to the printed contract until April 17, 1937; with the notation —
All disquisition concerning donations and the lack of power of the directors of the respondent
sugar milling company to make a gift to the planters would be relevant if the resolution in
question had embodied a separate agreement after the appellants had already bound modifications in detail of the printed terms, and the only major change was paragraph 9
themselves to the terms of the printed milling contract. But this was not the case. When the heretofore quoted; but when the report was made, that paragraph was not yet in effect,
resolution was adopted and the additional concessions were made by the company, the since it was conditioned on other centrals granting better concessions to their planters, and
appellants were not yet obligated by the terms of the printed contract, since they admittedly that did not happen until after 1950. There was no reason in 1936 to emphasize a
did not sign it until twenty-one days later, on September 10, 1936. Before that date, the concession that was not yet, and might never be, in effective operation.
printed form was no more than a proposal that either party could modify at its pleasure, and
the appellee actually modified it by adopting the resolution in question. So that by There can be no doubt that the directors of the appellee company had authority to modify
September 10, 1936 defendant corporation already understood that the printed terms were the proposed terms of the Amended Milling Contract for the purpose of making its terms
not controlling, save as modified by its resolution of August 20, 1936; and we are satisfied more acceptable to the other contracting parties. The rule is that —
that such was also the understanding of appellants herein, and that the minds of the parties
met upon that basis. Otherwise there would have been no consent or "meeting of the It is a question, therefore, in each case of the logical relation of the act to the
minds", and no binding contract at all. But the conduct of the parties indicates that they corporate purpose expressed in the charter. If that act is one which is lawful in itself,
assumed, and they do not now deny, that the signing of the contract on September 10, and not otherwise prohibited, is done for the purpose of serving corporate ends, and
1936, did give rise to a binding agreement. That agreement had to exist on the basis of the is reasonably tributary to the promotion of those ends, in a substantial, and not in a
printed terms as modified by the resolution of August 20, 1936, or not at all. Since there is remote and fanciful sense, it may fairly be considered within charter powers. The test
no rational explanation for the company's assenting to the further concessions asked by the to be applied is whether the act in question is in direct and immediate furtherance of
planters before the contracts were signed, except as further inducement for the planters to the corporation's business, fairly incident to the express powers and reasonably
agree to the extension of the contract period, to allow the company now to retract such necessary to their exercise. If so, the corporation has the power to do it; otherwise,
concessions would be to sanction a fraud upon the planters who relied on such additional not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
stipulations.
As the resolution in question was passed in good faith by the board of directors, it is valid
The same considerations apply to the "void innovation" theory of appellees. There can be no and binding, and whether or not it will cause losses or decrease the profits of the central, the
novation unless two distinct and successive binding contracts take place, with the later court has no authority to review them.
designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law. They hold such office charged with the duty to act for the corporation according to
their best judgment, and in so doing they cannot be controlled in the reasonable
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not exercise and performance of such duty. Whether the business of a corporation
attached to the printed contract until April 17, 1937. But, except in the case of statutory should be operated at a loss during depression, or close down at a smaller loss, is a
forms or solemn agreements (and it is not claimed that this is one), it is the assent and purely business and economic problem to be determined by the directors of the
concurrence (the "meeting of the minds") of the parties, and not the setting down of its corporation and not by the court. It is a well-known rule of law that questions of policy
terms, that constitutes a binding contract. And the fact that the addendum is only signed by or of management are left solely to the honest decision of officers and directors of a
the General Manager of the milling company emphasizes that the addition was made solely corporation, and the court is without authority to substitute its judgment of the board
in order that the memorial of the terms of the agreement should be full and complete. of directors; the board is the business manager of the corporation, and so long as it
acts in good faith its orders are not reviewable by the courts. (Fletcher on
Much is made of the circumstance that the report submitted by the Board of Directors of the Corporations, Vol. 2, p. 390).
appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed "amended And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
milling contracts", and did not make any reference at all to the terms of the resolution of Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
August 20, 1936. But a reading of this report shows that it was not intended to inventory all sugar production in Occidental Negros) have granted progressively increasing participations
the details of the amended contract; numerous provisions of the printed terms are alao to their adhered planter at an average rate of
glossed over. The Directors of the appellee Milling Company had no reason at the time to
call attention to the provisions of the resolution in question, since it contained mostly
62.333% for the 1951-52 crop year; AGAPITO FUELLAS, petitioner,
vs.
64.2% for 1952-53; ELPIDIO CADANO, ET AL., respondents.

64.3% for 1953-54; Ambrosio Padilla, Feliciano C. Tumale and Roberto R. Reverente for petitioner.
Valerio V. Rovira for respondents.
64.5% for 1954-55; and
63.5% for 1955-56, PAREDES, J.:

For serious physical injuries sustained by Pepito Cadano, son of plaintiff-appellee Elpidio
the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August
Cadano, two separate actions were instituted, Civil Case No. 583, filed on October 1, 1954,
20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
for damages against Agapito Fuellas, father of the minor Rico Fuellas, who caused the
injuries, and Criminal Case No. 1765, against Rico Fuellas, filed on November 11, 1954, for
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is serious physical injuries. They were tried jointly. On May 18, 1956, a judgment of conviction
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or in the criminal case was rendered, finding Rico Fuellas guilty of the offense charged. No
increase of participation in the milled sugar in accordance with paragraph 9 of the appellee pronouncement as to his civil liability was made, the trial judge having ruled that the same
Resolution of August 20, 1936, over and in addition to the 60% expressed in the printed "shall be determined in Civil Case No. 583 of this Court." On May 25, 1956, the same court,
Amended Milling Contract, or the value thereof when due, as follows:
rendered judgment in the civil case making defendant therein, now appellant Agapito
Fuellas, liable under Art. 2180 of the new Civil Code for the following damages: —
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants
having received an additional 2% corresponding to said year in October, 1953;
For medicine, etc. P1,000.00
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter — For moral damages 6,000.00
4.2% for the 1952-1953 crop year; As exemplary damages 2,000.00
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year; As attorney's fees 600.00
3.5% for the 1955-1956 crop year;
Total P9,600.00
with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional increases
with 6% annual interest thereon until paid. The Court of Appeals modified the judgment by
as they may be entitled to for the crop years subsequent to those herein adjudged.
reducing the moral damages to P3,000.00. An appeal was taken to this tribunal solely on
questions of law.
Costs against appellee, Bacolod-Murcia Milling Co.
Pepito Cadano and Rico Fuellas, son of defendant-appellant Agapito Fuellas, were both 13
years old, on September 16, 1954. They were classmates at St. Mary's High School,
Dansalan City. In the afternoon of September 16, 1954, while Pepito was studying his
lessons in the classroom, Rico took the pencil of one Ernesto Cabanok and surreptitiously
placed it inside the pocket of Pepito. When Ernesto asked Rico to return the pencil, it was
G.R. No. L-14409 October 31, 1961 Pepito who returned the same, an act which angered Rico, who held the neck of Pepito and
pushed him to the floor. Villamira, a teacher, separated Rico and Pepito and told them to go
home. Rico went ahead, with Pepito following. When Pepito had just gone down of the In the case of Araneta vs. Arreglado, G.R. No. L-11394, prom. September 9, 1958,
schoolhouse, he was met by Rico, still in an angry mood. Angelito Aba, a classmate, told the Benjamin Araneta was talking with other students of the Ateneo de Manila, seated atop a
two to shake hands. Pepito extended his hand to Rico. Instead of accepting the proffer to low ruined wall. Dario Arreglado, a former student of the Ateneo, chanced to pass by. The
shake hands, Rico held Pepito by the neck and with his leg, placed Pepito out of balance boys twitted him on his leaving the Ateneo and enrolling in the De la Salle College.
and pushed him to the ground. Pepito fell on his right side with his right arm under his body, Arreglado, resenting the banter, pulled a Japanese luger pistol (licensed in the name of his
whereupon, Rico rode on his left side. While Rico was in such position, Pepito suddenly father Juan Arreglado), fired the same at Araneta, hitting him in the lower jaw. Dario was
cried out "My arm is broken." Rico then got up and went away. Pepito was helped by others indicted for frustrated homicide and pleaded guilty. But in view of his youth, he being only 14
to go home. That same evening Pepito was brought to the Lanao General Hospital for years of age, the Court suspended the proceedings (Art. 80 of the Revised Penal Code).
treatment (Exh. 4). An X-Ray taken showed that there was a complete fracture of the radius Thereafter, action was instituted by Araneta and his father against Juan Arreglado, his wife
and ulna of the right forearm which necessitated plaster casting (Exhs. A, B and D). On and their son Dario to recover material, moral and exemplary damages. The Court of First
November 20, 1954, more than a month after Pepito's release from the hospital, the plaster Instance sentenced the Arreglados to pay P3,943.00 as damages and attorney's fees. The
cast was removed. And up to the last day of hearing of the case, the right forearm of Pepito Aranetas appealed in view of the meager amount of indemnity awarded. This tribunal
was seen to be shorter than the left forearm, still in bandage and could not be fully used. affirmed the decision but increased the indemnity to P18,000.00. This decision was
predicated upon the fact that Arreglado's father had acted negligently in allowing his son to
It is contended that in the decision of the Court of Appeals, the petitioner-appellant was have access to the pistol used to injure Benjamin. And this was the logical consequence of
ordered to pay damages for the deliberate injury caused by his son; that the said court held the case, considering the fact that the civil law liability under Article 2180 is not respondeat
the petitioner liable pursuant to par. 2 of Art. 2180 of the Civil Code, in connection with Art. superior but the relationship of pater familias which bases the liability of the father ultimately
2176 of the same Code; that according to the last article, the act of the minor must be one on his own negligence and not on that of his minor son (Cuison vs. Norton & Harrison, 55
wherein "fault or negligence" is present; and that there being no fault or negligence on the Phil. 23), and that if an injury is caused by the fault or negligence of his minor son, the law
part of petitioner-appellant's minor son, but deliberate intent, the above mentioned articles presumes that there was negligence on the part of his father (Bahia vs. Litonjua y Leynes,
are not applicable, for the existence of deliberate intent in the commission of an act 30 Phil., 625).
negatives the presence of fault or negligence in its commission. Appellant, therefore,
submits that the appellate Court erred in holding him liable for damages for the deliberate In an earlier case (Exconde vs. Capuno, et al., G.R. No. L-10132, prom. June 29, 1957),
criminal act of his minor son. holding the defendants jointly and severally liable with his minor son Dante for damages,
arising from the criminal act committed by the latter, this tribunal gave the following reasons
The above-mentioned provisions of the Civil Code states: — for the rule: —

Whoever by act or omission causes damage to another, there being fault or The civil liability which the law imposes upon the father and, in case of his death or
negligence is obliged to pay for the damage done. Such fault or negligence, if there incapacity, the mother, for any damages that may be caused by the minor children
is no pre-existing contractual relation between the parties is called a quasi-delict and who live with them, is obvious. This is a necessary consequence of the parental
is governed by the provisions of this chapter. (Article 2176) authority they exercise over them which imposes upon the parents the "duty of
supporting them, keeping them in their company, educating them in proportion to
The obligations imposed by article 2176 is demandable not only for one's own acts their means", while on the other hand, gives them the "right to correct and punish
or omissions, but also for those of persons for whom one is responsible. them in moderation" (Arts. 134 and 135, Spanish Civil Code). The only way by which
they can relieve themselves of this liability is if they prove that they exercised all the
The father and, in case of his death or incapacity, the mother, are responsible for the diligence of a good father of a family to prevent the damage (Art. 1903, last
damages caused by the minor children who live in their company. paragraph, Spanish Civil Code). This, defendants failed to prove.

xxx xxx xxx (Article 2180). And a noted Spanish commentator said: —

Since children and wards do not yet have the capacity to govern themselves, the law
imposes upon the parents and guardians the duty of exercising special vigilance over
the acts of their children and wards in order that damages to third persons due to the convicted. In that case, resort should be had to the general law which is our Civil
ignorance, lack of foresight or discernment of such children and wards may be Code.
avoided. If the parents and guardians fail to comply with this duty, they should suffer
the consequences of their abandonment or negligence by repairing the damage The particular law that governs this case is Article 2180, the pertinent portion of
caused" (12 Manresa, 649-650). (See also Arts. 311 and 316, Civil Code). which provides: "The father and, in case of his death or incapacity, the mother, are
responsible for damages caused by the minor children who live in their company." To
It is further argued that the only way by which a father can be made responsible for the hold that this provision does not apply to the instant case because it only covers
criminal act of his son committed with deliberate intent and with discernment, is an action obligations which arise from quasi-delicts and not obligations which arise from
based on the provisions of the Revised Penal Code on subsidiary liability of the parents; that criminal offenses, would result in the absurdity that while for an act where mere
the minor Fuellas having been convicted of serious physical injuries at the age of 13, the negligence intervenes the father or mother may stand subsidiarily liable for the
provisions of par. 3 of Art. 12, Revised Penal Code, could have been applied, but having damage caused by his or her son, no liability would attach if the damage is caused
acted with discernment, Art. 101 of the same Code can not include him. And as par. 2, of with criminal intent. Verily, the void apparently exists in the Revised Penal Code is
Art. 101, states that "the exemption from criminal liability established in subdivisions 1, 2, 3, subserved by this particular provision of our Civil Code, as may be gleaned from
5 and 6 of Article 12 and in subdivision 4 of Art. 11 of this Code does not include exemption some recent decisions of this Court which cover equal or identical cases.
from civil liability, which shall be enforced subject to the following rules: First, in cases of
subdivisions 1, 2 and 3 of Article 12, the civil liability for acts committed by an imbecile or Moreover, the case at bar was decided by the Court of Appeals on the basis of the evidence
insane person and by a person under nine years of age or by one over nine but under fifteen submitted therein by both parties, independently of the criminal case. And responsibility for
years of age, who has acted without discernment, shall devolve upon those having such fault or negligence under Article 2176 upon which the action in the present case was
person under their legal authority or control, unless it appears that there was no fault or instituted, is entirely separate and distinct from the civil liability arising from fault of
negligence on their part," the appellant concluded that this provision covers only a situation negligence under the Penal Code (Art. 2177), and having in mind the reasons behind the
where a minor under 15 but over 9 years old commits a criminal act "without discernment." law as heretofore stated, any discussion as to the minor's criminal responsibility is of no
moment.
In the recent case of Salen and Salbanera vs. Jose Balce, G.R. No. L-14414, April 27, 1960;
57 Off. Gaz. No. 37, p. 6603, September 11, 1961, the defendant Balce was the father of a IN VIEW HEREOF, the petition is dismissed, the decision appealed from is affirmed, with
minor Gumersindo Balce, below 18 years of age who was living with him. Gumersindo was costs against the petitioner.
found guilty of homicide for having killed Carlos Salen, minor son of plaintiffs. The trial court
rendered judgment dismissing the case, stating that the civil liability of the minor son of
defendant arising from his criminal liability must be determined under the provisions of the
Revised Penal Code and not under Art. 2180 of the new Civil Code. In reversing the
decision, this tribunal held: —

It is true that under Art. 101 of the Revised Penal Code, a father is made civilly liable G.R. No. 75875 December 15, 1989
for the acts committed by his son only if the latter is an imbecile, an insane, under 9
years of age, or over 9 but under 15 years of age, who acts without discernment, WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
unless it appears that there is no fault or negligence on his part. This is because a CHAMSAY, petitioners,
son who commits the act under any of those conditions is by law exempt from vs.
criminal liability (Article 12, subdivisions 1, 2 and 3, Revised Penal Code). The idea SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO,
is not to leave the act entirely unpunished but to attach certain civil liability to the ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
person who has the delinquent minor under his legal authority or control. But a minor BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ, respondents.
over 15 who acts with discernment is not exempt from criminal liability, for which
reason the Code is silent as to the subsidiary liability of his parents should he stand G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, United States entered into an Agreement with Saniwares and some Filipino investors
ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and whereby ASI and the Filipino investors agreed to participate in the ownership of an
AVELINO V. CRUX, petitioners, enterprise which would engage primarily in the business of manufacturing in the Philippines
vs. and selling here and abroad vitreous china and sanitary wares. The parties agreed that the
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. business operations in the Philippines shall be carried on by an incorporated enterprise and
WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents. that the name of the corporation shall initially be "Sanitary Wares Manufacturing
Corporation."
G.R. Nos. 75975-76 December 15, 1989
The Agreement has the following provisions relevant to the issues in these cases on the
LUCIANO E. SALAZAR, petitioner, nomination and election of the directors of the corporation:
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, 3. Articles of Incorporation
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF (a) The Articles of Incorporation of the Corporation shall be substantially in
APPEALS, respondents. the form annexed hereto as Exhibit A and, insofar as permitted under
Philippine law, shall specifically provide for
Belo, Abiera & Associates for petitioners in 75875.
(1) Cumulative voting for directors:
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
xxx xxx xxx

5. Management
GUTIERREZ, JR., J.:
(a) The management of the Corporation shall be vested in a Board of
These consolidated petitions seek the review of the amended decision of the Court of Directors, which shall consist of nine individuals. As long as American-
Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated Standard shall own at least 30% of the outstanding stock of the Corporation,
June 5, 1986, of the then Intermediate Appellate Court and directed that in all subsequent three of the nine directors shall be designated by American-Standard, and the
elections for directors of Sanitary Wares Manufacturing Corporation (Saniwares), American other six shall be designated by the other stockholders of the Corporation.
Standard Inc. (ASI) cannot nominate more than three (3) directors; that the Filipino (pp. 51 & 53, Rollo of 75875)
stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other
hand, the Filipino stockholders can nominate only six (6) candidates and in the event they At the request of ASI, the agreement contained provisions designed to protect it as a
cannot agree on the six (6) nominees, they shall vote only among themselves to determine minority group, including the grant of veto powers over a number of corporate acts and the
who the six (6) nominees will be, with cumulative voting to be allowed but without right to designate certain officers, such as a member of the Executive Committee whose
interference from ASI. vote was required for important corporate transactions.

The antecedent facts can be summarized as follows: Later, the 30% capital stock of ASI was increased to 40%. The corporation was also
registered with the Board of Investments for availment of incentives with the condition that at
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of least 60% of the capital stock of the corporation shall be owned by Philippine nationals.
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young
went abroad to look for foreign partners, European or American who could help in its The joint enterprise thus entered into by the Filipino investors and the American corporation
expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware, prospered. Unfortunately, with the business successes, there came a deterioration of the
initially harmonious relations between the two groups. According to the Filipino group, a seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No.
basic disagreement was due to their desire to expand the export operations of the company 05617). This motion to adjourn was accepted by the Chairman, Baldwin
to which ASI objected as it apparently had other subsidiaries of joint joint venture groups in Young, who announced that the motion was carried and declared the meeting
the countries where Philippine exports were contemplated. On March 8, 1983, the annual adjourned. Protests against the adjournment were registered and having
stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes been ignored, Mr. Jaqua the ASI representative, stated that the meeting was
were taken by the Secretary, Avelino Cruz. After disposing of the preliminary items in the not adjourned but only recessed and that the meeting would be reconvened
agenda, the stockholders then proceeded to the election of the members of the board of in the next room. The Chairman then threatened to have the stockholders
directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin who did not agree to the decision of the Chairman on the casting of votes
and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto bodily thrown out. The ASI Group, Luciano E. Salazar and other
Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin stockholders, allegedly representing 53 or 54% of the shares of Saniwares,
Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn decided to continue the meeting at the elevator lobby of the American
nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last two Standard Building. The continued meeting was presided by Luciano E.
nominations out of order on the basis of section 5 (a) of the Agreement, the consistent Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the
practice of the parties during the past annual stockholders' meetings to nominate only nine cumulative votes cast earlier in the meeting, the ASI Group nominated its four
persons as nominees for the nine-member board of directors, and the legal advice of nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles
Saniwares' legal counsel. The following events then, transpired: Chamsay. Luciano E. Salazar voted for himself, thus the said five directors
were certified as elected directors by the Acting Secretary, Andres
... There were protests against the action of the Chairman and heated Gatmaitan, with the explanation that there was a tie among the other six (6)
arguments ensued. An appeal was made by the ASI representative to the nominees for the four (4) remaining positions of directors and that the body
body of stockholders present that a vote be taken on the ruling of the decided not to break the tie. (pp. 37-39, Rollo of 75975-76)
Chairman. The Chairman, Baldwin Young, declared the appeal out of order
and no vote on the ruling was taken. The Chairman then instructed the These incidents triggered off the filing of separate petitions by the parties with the Securities
Corporate Secretary to cast all the votes present and represented by proxy and Exchange Commission (SEC). The first petition filed was for preliminary injunction by
equally for the 6 nominees of the Philippine Investors and the 3 nominees of Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo,
ASI, thus effectively excluding the 2 additional persons nominated, namely, Jr., Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay.
Luciano E. Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua The case was denominated as SEC Case No. 2417. The second petition was for quo
protested the decision of the Chairman and announced that all votes accruing warranto and application for receivership by Wolfgang Aurbach, John Griffin, David
to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) Whittingham, Luciano E. Salazar and Charles Chamsay against the group of Young and
were being cumulatively voted for the three ASI nominees and Charles Lagdameo (petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was docketed
Chamsay, and instructed the Secretary to so vote. Luciano E. Salazar and as SEC Case No. 2718. Both sets of parties except for Avelino Cruz claimed to be the
other proxy holders announced that all the votes owned by and or legitimate directors of the corporation.
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617)
were being voted cumulatively in favor of Luciano E. Salazar. The Chairman, The two petitions were consolidated and tried jointly by a hearing officer who rendered a
Baldwin Young, nevertheless instructed the Secretary to cast all votes equally decision upholding the election of the Lagdameo Group and dismissing the quo warranto
in favor of the three ASI nominees, namely, Wolfgang Aurbach, John Griffin petition of Salazar and Chamsay. The ASI Group and Salazar appealed the decision to the
and David Whittingham and the six originally nominated by Rogelio Vinluan, SEC en banc which affirmed the hearing officer's decision.
namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary then The SEC decision led to the filing of two separate appeals with the Intermediate Appellate
certified for the election of the following Wolfgang Aurbach, John Griffin, Court by Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay
David Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique (docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The No. 05617). The petitions were consolidated and the appellate court in its decision ordered
representative of ASI then moved to recess the meeting which was duly the remand of the case to the Securities and Exchange Commission with the directive that a
new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE
the supervision of the Commission. RECOGNIZING THAT THE STOCKHOLDERS OF SANIWARES ARE
DIVIDED INTO TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate INTENT OF THE AGREEMENT AND THE LAW.
court (Court of Appeals) rendered the questioned amended decision. Petitioners Wolfgang
Aurbach, John Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875 II
assign the following errors:
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED PRIVATE PETITIONERS HEREIN WERE THE DULY ELECTED
ELECTION OF PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD DIRECTORS DURING THE 8 MARCH 1983 ANNUAL STOCKHOLDERS
OF DIRECTORS OF SANIWARES WHEN IN FACT THERE WAS NO MEETING OF SANTWARES. (P. 24, Rollo-75951)
ELECTION AT ALL.
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM
EXERCISING THEIR FULL VOTING RIGHTS REPRESENTED BY THE The main issue hinges on who were the duly elected directors of Saniwares for the year
NUMBER OF SHARES IN SANIWARES, THUS DEPRIVING PETITIONERS 1983 during its annual stockholders' meeting held on March 8, 1983. To answer this
AND THE CORPORATION THEY REPRESENT OF THEIR PROPERTY question the following factors should be determined: (1) the nature of the business
RIGHTS WITHOUT DUE PROCESS OF LAW. established by the parties whether it was a joint venture or a corporation and (2) whether or
not the ASI Group may vote their additional 10% equity during elections of Saniwares' board
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS of directors.
PROVISIONS INTO THE AGREEMENT OF THE PARTIES WHICH WERE
NOT THERE, WHICH ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo- The rule is that whether the parties to a particular contract have thereby established among
75875) themselves a joint venture or some other relation depends upon their actual intention which
is determined in accordance with the rules governing the interpretation and construction of
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678;
following grounds: Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual
contractual agreements entered into by stockholders and the replacement of intention of the parties should be viewed strictly on the "Agreement" dated August 15,1962
the conditions of such agreements with terms never contemplated by the wherein it is clearly stated that the parties' intention was to form a corporation and not a joint
stockholders but merely dictated by the CA . venture.

11.2. The Amended decision would likewise sanction the deprivation of the They specifically mention number 16 under Miscellaneous Provisions which states:
property rights of stockholders without due process of law in order that a
favored group of stockholders may be illegally benefitted and guaranteed a xxx xxx xxx
continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-75975-
76) c) nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder. (At
On the other hand, the petitioners in G.R. No. 75951 contend that: P. 66, Rollo-GR No. 75875)

I
They object to the admission of other evidence which tends to show that the parties' It has been ruled:
agreement was to establish a joint venture presented by the Lagdameo and Young Group
on the ground that it contravenes the parol evidence rule under section 7, Rule 130 of the In an action at law, where there is evidence tending to prove that the parties
Revised Rules of Court. According to them, the Lagdameo and Young Group never pleaded joined their efforts in furtherance of an enterprise for their joint profit, the
in their pleading that the "Agreement" failed to express the true intent of the parties. question whether they intended by their agreement to create a joint
adventure, or to assume some other relation is a question of fact for the jury.
The parol evidence Rule under Rule 130 provides: (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield
(Tex. Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J.
Evidence of written agreements-When the terms of an agreement have been p. 871)
reduced to writing, it is to be considered as containing all such terms, and
therefore, there can be, between the parties and their successors in interest, In the instant cases, our examination of important provisions of the Agreement as well as
no evidence of the terms of the agreement other than the contents of the the testimonial evidence presented by the Lagdameo and Young Group shows that the
writing, except in the following cases: parties agreed to establish a joint venture and not a corporation. The history of the
organization of Saniwares and the unusual arrangements which govern its policy making
(a) Where a mistake or imperfection of the writing, or its failure to express the body are all consistent with a joint venture and not with an ordinary corporation. As stated by
true intent and agreement of the parties or the validity of the agreement is put the SEC:
in issue by the pleadings.
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated
(b) When there is an intrinsic ambiguity in the writing. the Agreement with ASI in behalf of the Philippine nationals. He testified that
ASI agreed to accept the role of minority vis-a-vis the Philippine National
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and group of investors, on the condition that the Agreement should contain
Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the provisions to protect ASI as the minority.
true intent of the parties, to wit:
An examination of the Agreement shows that certain provisions were
xxx xxx xxx included to protect the interests of ASI as the minority. For example, the vote
of 7 out of 9 directors is required in certain enumerated corporate acts [Sec. 3
4. While certain provisions of the Agreement would make it appear that the (b) (ii) (a) of the Agreement]. ASI is contractually entitled to designate a
parties thereto disclaim being partners or joint venturers such disclaimer is member of the Executive Committee and the vote of this member is required
directed at third parties and is not inconsistent with, and does not preclude, for certain transactions [Sec. 3 (b) (i)].
the existence of two distinct groups of stockholders in Saniwares one of
which (the Philippine Investors) shall constitute the majority, and the other The Agreement also requires a 75% super-majority vote for the amendment
ASI shall constitute the minority stockholder. In any event, the evident of the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is
intention of the Philippine Investors and ASI in entering into the Agreement is also given the right to designate the president and plant manager [Sec. 5 (6)].
to enter into ajoint venture enterprise, and if some words in the Agreement The Agreement further provides that the sales policy of Saniwares shall be
appear to be contrary to the evident intention of the parties, the latter shall that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares
prevail over the former (Art. 1370, New Civil Code). The various stipulations should not export "Standard" products otherwise than through ASI's Export
of a contract shall be interpreted together attributing to the doubtful ones that Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to
sense which may result from all of them taken jointly (Art. 1374, New Civil provide technology and know-how to Saniwares and the latter paid royalties
Code). Moreover, in order to judge the intention of the contracting parties, for the same. (At p. 2).
their contemporaneous and subsequent acts shall be principally considered.
(Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No. 2417) xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of The Lagdameo Group stated in their appellees' brief in the Court of Appeal
9 votes of the board of directors for certain actions, in effect gave ASI (which
designates 3 directors under the Agreement) an effective veto power. In fact, the Philippine Corporation Code itself recognizes the right of
Furthermore, the grant to ASI of the right to designate certain officers of the stockholders to enter into agreements regarding the exercise of their voting
corporation; the super-majority voting requirements for amendments of the rights.
articles and by-laws; and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors and the other Sec. 100. Agreements by stockholders.-
stockholders shall designate the other 6, clearly indicate that there are two
distinct groups in Saniwares, namely ASI, which owns 40% of the capital xxx xxx xxx
stock and the Philippine National stockholders who own the balance of 60%,
and that 2) ASI is given certain protections as the minority stockholder. 2. An agreement between two or more stockholders, if in writing and signed
by the parties thereto, may provide that in exercising any voting rights, the
Premises considered, we believe that under the Agreement there are two shares held by them shall be voted as therein provided, or as they may
groups of stockholders who established a corporation with provisions for a agree, or as determined in accordance with a procedure agreed upon by
special contractual relationship between the parties, i.e., ASI and the other them.
stockholders. (pp. 4-5)
Appellants contend that the above provision is included in the Corporation
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" Code's chapter on close corporations and Saniwares cannot be a close
in the selection of the nine directors on a six to three ratio. Each group is assured of a fixed corporation because it has 95 stockholders. Firstly, although Saniwares had
number of directors in the board. 95 stockholders at the time of the disputed stockholders meeting, these 95
stockholders are not separate from each other but are divisible into groups
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin representing a single Identifiable interest. For example, ASI, its nominees and
Young also testified that Section 16(c) of the Agreement that "Nothing herein contained shall lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for
be construed to constitute any of the parties hereto partners or joint venturers in respect of another 13 stockholders, the Chamsay family for 8 stockholders, the Santos
any transaction hereunder" was merely to obviate the possibility of the enterprise being family for 9 stockholders, the Dy family for 7 stockholders, etc. If the
treated as partnership for tax purposes and liabilities to third parties. members of one family and/or business or interest group are considered as
one (which, it is respectfully submitted, they should be for purposes of
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing determining how closely held Saniwares is there were as of 8 March 1983,
capacities of a local firm are constrained to seek the technology and marketing assistance of practically only 17 stockholders of Saniwares. (Please refer to discussion in
huge multinational corporations of the developed world. Arrangements are formalized where pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984
a foreign group becomes a minority owner of a firm in exchange for its manufacturing and Annex "A" thereof).
expertise, use of its brand names, and other such assistance. However, there is always a
danger from such arrangements. The foreign group may, from the start, intend to establish Secondly, even assuming that Saniwares is technically not a close
its own sole or monopolistic operations and merely uses the joint venture arrangement to corporation because it has more than 20 stockholders, the undeniable fact is
gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come that it is a close-held corporation. Surely, appellants cannot honestly claim
later. As the Philippine firm enlarges its operations and becomes profitable, the foreign that Saniwares is a public issue or a widely held corporation.
group undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint ventures is not In the United States, many courts have taken a realistic approach to joint
consistent with fair dealing to say the least. To the extent that such subversive actions can venture corporations and have not rigidly applied principles of corporation law
be lawfully prevented, the courts should extend protection especially in industries where designed primarily for public issue corporations. These courts have indicated
constitutional and legal requirements reserve controlling ownership to Filipino citizens. that express arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually applied to the agreement. Of course, voting or pooling agreements are perhaps more
corporate entities and with more consideration given to the nature of the useful and more often resorted to in close corporations. But they may also be
agreement between the joint venturers (Please see Wabash Ry v. American found necessary even in widely held corporations. Moreover, since the Code
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines limits the legal meaning of close corporations to those which comply with the
Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast requisites laid down by section 96, it is entirely possible that a corporation
Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A which is in fact a close corporation will not come within the definition. In such
2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. case, its stockholders should not be precluded from entering into contracts
571; Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint like voting agreements if these are otherwise valid. (Campos & Lopez-
Venture Corporations", 11 Vand Law Rev. p. 680,1958). These American Campos, op cit, p. 405)
cases dealt with legal questions as to the extent to which the requirements
arising from the corporate form of joint venture corporations should control, In short, even assuming that sec. 5(a) of the Agreement relating to the
and the courts ruled that substantial justice lay with those litigants who relied designation or nomination of directors restricts the right of the Agreement's
on the joint venture agreement rather than the litigants who relied on the signatories to vote for directors, such contractual provision, as correctly held
orthodox principles of corporation law. by the SEC, is valid and binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
As correctly held by the SEC Hearing Officer:
In regard to the question as to whether or not the ASI group may vote their additional equity
It is said that participants in a joint venture, in organizing the joint venture during elections of Saniwares' board of directors, the Court of Appeals correctly stated:
deviate from the traditional pattern of corporation management. A noted
authority has pointed out that just as in close corporations, shareholders' As in other joint venture companies, the extent of ASI's participation in the
agreements in joint venture corporations often contain provisions which do management of the corporation is spelled out in the Agreement. Section 5(a)
one or more of the following: (1) require greater than majority vote for hereof says that three of the nine directors shall be designated by ASI and
shareholder and director action; (2) give certain shareholders or groups of the remaining six by the other stockholders, i.e., the Filipino stockholders.
shareholders power to select a specified number of directors; (3) give to the This allocation of board seats is obviously in consonance with the minority
shareholders control over the selection and retention of employees; and (4) position of ASI.
set up a procedure for the settlement of disputes by arbitration (See I O' Neal,
Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC Having entered into a well-defined contractual relationship, it is imperative
Hearing Officer, P. 16) that the parties should honor and adhere to their respective rights and
obligations thereunder. Appellants seem to contend that any allocation of
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily board seats, even in joint venture corporations, are null and void to the extent
imply that agreements regarding the exercise of voting rights are allowed only that such may interfere with the stockholder's rights to cumulative voting as
in close corporations. As Campos and Lopez-Campos explain: provided in Section 24 of the Corporation Code. This Court should not be
prepared to hold that any agreement which curtails in any way cumulative
Paragraph 2 refers to pooling and voting agreements in particular. Does this voting should be struck down, even if such agreement has been freely
provision necessarily imply that these agreements can be valid only in close entered into by experienced businessmen and do not prejudice those who
corporations as defined by the Code? Suppose that a corporation has twenty are not parties thereto. It may well be that it would be more cogent to hold, as
five stockholders, and therefore cannot qualify as a close corporation under the Securities and Exchange Commission has held in the decision appealed
section 96, can some of them enter into an agreement to vote as a unit in the from, that cumulative voting rights may be voluntarily waived by stockholders
election of directors? It is submitted that there is no reason for denying who enter into special relationships with each other to pursue and implement
stockholders of corporations other than close ones the right to enter into not specific purposes, as in joint venture relationships between foreign and local
voting or pooling agreements to protect their interests, as long as they do not stockholders, so long as such agreements do not adversely affect third
intend to commit any wrong, or fraud on the other stockholders not parties to parties.
In any event, it is believed that we are not here called upon to make a general partially nationalized activities shall be allowed in proportion to their allowable
rule on this question. Rather, all that needs to be done is to give life and participation or share in the capital of such entities. (amendments introduced
effect to the particular contractual rights and obligations which the parties by Presidential Decree 715, section 1, promulgated May 28, 1975)
have assumed for themselves.
The ASI Group's argument is correct within the context of Section 24 of the Corporation
On the one hand, the clearly established minority position of ASI and the Code. The point of query, however, is whether or not that provision is applicable to a joint
contractual allocation of board seats Cannot be disregarded. On the other venture with clearly defined agreements:
hand, the rights of the stockholders to cumulative voting should also be
protected. The legal concept of ajoint venture is of common law origin. It has no precise
legal definition but it has been generally understood to mean an organization
In our decision sought to be reconsidered, we opted to uphold the second formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811
over the first. Upon further reflection, we feel that the proper and just solution [1920]) It is in fact hardly distinguishable from the partnership, since their
to give due consideration to both factors suggests itself quite clearly. This elements are similar community of interest in the business, sharing of profits
Court should recognize and uphold the division of the stockholders into two and losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d.
groups, and at the same time uphold the right of the stockholders within each 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v.
group to cumulative voting in the process of determining who the group's Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main
nominees would be. In practical terms, as suggested by appellant Luciano E. distinction cited by most opinions in common law jurisdictions is that the
Salazar himself, this means that if the Filipino stockholders cannot agree who partnership contemplates a general business with some degree of continuity,
their six nominees will be, a vote would have to be taken among the Filipino while the joint venture is formed for the execution of a single transaction, and
stockholders only. During this voting, each Filipino stockholder can cumulate is thus of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500
his votes. ASI, however, should not be allowed to interfere in the voting within [1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v.
the Filipino group. Otherwise, ASI would be able to designate more than the Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in
three directors it is allowed to designate under the Agreement, and may even this jurisdiction, since under the Civil Code, a partnership may be particular or
be able to get a majority of the board seats, a result which is clearly contrary universal, and a particular partnership may have for its object a specific
to the contractual intent of the parties. undertaking. (Art. 1783, Civil Code). It would seem therefore that under
Philippine law, a joint venture is a form of partnership and should thus be
Such a ruling will give effect to both the allocation of the board seats and the governed by the law of partnerships. The Supreme Court has however
stockholder's right to cumulative voting. Moreover, this ruling will also give recognized a distinction between these two business forms, and has held that
due consideration to the issue raised by the appellees on possible violation or although a corporation cannot enter into a partnership contract, it may
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and however engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos,
the nationalization requirements of the Constitution and the laws if ASI is 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and
allowed to nominate more than three directors. (Rollo-75875, pp. 38-39) Selected Cases, Corporation Code 1981)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the Moreover, the usual rules as regards the construction and operations of contracts generally
right to vote their additional equity pursuant to Section 24 of the Corporation Code which apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
gives the stockholders of a corporation the right to cumulate their votes in electing directors.
Petitioner Salazar adds that this right if granted to the ASI Group would not necessarily Bearing these principles in mind, the correct view would be that the resolution of the
mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites question of whether or not the ASI Group may vote their additional equity lies in the
section 2-a thereof which provides: agreement of the parties.

And provided finally that the election of aliens as members of the board of Necessarily, the appellate court was correct in upholding the agreement of the parties as
directors or governing body of corporations or associations engaging in regards the allocation of director seats under Section 5 (a) of the "Agreement," and the right
of each group of stockholders to cumulative voting in the process of determining who the With these findings, we the decisions of the SEC Hearing Officer and SEC which were
group's nominees would be under Section 3 (a) (1) of the "Agreement." As pointed out by impliedly affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin,
SEC, Section 5 (a) of the Agreement relates to the manner of nominating the members of David P Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V.
the board of directors while Section 3 (a) (1) relates to the manner of voting for these Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of
nominees. Saniwares at the March 8,1983 annual stockholders' meeting.

This is the proper interpretation of the Agreement of the parties as regards the election of On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object
members of the board of directors. to a cumulative voting during the election of the board of directors of the enterprise as ruled
by the appellate court and submits that the six (6) directors allotted the Filipino stockholders
To allow the ASI Group to vote their additional equity to help elect even a Filipino director should be selected by consensus pursuant to section 5 (a) of the Agreement which uses the
who would be beholden to them would obliterate their minority status as agreed upon by the word "designate" meaning "nominate, delegate or appoint."
parties. As aptly stated by the appellate court:
They also stress the possibility that the ASI Group might take control of the enterprise if the
... ASI, however, should not be allowed to interfere in the voting within the Filipino stockholders are allowed to select their nominees separately and not as a common
Filipino group. Otherwise, ASI would be able to designate more than the slot determined by the majority of their group.
three directors it is allowed to designate under the Agreement, and may even
be able to get a majority of the board seats, a result which is clearly contrary Section 5 (a) of the Agreement which uses the word designates in the allocation of board
to the contractual intent of the parties. directors should not be interpreted in isolation. This should be construed in relation to
section 3 (a) (1) of the Agreement. As we stated earlier, section 3(a) (1) relates to
Such a ruling will give effect to both the allocation of the board seats and the the manner of voting for these nominees which is cumulative voting while section 5(a)
stockholder's right to cumulative voting. Moreover, this ruling will also give relates to the manner of nominating the members of the board of directors. The petitioners
due consideration to the issue raised by the appellees on possible violation or in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and
the nationalization requirements of the Constitution and the laws if ASI is The insinuation that the ASI Group may be able to control the enterprise under the
allowed to nominate more than three directors. (At p. 39, Rollo, 75875) cumulative voting procedure cannot, however, be ignored. The validity of the cumulative
voting procedure is dependent on the directors thus elected being genuine members of the
Equally important as the consideration of the contractual intent of the parties is the Filipino group, not voters whose interest is to increase the ASI share in the management of
consideration as regards the possible domination by the foreign investors of the enterprise Saniwares. The joint venture character of the enterprise must always be taken into account,
in violation of the nationalization requirements enshrined in the Constitution and so long as the company exists under its original agreement. Cumulative voting may not be
circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position is that the used as a device to enable ASI to achieve stealthily or indirectly what they cannot
Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share in accomplish openly. There are substantial safeguards in the Agreement which are intended
the capital of the entity. It is to be noted, however, that the same law also limits the election to preserve the majority status of the Filipino investors as well as to maintain the minority
of aliens as members of the board of directors in proportion to their allowance status of the foreign investors group as earlier discussed. They should be maintained.
participation of said entity. In the instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable participation of the ASI Group. Hence, in WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED
future dealings, this limitation of six to three board seats should always be maintained as and the petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court
long as the joint venture agreement exists considering that in limiting 3 board seats in the 9- of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham
man board of directors there are provisions already agreed upon and embodied in the Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique
parties' Agreement to protect the interests arising from the minority status of the foreign Lagdameo, and George F. Lee are declared as the duly elected directors of Saniwares at
investors. the March 8,1983 annual stockholders' meeting. In all other respects, the questioned
decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No.
75875.
SO ORDERED. b. The plaintiff shall pay the defendant corporation P9.70,
Philippine Currency, per bag of white cement, FOB Davao and
Cagayan de Oro ports;

c. The plaintiff shall, every time the defendant corporation is


ready to deliver the good, open with any bank or banking
institution a confirmed, unconditional, and irrevocable letter of
G.R. No. L-68555 March 19, 1993
credit in favor of the corporation and that upon certification by
the boat captain on the bill of lading that the goods have been
PRIME WHITE CEMENT CORPORATION, petitioner, loaded on board the vessel bound for Davao the said bank or
vs. banking institution shall release the corresponding amount as
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents. payment of the goods so shipped.

De Jesus & Associates for petitioner. Right after the plaintiff entered into the aforesaid dealership agreement, he
placed an advertisement in a national, circulating newspaper the fact of his
Padlan, Sutton, Mendoza & Associates for private respondent. being the exclusive dealer of the defendant corporation's white cement
products in Mindanao area, more particularly, in the Manila Chronicle dated
August 16, 1969 (Exhibits R and R-1) and was even congratulated by his
business associates, so much so, he was asked by some of his businessmen
CAMPOS, JR., J.: friends and close associates if they can be his
sub-dealer in the Mindanao area.
Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement
Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court, Relying heavily on the dealership agreement, plaintiff sometime in the months
the dispositive portion of which reads as follows: of September, October, and December, 1969, entered into a written
agreement with several hardware stores dealing in buying and selling white
WHEREFORE, in view of the foregoing, the judgment appealed from is cement in the Cities of Davao and Cagayan de Oro which would thus enable
hereby affirmed in toto.1 him to sell his allocation of 20,000 bags regular supply of the said commodity,
by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2).
The facts, as found by the trial court and as adopted by the respondent Court are hereby After the plaintiff was assured by his supposed buyer that his allocation of
quoted, to wit: 20,000 bags of white cement can be disposed of, he informed the defendant
corporation in his letter dated August 18, 1970 that he is making the
On or about the 16th day of July, 1969, plaintiff and defendant corporation necessary preparation for the opening of the requisite letter of credit to cover
thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the the price of the due initial delivery for the month of September, 1970 (Exhibit
Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff B), looking forward to the defendant corporation's duty to comply with the
was obligated to act as the exclusive dealer and/or distributor of the said dealership agreement. In reply to the aforesaid letter of the plaintiff, the
defendant corporation of its cement products in the entire Mindanao area for defendant corporation thru its corporate secretary, replied that the board of
directors of the said defendant decided to impose the following conditions:
a term of five (5) years and proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to a. Delivery of white cement shall commence at the end of
and supply the plaintiff, as dealer with 20,000 bags (94 November, 1970;
lbs/bag) of white cement per month;
b. Only 8,000 bags of white cement per month for only a There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed
period of three (3) months will be delivered; the dealership agreement Exhibit "A", they were the President and Chairman
of the Board, respectively, of defendant-appellant corporation. Neither is the
c. The price of white cement was priced at P13.30 per bag; genuineness of the said agreement contested. As a matter of fact, it appears
on the face of the contract itself that both officers were duly authorized to
d. The price of white cement is subject to readjustment enter into the said agreement and signed the same for and in behalf of the
unilaterally on the part of the defendant; corporation. When they, therefore, entered into the said transaction they
created the impression that they were duly clothed with the authority to do so.
e. The place of delivery of white cement shall be Austurias It cannot now be said that the disputed agreement which possesses all the
(sic); essential requisites of a valid contract was never intended to bind the
corporation as this avoidance is barred by the principle of estoppel.3
f. The letter of credit may be opened only with the Prudential
Bank, Makati Branch; In this petition for review, petitioner Prime White Cement Corporation made the following
assignment of errors. 4
g. Payment of white cement shall be made in advance and
which payment shall be used by the defendant as guaranty in I
the opening of a foreign letter of credit to cover costs and
expenses in the procurement of materials in the manufacture THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
of white cement. (Exhibit C). COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED
PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO
xxx xxx xxx CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR
APPROVAL OF THE BOARD OF DIRECTORS.
Several demands to comply with the dealership agreement (Exhibits D, E, G,
I, R, L, and N) were made by the plaintiff to the defendant, however, II
defendant refused to comply with the same, and plaintiff by force of
circumstances was constrained to cancel his agreement for the supply of THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
white cement with third parties, which were concluded in anticipation of, and COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE,
pursuant to the said dealership agreement. PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND
OFFICERS OF THE CORPORATION.
Notwithstanding that the dealership agreement between the plaintiff and
defendant was in force and subsisting, the defendant corporation, in violation III
of, and with evident intention not to be bound by the terms and conditions
thereof, entered into an exclusive dealership agreement with a certain THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE,
hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90).2 PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS
PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.
After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of
P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and IV
for attorney's fees and costs. The appellate court affirmed the said decision mainly on the
following basis, and We quote:
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE "is not a matter of statutory or technical law. It springs from the fact that directors have the
COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO control and guidance of corporate affairs and property and hence of the property interests of
WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER. the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission, this
Court quoted with favor from Pepper v. Litton,11 thus:
V
. . . He cannot by the intervention of a corporate entity violate the ancient
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN precept against serving two masters. . . . He cannot utilize his inside
ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH information and his strategic position for his own preferment. He cannot
COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS violate rules of fair play by doing indirectly through the corporation what he
CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF could not do directly. He cannot use his power for his personal advantage
JUDICIAL PROCEEDINGS. and to the detriment of the stockholders and creditors no matter how absolute
in terms that power may be and no matter how meticulous he is to satisfy
There is only one legal issue to be resolved by this Court: whether or not the "dealership technical requirements. For that power is at all times subject to the equitable
agreement" referred by the President and Chairman of the Board of petitioner corporation is limitation that it may not be exercised for the aggrandizement, preference, or
a valid and enforceable contract. We do not agree with the conclusion of the respondent advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . .
Court that it is.
On the other hand, a director's contract with his corporation is not in all instances void or
Under the Corporation Law, which was then in force at the time this case arose, as well as
5 voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by
under the present Corporation Code, all corporate powers shall be exercised by the Board the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the
of Directors, except as otherwise provided by law. 6 Although it cannot completely abdicate Corporation Code provides, thus:
its power and responsibility to act for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In the absence of such express Sec. 32. Dealings of directors, trustees or officers with the corporation. — A
delegation, a contract entered into by its President, on behalf of the corporation, may still contract of the corporation with one or more of its directors or trustees or
bind the corporation if the board should ratify the same expressly or impliedly. Implied officers is voidable, at the option of such corporation, unless all the following
ratification may take various forms — like silence or acquiescence; by acts showing conditions are present:
approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.7 Furthermore, even in the absence of express or implied authority by ratification, 1. That the presence of such director or trustee in the board meeting in which
the President as such may, as a general rule, bind the corporation by a contract in the the contract was approved was not necessary to constitute a quorum for such
ordinary course of business, provided the same is reasonable under the meeting;
circumstances.8 These rules are basic, but are all general and thus quite flexible. They apply
where the President or other officer, purportedly acting for the corporation, is dealing with 2. That the vote of such director or trustee was not necessary for the approval
a third person, i. e., a person outside the corporation. of the contract;

The situation is quite different where a director or officer is dealing with his own corporation. 3. That the contract is fair and reasonable under the circumstances; and
In the instant case respondent Te was not an ordinary stockholder; he was a member of the
Board of Directors and Auditor of the corporation as well. He was what is often referred to as 4. That in the case of an officer, the contract with the officer has been
a "self-dealing" director. previously authorized by the Board of Directors.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to Where any of the first two conditions set forth in the preceding paragraph is
his corporation.9 In case his interests conflict with those of the corporation, he cannot absent, in the case of a contract with a director or trustee, such contract may
sacrifice the latter to his own advantage and benefit. As corporate managers, directors are be ratified by the vote of the stockholders representing at least two-thirds
committed to seek the maximum amount of profits for the corporation. This trust relationship
(2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in the market price of white cement. Yet, except for the contract with Henry Wee, the contracts
a meeting called for the purpose: Provided, That full disclosure of the adverse were for only two years from October, 1970. Why did he not protect the corporation in the
interest of the directors or trustees involved is made at such meeting: same manner when he entered into the "dealership agreement"? For that matter, why did
Provided, however, That the contract is fair and reasonable under the the President and the Chairman of the Board not do so either? As director, specially since
circumstances. he was the other party in interest, respondent Te's bounden duty was to act in such manner
as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is
Although the old Corporation Law which governs the instant case did not contain a similar to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in
provision, yet the cited provision substantially incorporates well-settled principles in effect, to enrich himself at the expense of the corporation. There is no showing that the
corporate law. 12 stockholders ratified the "dealership agreement" or that they were fully aware of its
provisions. The contract was therefore not valid and this Court cannot allow him to reap the
Granting arguendo that the "dealership agreement" involved here would be valid and fruits of his disloyalty.
enforceable if entered into with a person other than a director or officer of the corporation,
the fact that the other party to the contract was a Director and Auditor of the petitioner As a result of this action which has been proven to be without legal basis, petitioner
corporation changes the whole situation. First of all, We believe that the contract was neither corporation's reputation and goodwill have been prejudiced. However, there can be no
fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and award for moral damages under Article 2217 and succeeding articles on Section 1 of
supply to respondent Te 20,000 bags of white cement per month, for five years starting Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.
September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman
himself and must have known, or at least must be presumed to know, that at that time, In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court
prices of commodities in general, and white cement in particular, were not stable and were dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private
expected to rise. At the time of the contract, petitioner corporation had not even commenced respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of
the manufacture of white cement, the reason why delivery was not to begin until 14 months P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.
later. He must have known that within that period of six years, there would be a considerable
rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in SO ORDERED.
September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already
P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow
for an increase in price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of
the corporation from whom he was to buy the cement, would require such a provision. In
fact, this unfairness in the contract is also a basis which renders a contract entered into by
the President, without authority from the Board of Directors, void or voidable, although it G.R. No. 140667 August 12, 2004
may have been in the ordinary course of business. We believe that the fixed price of P9.70
per bag for a period of five years was not fair and reasonable. Respondent Te, himself, WOODCHILD HOLDINGS, INC., petitioner,
when he subsequently entered into contracts to resell the cement to his "new dealers" Henry vs.
Wee 13 and Gaudencio Galang 14 stipulated as follows: ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.

The price of white cement shall be mutually determined by us but in no case


shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang,
DECISION
on October 13, 1967. A similar contract with Prudencio Lim was made on December 29,
1969. 15 All of these contracts were entered into soon after his "dealership agreement" with
petitioner corporation, and in each one of them he protected himself from any increase in
purposes (example: entry of a 45-foot container), the seller agrees to sell additional
square meter from his current adjacent property to allow the buyer to full access and
full use of the property.5
CALLEJO, SR., J.: Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later
or on July 1, 1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI,
This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. as vendee, executed a contract to sell in which RECCI bound and obliged itself to sell to Dy
CV No. 56125 reversing the Decision2 of the Regional Trial Court of Makati, Branch 57, Lot No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.6On September 5, 1991, a
which ruled in favor of the petitioner. Deed of Absolute Sale7 in favor of WHI was issued, under which Lot No. 491-A-3-B-2
covered by TCT No. 78086 was sold for P5,000,000, receipt of which was acknowledged by
The Antecedents Roxas under the following terms and conditions:

The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the
Roxas Electric and Construction Company, was the beneficial use of and a right of way from Sumulong Highway to the property herein
conveyed consists of 25 square meters wide to be used as the latter's egress from
owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer and ingress to and an additional 25 square meters in the corner of Lot No. 491-A-3-
Certificate of Title (TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A B-1, as turning and/or maneuvering area for Vendee's vehicles.
portion of Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing
to the Sumulong Highway, Antipolo, Rizal. The Vendor agrees that in the event that the right of way is insufficient for the
Vendee's use (ex entry of a 45-foot container) the Vendor agrees to sell additional
At a special meeting on May 17, 1991, the respondent's Board of Directors approved a square meters from its current adjacent property to allow the Vendee full access and
resolution authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot full use of the property.
No. 491-A-3-B-2 covered by TCT No. 78086, with an area of 7,213 square meters, at a price
and under such terms and conditions which he deemed most reasonable and advantageous …
to the corporation; and to execute, sign and deliver the pertinent sales documents and
receive the proceeds of the sale for and on behalf of the company.3 The Vendor hereby undertakes and agrees, at its account, to defend the title of the
Vendee to the parcel of land and improvements herein conveyed, against all claims
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by of any and all persons or entities, and that the Vendor hereby warrants the right of
TCT No. 78086 on which it planned to construct its warehouse building, and a portion of the the Vendee to possess and own the said parcel of land and improvements thereon
adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van would be able to readily and will defend the Vendee against all present and future claims and/or action in
enter or leave the property. In a Letter to Roxas dated June 21, 1991, WHI President relation thereto, judicial and/or administrative. In particular, the Vendor shall eject all
Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for existing squatters and occupants of the premises within two (2) weeks from the
P1,000 per square meter or at the price of P7,213,000.4 One of the terms incorporated in signing hereof. In case of failure on the part of the Vendor to eject all occupants and
Dy's offer was the following provision: squatters within the two-week period or breach of any of the stipulations, covenants
and terms and conditions herein provided and that of contract to sell dated 1 July
5. This Offer to Purchase is made on the representation and warranty of the 1991, the Vendee shall have the right to cancel the sale and demand reimbursement
OWNER/SELLER, that he holds a good and registrable title to the property, which for all payments made to the Vendor with interest thereon at 36% per annum.8
shall be conveyed CLEAR and FREE of all liens and encumbrances, and that the
area of 7,213 square meters of the subject property already includes the area on On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for
which the right of way traverses from the main lot (area) towards the exit to the P8,649,000 to WHI for the construction of the warehouse building on a portion of the
Sumulong Highway as shown in the location plan furnished by the Owner/Seller to property with an area of 5,088 square meters.9 WBI proposed to start the project on October
the buyer. Furthermore, in the event that the right of way is insufficient for the buyer's 1, 1991 and to turn over the building to WHI on February 29, 1992.10
In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed stipulated beneficial use and right of way consisting of 25 square meters and 55
its lease agreement with WHI of a 5,000-square-meter portion of the warehouse yet to be square meters to the prejudice of the plaintiff.
constructed at the rental rate of P65 per square meter. Ponderosa emphasized the need for
the warehouse to be ready for occupancy before April 1, 1992.11 WHI accepted the offer. 7. Similarly, in as much as the 25 square meters and 55 square meters alloted to
However, WBI failed to commence the construction of the warehouse in October 1, 1991 as Woodchild Holdings for its beneficial use is inadequate as turning and/or
planned because of the presence of squatters in the property and suggested a renegotiation maneuvering area of its 45-foot container van, Woodchild Holdings manifested its
of the contract after the squatters shall have been evicted.12 Subsequently, the squatters intention pursuant to para. 5 of the Deed of Sale to purchase additional square
were evicted from the property. meters from Roxas Electric to allow it full access and use of the purchased property,
however, Roxas Electric refused and failed to merit Woodchild Holdings' request
On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the contrary to defendant Roxas Electric's obligation under the Deed of Absolute Sale
warehouse building for P11,804,160.13 The contractor started construction in April 1992 even (Annex "A").
before the building officials of Antipolo City issued a building permit on May 28, 1992. After
the warehouse was finished, WHI issued on March 21, 1993 a certificate of occupancy by 8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants
the building official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as of the premises within the stipulated time frame and as a consequence thereof,
lessee, executed a contract of lease over a portion of the property for a monthly rental of plaintiff's planned construction has been considerably delayed for seven (7) months
P300,000 for a period of three years from March 1, 1993 up to February 28, 1996.14 due to the squatters who continue to trespass and obstruct the subject property,
thereby Woodchild Holdings incurred substantial losses amounting to P3,560,000.00
In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked occasioned by the increased cost of construction materials and labor.
on a portion of the property over which WHI had been granted a right of way. Roxas
promised to look into the matter. Dy and Roxas discussed the need of the WHI to buy a 500- 9. Owing further to Roxas Electric's deliberate refusal to comply with its obligation
square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in under Annex "A," Woodchild Holdings suffered unrealized income of P300,000.00 a
the deed of absolute sale. However, Roxas died soon thereafter. On April 15, 1992, the WHI month or P2,100,000.00 supposed income from rentals of the subject property for
wrote the RECCI, reiterating its verbal requests to purchase a portion of the said lot as seven (7) months.
provided for in the deed of absolute sale, and complained about the latter's failure to eject
the squatters within the three-month period agreed upon in the said deed. 10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to
comply with its obligations and warranties under the Deed of Absolute Sale but
The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT notwithstanding such demand, defendant Roxas Electric refused and failed and
No. 78085 for its beneficial use within 72 hours from notice thereof, otherwise the continue to refuse and fail to heed plaintiff's demand for compliance.
appropriate action would be filed against it. RECCI rejected the demand of WHI. WHI
reiterated its demand in a Letter dated May 29, 1992. There was no response from RECCI. Copy of the demand letter dated April 15, 1992 is hereto attached as Annex "B" and
made an integral part hereof.
On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial
Court of Makati, for specific performance and damages, and alleged, inter alia, the following 11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to
in its complaint: Roxas Electric to particularly annotate on Transfer Certificate of Title No. N-78085
the agreement under Annex "A" with respect to the beneficial use and right of way,
5. The "current adjacent property" referred to in the aforequoted paragraph of the however, Roxas Electric unjustifiably ignored and disregarded the same.
Deed of Absolute Sale pertains to the property covered by Transfer Certificate of
Title No. N-78085 of the Registry of Deeds of Antipolo, Rizal, registered in the name Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and
of herein defendant Roxas Electric. made an integral part hereof.

6. Defendant Roxas Electric in patent violation of the express and valid terms of the
Deed of Absolute Sale unjustifiably refused to deliver to Woodchild Holdings the
12. By reason of Roxas Electric's continuous refusal and failure to comply with In its amended answer to the complaint, the RECCI alleged that the delay in the
Woodchild Holdings' valid demand for compliance under Annex "A," the latter was construction of its warehouse building was due to the failure of the WHI's contractor to
constrained to litigate, thereby incurring damages as and by way of attorney's fees in secure a building permit thereon.18
the amount of P100,000.00 plus costs of suit and expenses of litigation.15
During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot
The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus: No. 491-A-3-B-1 consisting of an area of 500 square meters, for the price of P1,000 per
square meter.
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of
Woodchild Holdings and ordering Roxas Electric the following: On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal
portion of which reads:
a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square
meters and 55 square meters; WHEREFORE, judgment is hereby rendered directing defendant:

b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full (1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated
access and use of the purchased property pursuant to para. 5 of the Deed of 25 sq. m. and 55 sq. m.;
Absolute Sale;
(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to
c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use allow said plaintiff full access and use of the purchased property pursuant to Par. 5 of
and right of way granted to Woodchild Holdings under the Deed of Absolute Sale; their Deed of Absolute Sale;

d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual (3) To cause annotation on TCT No. N-78085 the beneficial use and right of way
damages and unrealized income; granted by their Deed of Absolute Sale;

e) to pay attorney's fees in the amount of P100,000.00; and (4) To pay plaintiff the amount of P5,568,000 representing actual damages and
plaintiff's unrealized income;
f) to pay the costs of suit.
(5) To pay plaintiff P100,000 representing attorney's fees; and
Other reliefs just and equitable are prayed for.16
To pay the costs of suit.
In its answer to the complaint, the RECCI alleged that it never authorized its former
president, Roberto Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1, SO ORDERED.19
nor agreed to sell any portion thereof or create a lien or burden thereon. It alleged that,
under the Resolution approved on May 17, 1991, it merely authorized Roxas to sell Lot No. The trial court ruled that the RECCI was estopped from disowning the apparent authority of
491-A-3-B-2 covered by TCT No. 78086. As such, the grant of a right of way and the Roxas under the May 17, 1991 Resolution of its Board of Directors. The court reasoned that
agreement to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said to do so would prejudice the WHI which transacted with Roxas in good faith, believing that
deed are ultra vires. The RECCI further alleged that the provision therein that it would sell a he had the authority to bind the WHI relating to the easement of right of way, as well as the
portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential elements of a binding right to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.
contract.17
The RECCI appealed the decision to the CA, which rendered a decision on November 9,
1999 reversing that of the trial court, and ordering the dismissal of the complaint. The CA
ruled that, under the resolution of the Board of Directors of the RECCI, Roxas was merely
authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant right of THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE
way in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the APPELLANT TO EVICT THE SQUATTERS ON THE LAND AS AGREED IN THE
petitioner to buy a portion thereof. The appellate court also ruled that the grant of a right of DEED OF ABSOLUTE SALE (EXH. "C").
way and an option to the respondent were so lopsided in favor of the respondent because
the latter was authorized to fix the location as well as the price of the portion of its property VI.
to be sold to the respondent. Hence, such provisions contained in the deed of absolute sale
were not binding on the RECCI. The appellate court ruled that the delay in the construction THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF
of WHI's warehouse was due to its fault. THE COURT A QUO DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE
AMOUNT OF P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND
The Present Petition PLAINTIFF'S UNREALIZED INCOME AS WELL AS ATTORNEY'S FEES.20

The petitioner now comes to this Court asserting that: The threshold issues for resolution are the following: (a) whether the respondent is bound by
the provisions in the deed of absolute sale granting to the petitioner beneficial use and a
I. right of way over a portion of Lot

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the
ABSOLUTE SALE (EXH. "C") IS ULTRA VIRES. petitioner to buy a portion thereof, and, if so, whether such agreement is enforceable against
the respondent; (b) whether the respondent failed to eject the squatters on its property
II. within two weeks from the execution of the deed of absolute sale; and, (c) whether the
respondent is liable to the petitioner for damages.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF
THE COURT A QUO ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the
USE OF THE EXISTING RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE respondent authorized Roxas, then its president, to grant a right of way over a portion of Lot
METERS AND 55 SQUARE METERS BECAUSE THESE ARE VALID No. 491-A-3-B-1 in favor of the petitioner, and an option for the respondent to buy a portion
STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE of the said property. The petitioner contends that when the respondent sold Lot No. 491-A-
SALE (EXH. "C"). 3-B-2 covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide
the petitioner with a means of ingress to or egress from the property to the Sumulong
III. Highway, since the latter had no adequate outlet to the public highway. The petitioner
asserts that it agreed to buy the property covered by TCT No. 78085 because of the grant
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS by the respondent of a right of way and an option in its favor to buy a portion of the property
TO RULE THAT THE STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. covered by TCT No. 78085. It contends that the respondent never objected to Roxas'
"C") WERE DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE acceptance of its offer to purchase the property and the terms and conditions therein; the
DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS. respondent even allowed Roxas to execute the deed of absolute sale in its behalf. The
petitioner asserts that the respondent even received the purchase price of the property
IV. without any objection to the terms and conditions of the said deed of sale. The petitioner
claims that it acted in good faith, and contends that after having been benefited by the said
sale, the respondent is estopped from assailing its terms and conditions. The petitioner
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT
notes that the respondent's Board of Directors never approved any resolution rejecting the
DUE PROCESS BY THE ASSAILED DECISION.
deed of absolute sale executed by Roxas for and in its behalf. As such, the respondent is
obliged to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 with an area of
V. 500 square meters at the price of P1,000 per square meter, based on its evidence and
Articles 649 and 651 of the New Civil Code.
For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991 As for any obligation wherein the agent has exceeded his power, the principal is not
Resolution of its Board of Directors to impose a burden or to grant a right of way in favor of bound except when he ratifies it expressly or tacitly.
the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the petitioner.
Hence, the respondent was not bound by such provisions contained in the deed of absolute Thus, contracts entered into by corporate officers beyond the scope of authority are
sale. Besides, the respondent contends, the petitioner cannot enforce its right to buy a unenforceable against the corporation unless ratified by the corporation.23
portion of the said property since there was no agreement in the deed of absolute sale on
the price thereof as well as the specific portion and area to be purchased by the petitioner. In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing with an
assumed agency, whether the assumed agency be a general or special one, are bound at
We agree with the respondent. their peril, if they would hold the principal liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case either is controverted, the burden of
In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that: proof is upon them to establish it.

A corporation is a juridical person separate and distinct from its stockholders or In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a
members. Accordingly, the property of the corporation is not the property of its portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or burden
stockholders or members and may not be sold by the stockholders or members thereon. The petitioner was thus burdened to prove that the respondent so authorized
without express authorization from the corporation's board of directors. Section 23 of Roxas to sell the same and to create a lien thereon.
BP 68, otherwise known as the Corporation Code of the Philippines, provides:
Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the
"SEC. 23. The Board of Directors or Trustees. – Unless otherwise provided in respondent, which is worded as follows:
this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to
corporations controlled and held by the board of directors or trustees to be any interested buyer, its 7,213-sq.-meter property at the Sumulong Highway,
elected from among the holders of stocks, or where there is no stock, from Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and
among the members of the corporation, who shall hold office for one (1) year on terms and conditions which he deems most reasonable and advantageous to the
and until their successors are elected and qualified." corporation;

Indubitably, a corporation may act only through its board of directors or, when FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the
authorized either by its by-laws or by its board resolution, through its officers or corporation, be, as he is hereby authorized to execute, sign and deliver the pertinent
agents in the normal course of business. The general principles of agency govern sales documents and receive the proceeds of sale for and on behalf of the
the relation between the corporation and its officers or agents, subject to the articles company.25
of incorporation, by-laws, or relevant provisions of law. …22
Evidently, Roxas was not specifically authorized under the said resolution to grant a right of
Generally, the acts of the corporate officers within the scope of their authority are binding on way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the
the corporation. However, under Article 1910 of the New Civil Code, acts done by such petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-
officers beyond the scope of their authority cannot bind the corporation unless it has ratified A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the
such acts expressly or tacitly, or is estopped from denying them: adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may
such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to
Art. 1910. The principal must comply with all the obligations which the agent may the petitioner "on such terms and conditions which he deems most reasonable and
have contracted within the scope of his authority. advantageous." Under paragraph 12, Article 1878 of the New Civil Code, a special power of
attorney is required to convey real rights over immovable property. 26 Article 1358 of the New
Civil Code requires that contracts which have for their object the creation of real rights over
immovable property must appear in a public document.27 The petitioner cannot feign No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon, or that
ignorance of the need for Roxas to have been specifically authorized in writing by the Board the respondent allowed him to do so.
of Directors to be able to validly grant a right of way and agree to sell a portion of Lot No.
491-A-3-B-1. The rule is that if the act of the agent is one which requires authority in writing, The petitioner's contention that by receiving and retaining the P5,000,000 purchase price of
those dealing with him are charged with notice of that fact.28 Lot No. 491-A-3-B-2, the respondent effectively and impliedly ratified the grant of a right of
way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an option to sell
Powers of attorney are generally construed strictly and courts will not infer or presume broad a portion thereof, is barren of merit. It bears stressing that the respondent sold Lot No. 491-
powers from deeds which do not sufficiently include property or subject under which the A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the
agent is to deal.29 The general rule is that the power of attorney must be pursued within legal respondent had the right to retain the P5,000,000, the purchase price of the property it had
strictures, and the agent can neither go beyond it; nor beside it. The act done must be sold to the petitioner. For an act of the principal to be considered as an implied ratification of
legally identical with that authorized to be done.30 In sum, then, the consent of the an unauthorized act of an agent, such act must be inconsistent with any other hypothesis
respondent to the assailed provisions in the deed of absolute sale was not obtained; hence, than that he approved and intended to adopt what had been done in his name.36 Ratification
the assailed provisions are not binding on it. is based on waiver – the intentional relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do independently of the unauthorized act of
We reject the petitioner's submission that, in allowing Roxas to execute the contract to sell the agent. Moreover, if a writing is required to grant an authority to do a particular act,
and the deed of absolute sale and failing to reject or disapprove the same, the respondent ratification of that act must also be in writing.37 Since the respondent had not ratified the
thereby gave him apparent authority to grant a right of way over Lot No. 491-A-3-B-1 and to unauthorized acts of Roxas, the same are unenforceable.38 Hence, by the respondent's
grant an option for the respondent to sell a portion thereof to the petitioner. Absent estoppel retention of the amount, it cannot thereby be implied that it had ratified the unauthorized acts
or ratification, apparent authority cannot remedy the lack of the written power required under of its agent, Roberto Roxas.
the statement of frauds.31 In addition, the petitioner's fallacy is its wrong assumption of the
unproved premise that the respondent had full knowledge of all the terms and conditions On the last issue, the petitioner contends that the CA erred in dismissing its complaint for
contained in the deed of absolute sale when Roxas executed it. damages against the respondent on its finding that the delay in the construction of its
warehouse was due to its (petitioner's) fault. The petitioner asserts that the CA should have
It bears stressing that apparent authority is based on estoppel and can arise from two affirmed the ruling of the trial court that the respondent failed to cause the eviction of the
instances: first, the principal may knowingly permit the agent to so hold himself out as squatters from the property on or before September 29, 1991; hence, was liable for
having such authority, and in this way, the principal becomes estopped to claim that the P5,660,000. The respondent, for its part, asserts that the delay in the construction of the
agent does not have such authority; second, the principal may so clothe the agent with the petitioner's warehouse was due to its late filing of an application for a building permit, only
indicia of authority as to lead a reasonably prudent person to believe that he actually has on May 28, 1992.
such authority.32 There can be no apparent authority of an agent without acts or conduct on
the part of the principal and such acts or conduct of the principal must have been known and The petitioner's contention is meritorious. The respondent does not deny that it failed to
relied upon in good faith and as a result of the exercise of reasonable prudence by a third cause the eviction of the squatters on or before September 29, 1991. Indeed, the
person as claimant and such must have produced a change of position to its detriment. The respondent does not deny the fact that when the petitioner wrote the respondent demanding
apparent power of an agent is to be determined by the acts of the principal and not by the that the latter cause the eviction of the squatters on April 15, 1992, the latter were still in the
acts of the agent.33 premises. It was only after receiving the said letter in April 1992 that the respondent caused
the eviction of the squatters, which thus cleared the way for the petitioner's contractor to
For the principle of apparent authority to apply, the petitioner was burdened to prove the commence the construction of its warehouse and secure the appropriate building permit
following: (a) the acts of the respondent justifying belief in the agency by the petitioner; (b) therefor.
knowledge thereof by the respondent which is sought to be held; and, (c) reliance thereon
by the petitioner consistent with ordinary care and prudence.34 In this case, there is no The petitioner could not be expected to file its application for a building permit before April
evidence on record of specific acts made by the respondent35 showing or indicating that it 1992 because the squatters were still occupying the property. Because of the respondent's
had full knowledge of any representations made by Roxas to the petitioner that the failure to cause their eviction as agreed upon, the petitioner's contractor failed to commence
respondent had authorized him to grant to the respondent an option to buy a portion of Lot the construction of the warehouse in October 1991 for the agreed price of P8,649,000. In
the meantime, costs of construction materials spiraled. Under the construction contract G.R. No. 11897 September 24, 1918
entered into between the petitioner and the contractor, the petitioner was obliged to pay
P11,804,160,39including the additional work costing P1,441,500, or a net increase of J. F. RAMIREZ, plaintiff-appellee,
P1,712,980.40 The respondent is liable for the difference between the original cost of vs.
construction and the increase thereon, conformably to Article 1170 of the New Civil Code, THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.
which reads:
Jose Moreno Lacalle for appellant Fernandez.
Art. 1170. Those who in the performance of their obligations are guilty of fraud, Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
negligence, or delay and those who in any manner contravene the tenor thereof, are No appearance for appellee.
liable for damages.
STREET, J.:
The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the
lease of the property to the Ponderosa Leather Goods Company. The respondent is, thus, The Orientalist Company is a corporation, duly organized under the laws of the Philippine
liable to the petitioner for the said amount, under Articles 2200 and 2201 of the New Civil Islands, and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit,
Code: was engaged in the business of maintaining and conducting a theatre in the city of Manila
for the exhibition of cinematographic films. Under the articles of incorporation the company
Art. 2200. Indemnification for damages shall comprehend not only the value of the is authorized to manufacture, buy, or otherwise obtain all accessories necessary for
loss suffered, but also that of the profits which the obligee failed to obtain. conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a resident of
the city of Paris, France, and was engaged in the business of marketing films for a
Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who manufacturer or manufacturers, there engaged in the production or distribution of
acted in good faith is liable shall be those that are the natural and probable cinematographic material. In this enterprise the plaintiff was represented in the city of Manila
consequences of the breach of the obligation, and which the parties have foreseen by his son, Jose Ramirez.
or could have reasonably foreseen at the time the obligation was constituted.
In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila,
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible became apprised of the fact that the plaintiff in Paris had control of the agencies for two
for all damages which may be reasonably attributed to the non-performance of the different marks of films, namely, the "Eclair Films" and the "Milano Films;" and negotiations
obligation. were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of the
plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the
In sum, we affirm the trial court's award of damages and attorney's fees to the petitioner. Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the
Orientalist Company and also its treasure, was chiefly active in this matter, being moved by
IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the the suggestions and representations of Vicente Ocampo, manage of the Oriental Theater, to
assailed Decision of the Court of Appeals WITH MODIFICATION. The respondent is the effect that the securing of the said films was necessary to the success of the
ordered to pay to the petitioner the amount of P5,612,980 by way of actual damages and corporation.
P100,000 by way of attorney's fees. No costs.
Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father,
SO ORDERED. placed in the hands of Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the
terms upon which the plaintiff would undertake to supply from Paris the aforesaid films. This
officer was declared to be good until the end of July; and as only about for the Orientalist
Company to act on the matter speedily, if it desired to take advantage of said offer.
Accordingly, Ramon J. Fernandez, on July 30, had an informal conference with all the
members of the company's board of directors except one, and with approval of those with
whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the
offer contained in the memorandum of July 4th for the exclusive agency of the Eclair films. A parties in this case are J. F. Ramirez of the one part, and the Orientalist Company, with
few days later, on August 5, he addressed another letter couched in the same terms, Ramon J. Fernandez of the other.
likewise accepting the office of the exclusive agency for the Milano Films.
In due time the films began to arrive in Manila, a draft for the cost and expenses incident to
The memorandum offer contained a statement of the price at which the films would be sold, each shipment being attached to the proper bill of lading. It appears that the Orientalist
the quantity which the representative of each was required to take and information Company was without funds to meet these obligations and the first few drafts were dealt
concerning the manner and intervals of time for the respective shipments. The expenses of with in the following manner: The drafts, upon presented through the bank, were accepted in
packing, transportation and other incidentals were to be at the cost of the purchaser. There the name of the Orientalist Company by its president B. Hernandez, and were taken up by
was added a clause in which J. F. Ramirez described his function in such transactions as the latter with his own funds. As the drafts had thus been paid by B. Hernandez, the films
that of a commission agent and stated that he would see to the prompt shipment of the which had been procured by he payment of said drafts were treated by him as his own
films, would pay the manufacturer, and take care that the films were insured — his property; and they in fact never came into the actual possession of the Orientalist Company
commission for such services being fixed at 5 per cent. as owner at all, though it is true Hernandez rented the films to the Orientalist Company and
they were exhibited by it in the Oriental Theater under an arrangement which was made
What we consider to be the most portion of the two letters of acceptance written by R. J. between him and the theater's manager.
Fernandez to Jose Ramirez is in the following terms:
During the period between February 27, 1914, and April 30, 1914, there arrived in the city of
We willingly accepted the officer under the terms communicated by your father in his Manila several remittances of films from Paris, and it is these shipments which have given
letter dated at Paris on July 4th of the present year. occasion for the present action. All of the drafts accompanying these films were drawn, as
on former occasions, upon the Orientalist Company; and all were accepted in the name of
These communications were signed in the following form, in which it will be noted the B. Hernandez, except the last, which was accepted by B. Hernandez individually. None of
separate signature of R. J. Fernandez, as an individual, is placed somewhat below and to the drafts thus accepted were taken up by the drawee or by B. Hernandez when they fell
the left of the signature of the Orientalist Company as singed by R. J. Fernandez, in the due; and it was finally necessary for the plaintiff himself to take them up as dishonored by
capacity of treasurer: non-payment.

Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist
THE ORIENTALIST COMPANY, Company, and Ramon J. Fernandez. As the films which accompanied the dishonored were
By R. J. FERNANDEZ, liable to deteriorate, the court, upon application of the plaintiff, and apparently without
Treasurer, opposition on the part of the defendants, appointed a receiver who took charge of the films
and sold them. The amount realized from this sale was applied to the satisfaction of the
R. J. FERNANDEZ. plaintiff's claim and was accordingly delivered to him in part payment thereof. At trial
judgment was given for the balance due to the plaintiff, namely P6,018.93, with interest from
Both of these letters also contained a request that Jose Ramirez should at once telegraph to May 19, 1914, the date of the institution of the action. In the judgment of the trial court the
his father in Paris that his offer had been accepted by the Orientalist Company and instruct Orientalist Company was declared to be a principal debtor and Ramon J. Fernandez was
him to make a contract with the film companies, according to the tenor of the offer, and in declared to be liable subsidiarily as guarantor. From this judgment both of the parties
the capacity of attorney-in-fact for the Orientalist Company. The idea behind the latter defendant appealed.
suggestion apparently was that the contract for the films would have to be made directly
between the film-producing companies and the Orientalist Company; and it seemed In this Court neither of the parties appellant make any question with respect to the right of
convenient, in order to save time, that the Orientalist Company should clothed J. F. Ramirez the plaintiff to recover from somebody the amount awarded by the lower court; but each of
with full authority as its attorney-in-fact. This idea was never given effect; and so far as the the defendants insists the other is liable for the whole. It results that the real contention upon
record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he this appeal is between the two defendants.
indicated in the officer of July 4 that he would do, with the result that the only contracting
It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not us to consider whether the administration resulting from the failure of the defendant
challenged by the Orientalist Company that the judgment has already been executed as company to deny the execution of the contracts under oath is binding upon it for all
against the company is exclusively and primarily liable the entire indebtedness, the question purposes of this lawsuit, or whether such failure should be considered a mere irregularity of
as to the liability of Ramon J. Fernandez would be academic. But if the latter is liable as procedure which was waived when the evidence referred to was admitted without objection
principal obligor for the whole or any part of the debt, it will be necessary to modify the from the plaintiff. The proper solution of this problem makes it necessary to consider
judgment in order to adjust the rights of the defendants in accordance with such finding. carefully the principle underlying the provision above quoted.

It will be noted that the action is primarily founded upon the liability created by the letters That the situation was one in which an answer under oath denying the authority of the agent
dated July 30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913; should have been interposed, supposing that the company desired to contest this point, is
and both of the letters mentioned are copied into the complaint as the foundation of the not open to question. In the case of Merchant vs. International Banking Corporation, (6 Phil.
action. The action is not based upon the dishonored drafts which were accepted by B. Rep., 314), it appeared that one Brown has signed the name of the defendant bank as
Hernandez in the name of the Orientalist Company; and although these drafts, as well as guarantor of a promissory note. The bank was sued upon this guaranty and at the hearing
the last draft, which was accepted by B. Hernandez individually, have been introduced in attempted to prove that Brown had no authority to bind the bank by such contract. It was
evidence, this was evidently done for the purpose of proving the amount of damages which held that buy failing to deny the contract under oath, the bank had admitted the genuineness
the plaintiff was entitled to recover. and due execution thereof, and that this admission extended not only to the authenticity of
the signature of Brown but also to his authority. Said Justice Willard: "The failure of the
In the discussion which is to follow we shall consider, first, the question of the liability of the defendant to deny the genuineness and due execution of this guaranty under oath was an
corporation upon the contracts contained in the letters of July 30 and August 5, 1913, and, admission not only of the signature of Brown, but also his authority to make the contract in
secondly the question of the liability of Ramon J. Fernandez, based upon his personal behalf of the defendant and of the power the contract in behalf of the defendant and of the
signature to the same documents. power of the defendant to enter into such a contract.

As to the liability of the corporation a preliminary point of importance arises upon the The rule thus stated is in entire accord with the doctrine prevailing in the United States, as
pleadings. The action, as already stated, is based upon documents purporting to be signed will be seen by reference to the following, among other authorities:
by the Orientalist Company, and copies of the documents are set out in the complaint. It was
therefore incumbent upon the corporation, if it desired to question the authority of Fernandez The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining
to bind it, to deny the due execution of said contracts under oath, as prescribed in section corporation upon an appeal bond. The name of the company had been affixed to the
103 of the Code of Civil procedure. Said section, in the part pertinent to the situation now obligation by an agent, and no sufficient affidavit was filed by the corporation questioning its
under consideration, reads as follows: signature or the authority of the agent to bind the company. It was held that the plaintiff did
not have to prove the due execution of the bond and that the corporation as to be taken as
When an action is brought upon a written instrument and the complaint contains or admitting the authority of the agent to make the signature. Among other things the court
has annexed or has annexed a copy of such instrument, the genuineness and due said: "But it is said that the authority of Barrett to execute the bond is distinguishable from
execution of the instrument shall be deemed admitted, unless specifically denied the signing and, although the signature must be denied under oath, the authority of the
under oath in the answer. agent need not be. Upon this we observe that the statute manifestly refers to the legal effect
of the signature, rather than the manual act of singing. If the name of the obligor, in a bond,
No sworn answer denying the genuineness and due execution of the contracts in question is subscribed by one in his presence, and by his direction, the effect is the same as if his
or questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was name should be signed with his own hand, and under such circumstances we do not doubt
filed in this case; but evidence was admitted without objection from the plaintiff, tending to that the obligor must deny his signature under oath, in order to put the obligee to proof of the
show that Ramon J. Fernandez had no such authority. This evidence consisted of extracts fact. Quit facit per aliam facit per se, and when the name is signed by one thereunto
from the minutes of the proceedings of the company's board of directors and also of extracts authorized, it is as much as the signature of the principal as if written with his own hand.
from the minutes of the proceedings of the company's stockholders, showing that the Therefore, if the principal would deny the authority of the agent, as the validity of the
making of this contract had been under consideration in both bodies and that the authority to signature is thereby directly attacked, the denial must be under oath.
make the same had been withheld by the stockholders. It therefore becomes necessary for
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory officer or agent to execute in its behalf the contract upon which the action brought
note purporting to have been given by on A. B., as the treasurer of the defendant company. and where it intends to defend on the ground of total want of power in the corporation
Said the court: "Under the Judiciary Act of 1799, requiring the defendant to deny on oath an to make such a contract. (Opus citat. sec. 7619.)
instrument of writing, upon which he is sued, the plea in this case should have been verified.
In Simon vs. Calfee (80 Ark., 65), it was said:
If the person who signed this note for the company, and upon which they are sued, was not
authorized to make it, let them say so upon oath, and the onus is then on the plaintiff to Though the power of the officers of a business corporation to issue negotiable paper
overcome the plea." in its name is not presumed, such corporation can not avail itself of a want of power
in its officers to bind it unless the defense was made on such ground.
It should be noted that the provision contained in section 103 of our Code of Civil Procedure
is embodied in some form or other in the statutes of probably all of the American States, and The rule has been applied where the question was whether corporate officer, having
it is not by any means peculiar to the laws of California, though it appears to have been admitted power to make a contract, had in the particular instance exceeded that authority,
taken immediately from the statutes of that State. (Secs. 447, 448, California Code of Civil (Merill vs. Consumers' Coal Co., 114 N.Y., 216); and it has been held that where the answer
Procedure.) in a suit against a corporation on its note relies simply on the want of power of the
corporation to issue notes, the defendant can not afterwards object that the plaintiff has not
There is really a broader question here involved than that which relates merely to the shown that the officer executing the note were empowered to do so. (Smith vs. Eureka Flour
formality of verifying the answer with an affidavit. This question arises from the circumstance Mills Co., 6 Cal., 1.)
that the answer of the corporation does not in any was challenge the authority of Ramon J.
Fernandez to bind it by the contracts in question and does not set forth, as a special The reason for the rule enunciated in the foregoing authorities will, we think, be readily
defense, any such lack of authority in him. Upon well-established principles of pleading lack appreciated. In dealing with corporations the public at large is bound to rely to a large extent
of authority in an officer of a corporation to bind it by a contract executed by him in its name upon outward appearances. If a man is found acting for a corporation with the external
is a defense which should be specially pleaded — and this quite apart from the requirement, indicia of authority, any person, not having notice of want of authority, may usually rely upon
contained in section 103, that the answer setting up such defense should be verified by those appearances; and if it be found that the directors had permitted the agent to exercise
oath. But is should not here escape observation that section 103 also requires — in denial that authority and thereby held him out as a person competent to bind the corporation, or
contemplated in that section shall be specific. An attack on the instrument in general terms had acquiesced in a contract and retained the benefit supposed to have been conferred by
is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., it, the corporation will be bound, notwithstanding the actual authority may never have been
254.) granted. The public is not supposed nor required to know the transactions which happen
around the table where the corporate board of directors or the stockholders are from time to
In the first edition of a well-known treatise on the laws of corporations we find the following time convoked. Whether a particular officer actually possesses the authority which he
proposition: assumes to exercise is frequently known to very few, and the proof of it usually is not readily
accessible to the stranger who deals with the corporation on the faith of the ostensible
If an action is brought against a corporation upon a contract alleged to be its authority exercised by some of the corporate officers. It is therefore reasonable, in a case
contract, if it desires to set up the defense that the contract was executed by one not where an officer of a corporation has made a contract in its name, that the corporation
authorized as its agent, it must plead non est factum. (Thompson on Corporations, should be required, if it denies his authority, to state such defense in its answer. By this
1st ed., vol. 6, sec. 7631.) means the plaintiff is apprised of the fact that the agent's authority is contested; and he is
given an opportunity to adduce evidence showing either that the authority existed or that the
Again, says the same author: contract was ratified and approved.

A corporation can not avail itself of the defense that it had no power to enter into the We are of the opinion that the failure of the defendant corporation to make any issue in its
obligation to enforce which the suit is brought, unless it pleads that defense. This answer with regard to the authority of Ramon J. Fernandez to bind it, and particularly its
principle applies equally where the defendant intends to challenge the power of its failure to deny specifically under oath the genuineness and due execution of the contracts
sued upon, have the effect of elimination the question of his authority from the case,
considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written copy of the release. The execution of the release was not denied under oath; but at the trial
instrument, the foundation of the suit, is not denied upon oath, it shall be deemed to be evidence was submitted on behalf of the plaintiff tending to show that at the time he signed
admitted. It is familiar doctrine that an admission made in a pleading can not be the release, he was incompetent by reason of drunkenness to bind himself thereby. It was
controverted by the party making such admission; and all proof submitted by him contrary held that inasmuch as this evidence had been submitted by the plaintiff without objection, it
thereto or inconsistent therewith should simply be ignored by the court, whether objection is was proper for the court to consider it. We do not question the propriety of that decision,
interposed by the opposite party or not. We can see no reason why a constructive especially as the issue had been passed upon by a jury; but we believe that the decision
admission, created by the express words of the statute, should be considered to have less would have been more soundly planted if it had been said that the incapacity of the plaintiff,
effect than any other admission. due to his drunken condition, was a matter which did not involve either the genuineness or
due execution of the release. Like the defenses of fraud, coercion, imbecility, and mistake, it
The parties to an action are required to submit their respective contentions to the court in was a matter which could be proved under the general issue and did not have to be set up
their complaint and answer. These documents supply the materials which the court must in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar
use in order to discover the points of contention between the parties; and where the statute explanation can, we think, be given of the case of Clark vs. Child in which the rule declared
says that the due execution of a document which supplies the foundation of an action is to in the earlier case was followed. With respect to both decisions which we merely observe
be taken as admitted unless denied under oath, the failure of the defendant to make such that upon point of procedure which they are supposed to maintain, the reasoning of the
denial must be taken to operate as a conclusive admission, so long as the pleadings remain court is in our opinion unconvincing.
that form.
We shall now consider the liability of the defendant company on the merits just as if that
It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial liability had been properly put in issue by a specific answer under oath denying the authority
variances between the allegations of a pleading and the proof shall be disregarded and the of Fernandez go to bind it. Upon this question it must at the outset be premised that Ramon
facts shall be found according to the evidence. The same section, however, recognizes the J. Fernandez, as treasurer, had no independent authority to bind the company by signing its
necessity for an amendment of the pleadings. And judgment must be in conformity with the name to the letters in question. It is declared by signing its name to the letters in question. It
case made in conformity with the case made in the pleadings and established by the proof, is declared in section 28 of the Corporation Law that corporate power shall be exercised,
and relief can not be granted that is substantially inconsistent with either. A party can no and all corporate business conducted by the board of directors; and this principle is
more succeed upon a case proved but not alleged than upon a case alleged but nor proved. recognized in the by-laws of the corporation in question which contain a provision declaring
This rule of course operates with like effect upon both parties, and applies equality to the that the power to make contracts shall be vested in the board of directors. It is true that it is
defendants special defense as to the plaintiffs cause of action. also declared in the same by-laws that the president shall have the power, and it shall be his
duty, to sign contract; but this has reference rather to the formality of reducing to proper
Of course this Court, under section 109 of the Code of Civil Procedure, has authority even form the contract which are authorized by the board and is not intended to confer an
now to permit the answer of the defendant to be amended; and if we believed that the independent power to make contract binding on the corporation.
interests of justice so required, we would either exercise that authority or remand the cause
for a new trial in court below. As will appear further on in this opinion, however, we think that The fact that the power to make corporate contract is thus vested in the board of directors
the interests of justice will best be promoted by deciding the case, without more ado, upon does not signify that a formal vote of the board must always be taken before contractual
the issues presented in the record as it now stands. liability can be fixed upon a corporation; for the board can create liability, like an individual,
by other means than by a formal expression of its will. In this connection the case of Robert
That we may not appear to have overlooked the matter, we will observe that two cases are Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there appeared that
cited from California in which the Supreme Court of the State has held that where a release the secretary of the defendant corporation had signed an obligation on its behalf binding it
is pleaded by way of defense and evidence tending to destroy its effect is introduced without as guarantor of the performance of an important contract upon which the name of another
objection, the circumstance that it was not denied under oath is immaterial. In the earlier of corporation appeared as principal. The defendant company set up by way of defense that is
these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a secretary had no authority to bind it by such an engagement. The court found that the
railroad company to recover damages for the death of the plaintiff's minor son, alleged to guaranty was given with the knowledge and consent of the president and directors, and that
have been killed by the negligence of the defendant. The defendant company pleaded by this consent of the president and directors, and that this consent was given with as much
way of defense a release purporting to be signed by the plaintiff, and in its answer inserted a observance of formality as was customary in the transaction of the business of the
company. It was held that, so far as the authority of the secretary was concerned, the The possibility that the corporation might not see fit to authorize the contract, or might for
contract was binding. In discussing this point, the court quoted with approval the following lack of funds be unable to make the necessary outlay, was foreseen; and in such
language form one of its prior decisions: contingency the stockholders were informed, that the four gentlemen above mentioned
(Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their
The authority of the subordinate agent of a corporation often depends upon the own account and risk, and shall be entitled only to a compensation of 10 per cent of their
course of dealings which the company or its director have sanctioned. It may be outlay in importing the films, said payment to be made in shares of said corporation,
established sometimes without reference to official record of the proceedings of the inasmuch as the corporation is lacking available funds for the purpose, and also because
board, by proof of the usage which the company had permitted to grow up in there are 88 shares of stock remaining still unsold."
business, and of the acquiescence of the board charged with the duty of supervising
and controlling the company's business. In view of this statement, the stockholders adopted a resolution to the effect that the
agencies of the Eclair and Milano films should be accepted, if the corporation could obtain
It appears in evidence, in the case now before us, that on July 30, the date upon which the the money with which to meet the expenditure involved, and to this end appointed a
letter accepting the offer of the Eclair films was dispatched the board of directors of the committee to apply to the bank for a credit. The evidence shows that an attempt was made,
Orientalist Company convened in special session in the office of Ramon J. Fernandez at the on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine
request of the latter. There were present the four members, including the president, who had Islands for the purpose indicated, but the bank declined to grant his credit. Thereafter
already signified their consent to the making of the contract. At this meeting, as appears another special meeting of the shareholders of the defendant corporation was called at
from the minutes, Fernandez informed the board of the offer which had been received from which the failure of their committee to obtain a credit from the bank was made known. A
the plaintiff with reference to the importation of films. The minutes add that terms of this offer resolution was thereupon passed to the effect that the company should pay to Hernandez,
were approved; but at the suggestion of Fernandez it was decided to call a special meeting Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in importing
of the stockholders to consider the matter and definite action was postponed. the films, said payment to be made in shares of the company in accordance with the
suggestion made at the previous meeting. At the time this meeting was held three shipment
The stockholders meeting was convoked upon September 18, 1913, upon which occasion of the films had already been received in Manila.
Fernandez informed those present of the offer in question and of the terms upon which the
films could be procured. He estimated that the company would have to make an outlay of We believe it is a fair inference from the recitals of the minutes of the stockholders meeting
about P5,500 per month, if the offer for the two films should be accepted by it. of September 18, and especially from the first paragraph above quoted, that this body was
then cognizant that the officer had already been accepted in the name of the Orientalist
The following extracts from the minutes of this meeting are here pertinent: Company and that the films which were then expected to arrive were being imported by
virtue of such acceptance. Certainly four members of the board of directors there present
Mr. Fernandez informed the stockholders that, in view of the urgency of the matter were aware of this fact, as the letter accepting the offer had been sent with their knowledge
and for the purpose of avoiding that other importers should get ahead of the and consent. In view of this circumstance, a certain doubt arises whether they meant to
corporation in this regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr. utilize the financial assistance of the four so-called importers in order that the corporation
Papa met for the purpose of considering the acceptance of the offer together with the might bet the benefit of the contract for the films, just as it would have utilized the credit of
responsibilities attached thereto, made to the corporation by the film manufacturers the bank if such credit had been extended. If such was the intention of the stockholders their
of Eclair and Milano of Paris and Italy respectively, inasmuch as the first shipment of action amounted to a virtual, though indirect, approval of the contract. It is not however,
films was then expected to arrive. necessary to found the judgment on this interpretation of the stockholders proceedings,
inasmuch as we think for reasons presently to be stated, that the corporation is bound, and
At the same time he informed the said stockholders that he had already made we will here assume that in the end the contract were not approved by the stockholders.
arrangements with respect to renting said films after they have been once exhibited
in the Cine Oriental, and that the corporation could very well meet the expenditure It will be observed that Ramon J. Fernandez was the particular officer and member of the
involved and net a certain profit, but that, if we could enter into a contract with about board of directors who was most active in the effort to secure the films for the corporation.
nine cinematographs, big gains would be obtained through such a step. The negotiations were conducted by him with the knowledge and consent of other members
of the board; and the contract was made with their prior approval. As appears from the
papers in this record, Fernandez was the person to who keeping was confided the printed to do beyond electing directors, making by-laws, and exercising certain other special powers
stationery bearing the official style of the corporation, as well as rubber stencil with which defined by-law. In conformity with this idea it is settled that contract between a corporation
the name of the corporation could be signed to documents bearing its name. and third person must be made by the director and not by the stockholders. The corporation,
in such matters, is represented by the former and not by the latter. (Cook on Corporations,
Ignoring now, for a moment, the transactions of the stockholders, and reverting to the sixth ed., secs. 708, 709.) This conclusion is entirely accordant with the provisions of section
proceedings of the board of directors of the Orientalist Company, we find that upon October 28 of our Corporation Law already referred to. It results that where a meeting of the
27, 1913, after Fernandez had departed from the Philippine Islands, to be absent for many stockholders is called for the purpose of passing on the propriety of making a corporate
months, said board adopted a resolution conferring the following among other powers on contract, its resolutions are at most advisory and not in any wise binding on the board.
Vicente Ocampo, the manager of the Oriental theater, namely:
In passing upon the liability of a corporation in cases of this kind it is always well to keep in
(1) To rent a box for the films in the "Kneeler Building." mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and
(4) To be in charge of the films and of the renting of the same. he must necessarily rely upon the external manifestations of corporate consent. The
integrity of commercial transactions can only be maintained by holding the corporation
(5) To advertise in the different newspapers that we are importing films to be strictly to the liability fixed upon it by its agents in accordance with law, and we would be
exhibited in the Cine Oriental. sorry to announce a doctrine which would permit the property of a man in the city of Paris to
be whisked out of his hands and carried into a remote quarter of the earth without recourse
(6) Not to deliver any film for rent without first receiving the rental therefor or the against the corporations whose name and authority had been used in the manner disclosed
guaranty for the payment thereof. in this case. As already observed, it is familiar doctrine that if a corporation knowingly
permits one of its officer, or any other agent, to do acts within the scope of an apparent
authority, and thus hold him out to the public as possessing power to do those acts, the
(7) To buy a book and cards for indexing the names of the films.
corporation will as against any one who has in good faith dealt with the corporation through
such agent, be estopped from denying his authority; and where it is said "if the corporation
(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the permits" this means the same as "if the thing is permitted by the directing power of the
Hon. R. Acuña to enter into agreements with cinematograph proprietors in the corporation."
provinces for the purpose of renting films from us.
It being determined that the corporation is bound by the contract in question, it remains to
It thus appears that the board of directors, before the financial inability of the corporation to consider the character of the liability assumed by R. J. Fernandez, in affixing his personal
proceed with the project was revealed, had already recognized the contract as being in signature to said contract. The question here is whether Fernandez is liable jointly with the
existence and had proceeded to take the steps necessary to utilize the films. Particularly Orientalists Company as a principal obligor, or whether his liability is that of a guarantor
suggestive is the direction given at this meeting for the publication of announcements in the merely.
newspapers to the effect that the company was engaged in importing films. In the light of all
the circumstances of the case, we are of the opinion that the contracts in question were thus
As appears upon the face of the contracts, the signature of Fernandez, in his individual
inferentially approved by the company's board of directors and that the company is bound
capacity, is not in line with the signature of the Orientalist Company, but is set off to the left
unless the subsequent failure of the stockholders to approve said contracts had the effect of
of the company's signature and somewhat who sign contracts in some capacity other than
abrogating the liability thus created.
that of principal obligor to place their signature alone would justify a court in holding that
Fernandez here took upon himself the responsibility of a guarantor rather than that of a
Both upon principle and authority it is clear that the action of the stockholders, whatever its principal obligor. We do, however, think, that the form in which the contract is signed raises
character, must be ignored. The functions of the stockholders of a corporation are, it must a doubt as to what the real intention was; and we feel justified, in looking to the evidence to
be remembered, of a limited nature. The theory of a corporation is that the stockholders may discover that intention. In this connection it is entirely clear, from the testimony of both
have all the profits but shall turn over the complete management of the enterprise to their Ramirez and Ramon J. Fernandez, that the responsibility of the latter was intended to be
representatives and agents, called directors. Accordingly, there is little for the stockholders that of guarantor. There is, to be sure, a certain difference between these witnesses as to
the nature of this guaranty, inasmuch as Fernandez would have us believe that his name
was signed as a guaranty that the contract would be approved by the corporation, while
Ramirez says that the name was put on the contract for the purpose of guaranteeing, not DAVIDE, JR., J.:
the approval of the contract, but its performance. We are convinced that the latter was the
real intention of the contracting parties.
Assailed in this petition for review is the decision of the respondent Court of Appeals
We are not unmindful of the force of that rule of law which declares that oral evidence is in C.A.-G.R. No. 61072-R, 1 promulgated on 21 December 1979, reversing the
admissible to show the character in which the signature was affixed. This conclusion is decision 2 of the then Court of First Instance (now Regional Trial Court) of Leyte
perhaps supported by the language of the second paragraph of article 1281 of the Civil dated 20 November 1975 in Civil Case No. 5064 entitled "Yao Ka Sin Trading versus
Code, which declares that if the words of a contract should appear contrary to the evident Prime White Cement Corporation."
intention of the parties, the intention shall prevail. But the conclusion reached is, we think,
deducible from the general principle that in case of ambiguity parol evidence is admissible to The root of this controversy is the undated letter-offer of Constancio B. Maglana,
show the intention of the contracting parties. President and Chairman of the Board of private respondent Prime White Cement
Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter
It should be stated in conclusion that as the issues in this case have been framed, the only referred to as YKS, which describes itself as "a business concern of single
question presented to this court is: To what extent are the signatory parties to the contract proprietorship," 3 and is represented by its manager, Mr. Henry Yao; the letter reads
liable to the plaintiff J. F. Ramirez? No contentious issue is raised directly between the as follows:
defendants, the Orientalist Company and Ramon H. Fernandez; nor does the present the
present action involve any question as to the undertaking of Fernandez and his three
associates to effect the importation of the films upon their own account and risk. Whether PRIME WHITE CEMENT CORPORATION
they may be bound to hold the company harmless is a matter upon which we express no 602 Cardinal Life Building
opinion. Herran Street, Manila

The judgment appealed from is affirmed, with costs equally against the two appellant. So Yao Ka Sin
ordered. Tacloban City

Torres, Johnson, Malcolm, Avanceña and Fisher, JJ., concur. Gentlemen:

We have the pleasure to submit hereby our firm offer to you under the
following quotations, terms, and conditions, to wit:

1). Commodity — Prime White Cement


G.R. No. L-53820 June 15, 1992
2). Price — At your option: a) P24.30 per 94 lbs. bag net,
YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner, FOB Cebu City; and b) P23.30 per 94 lbs. bag net, FOB
vs. Asturias Cebu.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT
CORPORATION, represented by its President-Chairman, CONSTANCIO B. 3). Quality — As fully specified in certificate No. 224-73
MALAGNA, respondents. by Bureau of Public Works, Republic of the Philippines.
4). Quantity — Forty-five Thousand (45,000) bags at 94 President &
lbs. net per bag withdrawable in guaranteed monthly Chairman
quantity of Fifteen Thousand (15,000) bags minimum
effective from June, 1973 to August 1973. CONFORME:

5). Delivery Schedule — Shipment be made within four YAO KA SIN TRADING
(4) days upon receipt of your shipping instruction. BY: (SGD) HENRY YAO

6). Bag/Container — a) All be made of Standard Kraft WITNESSES:


(water resistant paper, 4 ply, with bursting strength of 220
pounds, and b) Breakage allowance — additional four (SGD) T. CATINDIG (SGD) ERNESTO LIM
percent (4%) over the quantity of each shipment.
RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance
7). Terms of Payment — Down payment of PESOS: of the above offer, the sum of Pesos: TWO HUNDRED FORTY
TWO HUNDRED FORTY THREE THOUSAND THREE THOUSAND ONLY (P243,000.00) in the form of Producers'
(P243,000.00) payable on the signing of this contract and Bank of the Philippines Check No. C-153576 dated June 7, 1973.
the balance to be paid upon presentation of
corresponding shipping documents. PRIME WHITE
CEMENT
It is understood that in the event of a delay in our shipment, you hold CORPORATION
the option to discount any price differential resulting from a lower BY:
market price vis-a-vis the contract price. In addition, grant (sic) you the
option to extend this contract until the complete delivery of Forty Five (SGD)
Thousand (45,000) bags of 94 lbs. each is made by us. You are also CONSTANCIO
hereby granted the option to renew this contract under the same price, B. MAGLANA
terms and conditions. President &
Chairman 4
Please countersign on the space provided for below as your
acknowledgement and confirmation of the above transaction. Thank This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and
You. signed on 7 June 1973 in the office of Mr. Teodoro Catindig, Senior Vice-President
of the Consolidated Bank and Trust Corporation (Solid Bank). 5
Very truly yours,
The principal issue raised in this case is whether or not the aforesaid letter-offer, as
PRIME WHITE accepted by YKS, is a contract that binds the PWCC. The trial court rule in favor of
CEMENT the petitioner, but the respondent Court held otherwise.
CORPORATION
BY: (SGD) The records disclose the following material operative facts:
CONSTANCIO
B. MAGLANA
In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a
signing of Exhibit "A", the Board of Directors of PWCC disapproved the same; the follow-up to the letter of 15 August 1973; YKS insisted on the delivery of 45,030
rejection is evidenced by the following Minutes (Exhibit "10"): bags of white cement. 10

the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the
because of the alledged letter-contract adhered to by them, but must latter's attention to the statement of delivery dated 24 August 1973, particularly the
be understood as a new and separate contract, and has in no way to price change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu. 11
do with the letter-offer which they (sic) as consummated is by this
resolution totally disapproved and is unacceptable to the corporation. On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC insisting on
the full compliance with the terms of Exhibit "A" and informing the latter that it is
On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the exercising the option therein stipulated.
disapproval of Exhibit "A". Pursuant, however, to its decision with respect to the
10,000 bags of cement, it is issued the corresponding Delivery Order (Exhibit "4") On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the
and Official Receipt No. 0394 (Exhibit "5") for the payment of the same in the 2 November 1973 telegram, but this was returned to sender as unclaimed. 13
amount of P243,000.00 This is the same amount received and acknowledged by
Maglana in Exhibit "A". As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.

YKS accepted without protest both the Delivery and Official Receipts. On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last
time, compliance by the latter with its obligation under
While YKS denied having received a copy of Exhibit "1", it was established that the Exhibit "A". 14
original thereof was shown to Mr. Henry Yao; since no one would sign a receipt for
it, the original was left at the latter's office and this fact was duly noted in Exhibit "1" On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned
(Exhibit "l-A"). letter of 9 February 1974; PWCC reiterated the unenforceability of Exhibit "A". 15

On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a
4 August 1973 letter stating that it is "withdrawing or taking delivery of not less than complaint for Specific Performance with Damages against PWCC. The
10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V complaint 16 was based on Exhibit "A" and was docketed as Civil Case No. 5064.
Taurus." In said reply, PWCC reminded YKS of its (PWCC's) 5 July 1973 letter
(Exhibit "1") and told the latter that PWCC "only committed to you and which you In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath
correspondingly paid 10,000 bags of white cement of which 4,150 bags were already the material averments in the complaint and alleged that: (a) YKS "has no legal
delivered to you as of August 11, 1973. 6 Unfortunately, no copy of the said 4 personality to sue having no legal personality even by fiction to represent itself;" (b)
August 1973 letter of YKS was presented in evidence. Mr. Maglana, its President and Chairman, was lured into signing Exhibit "A"; (c) such
signing was subject to the condition that Exhibit "A" be approved by the Board of
On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in reply to the Directors of PWCC, as corporate commitments are made through it; (d) the latter
latter's letter of 15 August 1973. Enclosed in the reply was a copy of Exhibit "2". disapproved it, hence Exhibit "A" was never consummated and is not enforceable
While the records reveal that YKS received this reply also on 21 August 1973 against PWCC; (e) it agreed to sell 10,000 bags of white cement, not under Exhibit
(Exhibit "3" "A"), 8 it still denied having received it. Likewise, no copy of the so-called "A", but under a separate contract prepared by the Board; (f) the rejection by the
15 August 1973 letter was presented in evidence. Board of Exhibit "A" was made known to YKS through various letters sent to it,
copies of which were attached to the Answer as Annexes 1, 2 and 3; 18(g) YKS
knew, per Delivery Order 19 and Official Receipt 20 issued by PWCC, that only to the Board. While the president. may be tasked with the preparation of a contract,
10;000 bags were sold to it without any terms or conditions, at P24.30 per bag FOB it must first pass through the legal counsel and the comptroller of the corporation. 26
Asturias, Cebu; (h) YKS is solely to blame for the failure to take complete delivery of
10,000 bags for it did not send its boat or truck to PWCC's plant; and (i) YKS has, On 20 November 1975, after trial on the merits, the court handed down its decision
therefore, no cause of action. in favor of herein petitioner, the dispositive portion of which reads:

In its Counterclaim, PWCC asks for moral damages in the amount of not less than WHEREFORE, in view of the foregoing, judgment is hereby rendered:
P10,000.00, exemplary damages in the sum of P500,000.00 and attorney's fees in
the sum of P10,000.00. (1) Ordering defendant: to complete the delivery of
45,000 bags of prime white cement at 94 lbs. net per bag
On 24 July 1974, YKS filed its Answer to the Counterclaim. 21 at the price agreed, with a breakage allowance of empty
bags at 4% over the quantity agreed;
Issues having been joined, the trial court conducted a pre-trial. 22 On that occasion,
the parties admitted that according to the By-Laws of PWCC, the Chairman of the (2) Ordering defendant to pay P50,000.00, as moral
Board, who is also the President of the corporation, "has the power to execute and damages; P5,000.00 as exemplary damages; P3,000.00
sign, for and in behalf of the corporation, all contracts or agreements which the as attorney's fees; and the costs of these proceedings.
corporation enters into," subject to the qualification that "all the president's
actuations, prior to and after he had signed and executed said contracts, shall be SO ORDERED. 27
given to the board of directors of defendant Corporation." Furthermore, it was
likewise stated for the record "that the corporation is a semi-subsidiary of the In disregarding PWCC's theory, the trial court interpreted the provision of the By-
government because of the NIDC participation in the same, and that all contracts of Laws — granting its Board of Directors the power to enter into an agreement or
the corporation should meet the approval of the NIDC and/or the PNB Board contract of any kind with any person through the President, — to mean that the latter
because of an exposure and financial involvement of around P10 million therein. 23 may enter into such contract or agreement at any time and that the same is not
subject to the ratification of the board of directors but "subject only to the declared
During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding objects and purpose of the corporation and existing laws." It then concluded:
upon it because Mr. Maglana was not authorized to make the offer and sign the
contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board of It is obvious therefore, that it is not the whole membership of the board
Directors has the power . . . (7) To enter into (sic) agreement or contract of any kind of directors who actually enters into any contract with any person in the
with any person in the name and for and in behalf of the corporation through its name and for and in behalf of the corporation, but only its president. It
President, subject only to the declared objects and purpose of the corporation and is likewise crystal clear that this automatic representation of the board
the existing provisions of law. 24 Among the powers of the President is "to operate by the president is limited only by the "declared objects and purpose of
and conduct the business of the corporation according to his own judgment and the corporation and existing provisions of law." 28
discretion, whenever the same is not expressly limited by such orders, directives or
resolutions." 25 Per standard practice of the corporation, contracts should first pass It likewise interpreted the provision on the power of the president to "operate and
through the marketing and intelligence unit before they are finalized. Because of its conduct the business of the corporation according to the orders, directives or
interest in the PWCC, the NIDC, through its comptroller, goes over contracts resolutions of the board of directors and according to his own judgment and
involving funds of and white cement produced by the PWCC. Finally, among the discretion whenever the same is not expressly limited by such orders, directives and
duties of its legal counsel is to review proposed contracts before they are submitted resolutions," to mean that the president can operate and conduct the business of the
corporation according to his own judgment and discretion as long as it is not
expressly limited by the orders, directives or resolutions of the board of THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A
directors. 29 The trial court found no evidence that the board had set a prior VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE
limitation upon the exercise of such judgment and discretion; it further ruled that the PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY
By-Laws, does not require that Exhibit "A" be approved by the Board of Directors. ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED
Finally, in the light of the Chairman's power to "execute and sign for and in behalf of PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED TO
the corporation all contracts or agreements which the corporation may enter into" BE ENTERED INTO OR LATER ON RATIFIED BY THE
(Exhibit "I-1"), it concluded that Mr. Maglana merely followed the By-Laws DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A" WAS
"presumably both as president and chairman of the board thereof." 30Hence, Exhibit TOTALLY REJECTED AND DISAPPROVED IN TOTO BY THE
"A" was validly entered into by Maglana and thus binds the corporation. DEFENDANT'S BOARD OF DIRECTORS IN CLEAR, PLAIN
LANGUAGE AND DULY INFORMED AND TRANSMITTED TO
The trial court, however, ruled that the option to sell is not valid because it is not PLAINTIFF.
supported by any consideration distinct from the price; it was exercised before
compliance with the original contract by PWCC; and the repudiation of the original II
contract by PWCC was deemed a withdrawal of the option before acceptance by the
petitioner. THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN
LEGALLY UTILIZE THE COURTS AS THE FORUM TO GIVE LIFE
Both parties appealed from the said decision to the respondent Court of Appeals AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-
before which petitioner presented the following Assignment of Errors: EXISTING CONTRACT.

I III

THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN
RENEW THE CONTRACT OF SALE IS NOT ENFORCEABLE AND CONTRADICT HIS VERY OWN ACTUATIONS AND
BECAUSE THE OPTION WAS MADE EVEN BEFORE THE REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS
COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY FROM THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS
DEFENDANT AND THAT DEFENDANT'S PROMISE TO SELL IS OF CEMENT ONLY, UNDER THE PRICE, TERMS AND
NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT
THE PRICE. FROM THOSE WHICH APPEAR IN EXHIBIT "A".

II IV

THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S
ACTUAL DAMAGES, SUFFICIENT EXEMPLARY DAMAGES AND COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY
ATTORNEY'S FEES AS ALLEGED IN THE COMPLAINT AND CLEAR AND INDUBITABLE EVIDENCE. 32
PROVEN DURING THE TRIAL." 31
In its decision 33 promulgated on 21 December 1979, the respondent Court
while the private respondent cited the following errors: reversed the decision of the trial court, thus:

I
WHEREFORE, the judgment appealed from is REVERSED and set 3. Letter dated August 21, 1973 to plaintiff reiterating
aside, Plaintiff's complaint is dismissed with costs. Plaintiff is ordered defendant's letter of August 4, 1973 (Annex "3" to
to pay defendant corporation P25,000.00 exemplary damages, and defendant's Answer).
P10,000.00 attorney's fees.
4. Letter to stores dated August 21, 1973,
SO ORDERED.
5. Receipt from plaintiff (sic) P243,000.00 in payment of
Such conclusion is based on its findings, to wit: 10,000 bags of white cement at P24.30 per bag (Annex
"5", to defendant's Answer).
Before resolving the issue, it is helpful to bring out some preliminary
facts. First, the defendant corporation is supervised and principally plaintiff is deemed to have admitted, not only the due execution and
financed by the National Investment and Development Corporation genuiness (sic) of said documents, (Rule 8 Sec. 8, Rules of Court) but
(NIDC), a subsidiary investment of the Philippine National Bank (PNB), also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the
with cash financial exposure of some P10,000,000.00. PNB is a foregoing documents tend to prove that the letter-offer, Exhibit "A", was
government financial institution whose Board is chairmaned (sic) by rejected by defendant corporation's Board of Directors and plaintiff was
the Minister of National Defense. This fact is very material to the issue duly notified thereof and that the P243,000.00 check was considered
of whether defendant corporations president can bind the corporation by both parties as payment of the 10,000 bags of cement under a
with his own act. separate transaction. As proof of which plaintiff did not complain nor
protest until February 9, 1974, when he threatened legal action.
Second, for failure to deny under oath the following actionable
documents in support of defendant's counterclaim: Third, Maglana's signing the letter-offer prepared for him in the
Solidbank was made clearly upon the condition that it was subject to
1. The resolution contained in defendant's letter to the approval of the board of directors of defendant corporation. We find
plaintiff dated July 5, 1973, on the 10,000 bags of white consistency herein because according to the Corporation Law, and the
cement delivered to plaintiff was not by reason of the By-Laws of defendant corporation, all corporate commitments and
letter contract, Exhibit "A", which was totally disapproved business are conducted by, and contracts entered into through, the
by defendant corporation's board of directors, clearly express authority of the Board of Directors (Sec. 28. Corp. Law, Exh "I"
stating that "If within ten (10) days from date hereof, we or "8").
will not hear from you but you will withdraw cement at
P24.30 per bag from our plant, then we will deposit your Fourth, What Henry Yao and Maglana agreed upon as embodied in
check of P243,000.00 dated June 7, 1973 issued by the Exhibit "A", insofar as defendant corporation is concerned, was an
Producers Bank of the Philippines, per instruction of the unauthorized contract (Arts. 1317 and 1403 (1), Civil Code). And
Board." (Annex "I" to defendant's Answer). because Maglana was not authorized by the Board of Directors of
defendant corporation nor was his, actuation ratified by the Board, the
2. Letter of defendant to plaintiff dated August 4, 1973 agreement is unenforceable (Art. 1403 (1), Civil Code; Raquiza et al.
that defendant "only committed to you and which you vs. Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43 O-
accordingly paid 10,000 bags of white cement of which G. 3224).
4,150 bags were already delivered to you as of August 1,
1973" (Annex "2" of defendant's Answer).
While it may be true that Maglana is President of defendant We gave due course 37 to the petition after private respondent filed its
corporation nowhere in the Articles of Incorporation nor in the By-Laws Comment 38 and required the parties to submit simultaneously their Memoranda,
of said corporation was he empowered to enter into any contract all by which the parties subsequently complied with. 39
himself and bind the corporation without first securing the authority and
consent of the Board of Directors. Whatever authority Maglana may Before going any further, this Court must first resolve an issue which, although
have must be derived from the Board of Directors of defendant raised in the Answer of private respondent, was neither pursued in its appeal before
corporation. A corporate officers power as an agent must be sought the respondent Court nor in its Comment and Memorandum in this case. It also
from the law, the articles of incorporation and the By-Laws or from a eluded the attention of the trial court and the respondent Court. The issue, which is
resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of of paramount importance, concerns the lack of capacity of plaintiff/petitioner to sue.
Liquidators vs. Kalaw, 20 SCRA 987). In the caption of both the complaint and the instant petition, the plaintiff and the
petitioner, respectively, is:
It clearly results from the foregoing that the judgment appealed from is
untenable. Having no cause of action against defendant corporation, YAO KA SIN TRADING,
plaintiff is not entitled to any relief. We see no justification, therefore, owned and operated by
for the court a quo's awards in its favor. . . . 34 YAO KA SIN. 40

Its motion for reconsideration having been denied by the respondent Court in its and is described in the body thereof as "a business concern of single proprietorship
resolution 35 dated 15 April 1980, petitioner filed the instant petition based on the owned and operated by Yao Ka Sin." 41 In the body of the petition, it is described as
following grounds: "a single proprietorship business concern." 42 It also appears that, as gathered from
the decision of the trial court, no Yao Ka Sin testified. Instead, one Henry Yao took
1. That the contract (Exh. "A") entered into by the President and the witness stand and testified that he is the "manager of Yao Ka Sin Trading" and "it
Chairman of the Board of Directors Constancio B. Maglana in behalf of was in representation of the plaintiff" that he signed Exhibit "A" 43 Under Section 1,
the respondent corporation binds the said corporation. Rule 3 of the Rules of Court, only natural or juridical persons or entities authorized
by law may be parties in a civil action. In Juasing Hardware vs. Mendoza, 44 this
2. That the contract (Exh. "A") was never novated nor superceded (sic) Court held that a single proprietorship is neither a natural person nor a juridical
by a subsequent contract. person under Article 44 of the Civil Code; it is not an entity authorized by law to bring
suit in court:
3. That the option to renew the contract as contained in Exhibit "A" is
enforceable. The law merely recognizes the existence of a sole proprietorship as a
form of business organization conducted for profit by a single
4. That Sec. 8, Rule 8 of the Rules of Court only applies when the individual, and requires the proprietor or owner thereof to secure
adverse party appear (sic) to be a party to the instrument but not to licenses and permits, register the business name, and pair taxes to the
one who is not a party to the instrument and Sec. 1, Rule 9 of the said national government. It does not vest juridical or legal personality upon
Rules with regards (sic) to denying under oath refers only to the sole proprietorship nor empower it to file or defend an action in
allegations of court. 45
usury. 36
Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46
The complaint then should have been amended to implead Yao Ka Sin as plaintiff in b) The power of the Chairman of the Board of Directors to "execute
substitution of Yao Ka Sin Trading. However, it is now too late in the history of this and sign, for and in behalf of the corporation, all contracts or
case to dismiss this petition and, in effect, nullify all proceedings had before the trial agreements which the corporation may enter into" (Exhibit "I-1").
court and the respondent Court on the sole ground of petitioner's lack of capacity to
sue. Considering that private respondent did not pursue this issue before the And even admitting, for the sake of argument, that Mr. Maglana was not so
respondent Court and this Court; that, as We held in Juasing, the defect is merely authorized under the By-Laws, the private respondent, pursuant to the doctrine laid
formal and not substantial, and an amendment to cure such defect is expressly down by this Court in Francisco vs. Government Service Insurance
authorized by Section 4, Rule 10 of the Rules of Court which provides that "[a] defect System 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his act for
in the designation of the parties may be summarily corrected at any stage of the clothing him with apparent authority.
action provided no prejudice is caused thereby to the adverse party;" and that "[a]
sole proprietorship does not, of coarse, possess any juridical personality separate We are not persuaded.
and apart from the personality of the owner of the enterprise and the personality of
the persons acting in the name of such proprietorship," 47 We hold and declare that Since a corporation, such as the private respondent, can act only through its officers
Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the and agents, "all acts within the powers of said corporation may be performed by
petitioner in the instant case. As this Court stated nearly eighty (80) years ago agents of its selection; and, except so far as limitations or restrictions may be
in Alonso vs. Villamor: 48 imposed by special charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural person govern the
No one has been misled by the error in the name of the party plaintiff. officer or agent of a corporation, of whatever status or rank, in respect to his power
If we should by reason of this error send this case back for amendment to act for the corporation; and agents when once appointed, or members acting in
and new trial, there would be on the retrial the same complaint, the their stead, are subject to the same rules, liabilities and incapacities as are agents of
same answer, the same defense, the same interests, the same individuals and private persons." 51 Moreover, " . . . a corporate officer or agent may
witnesses, and the same evidence. The name of the plaintiff would represent and bind the corporation in transactions with third persons to the extent
constitute the only difference between the old trial and the new. In our that authority to do so has been conferred upon him, and this includes powers which
judgment there is not enough in a name to justify such action. have been intentionally conferred, and also such powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the powers
And now to the merits of the petition. intentionally conferred, powers added by custom and usage, as usually pertaining to
the particular officer or agent, and such apparent powers as the corporation has
The respondent Court correctly ruled that Exhibit "A" is not binding upon the private caused persons dealing with the officer or agent to believe that it has conferred. 52
respondent. Mr. Maglana, its President and Chairman, was not empowered to
execute it. Petitioner, on the other hand, maintains that it is a valid contract because While there can be no question that Mr. Maglana was an officer — the President and
the Maglana has the power to enter into contracts for the corporation as implied from Chairman — of private respondent corporation at the time he signed Exhibit "A", the
the following provisions of the By-Laws of private respondent: above provisions of said private respondent's By-Laws do not in any way confer
upon the President the authority to enter into contracts for the corporation
a) The power of the Board of Directors to . . . enter into (sic) agreement independently, of the Board of Directors. That power is exclusively lodged in the
or contract of any kind with any person in the name and for and in latter. Nevertheless, to expedite or facilitate the execution of the contract, only the
behalf of the corporation through its President, subject only to the President — and not all the members of the Board, or so much thereof as are
declared objects and purpose of the corporation and the existing required for the act — shall sign it for the corporation. This is the import of the
provisions of law. (Exhibit "8-A"); and words through the presidentin Exhibit "8-A" and the clear intent of the power of the
chairman "to execute and sign for and in behalf of the corporation all contracts and
agreements which the corporation may enter into" in Exhibit "I-1". Both powers It was incumbent upon the petitioner to prove that indeed the private respondent had
presuppose a prior act of the corporation exercised through the Board of Directors. clothed Mr. Maglana with the apparent power to execute Exhibit "A" or any similar
No greater power can be implied from such express, but limited, delegated authority. contract. This could have been easily done by evidence of similar acts executed
Neither can it be logically claimed that any power greater than that expressly either in its favor or in favor of other parties. Petitioner miserably failed to do that.
conferred is inherent in Mr. Maglana's position as president and chairman of the Upon the other hand, private respondent's evidence overwhelmingly shows that no
corporation. contract can be signed by the president without first being approved by the Board of
Directors; such approval may only be given after the contract passes through, at
Although there is authority "that if the president is given general control and least, the comptroller, who is the NIDC representative, and the legal counsel.
supervision over the affairs of the corporation, it will be presumed that he has
authority to make contract and do acts within the course of its ordinary The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are
business," 53 We find such inapplicable in this case. We note that the private hopelessly unavailing to the petitioner. In said cases, this Court found sufficient
corporation has a general manager who, under its By-Laws has, inter alia, the evidence, based on the conduct and actuations of the corporations concerned, of
following powers: "(a) to have the active and direct management of the business and apparent authority conferred upon the officer involved which bound the corporations
operation of the corporation, conducting the same accordingly to the order, on the basis of ratification. In the first case, it was established that the offer of
directives or resolutions of the Board of Directors or of the president." It goes without compromise made by plaintiff in the letter, Exhibit "A", was validly accepted by the
saying then that Mr. Maglana did not have a direct and active and in the GSIS. The terms of the trial offer were clear, and over the signature of defendant's
management of the business and operations of the corporation. Besides, no general manager Rodolfo Andal, plaintiff was informed telegraphically that her
evidence was adduced to show that Mr. Maglana had, in the past, entered into proposal had been accepted. It was sent by the GSIS Board Secretary and
contracts similar to that of Exhibit "A" either with the petitioner or with other parties. defendant did not disown the same. Moreover, in a letter remitting the payment of
P30,000 advanced by her father, plaintiff quoted verbatim the telegram of
Petitioner's last refuge then is his alternative proposition, namely, that private acceptance. This was in itself notice to the corporation of the terms of the allegedly
respondent had clothed Mr. Maglana with the apparent power to act for it and had unauthorized telegram. Notwithstanding this notice, GSIS pocketed the amount and
caused persons dealing with it to believe that he was conferred with such power. kept silent about the telegram. This Court then ruled that:
The rule is of course settled that "[a]lthough an officer or agent acts without, or in
excess of, his actual authority if he acts within the scope of an apparent authority This silence, taken together with the unconditional acceptance of three
with which the corporation has clothed him by holding him out or permitting him to other subsequent remittances from plaintiff, constitutes in itself a
appear as having such authority, the corporation is bound thereby in favor of a binding ratification of the original agreement (Civil Code, Art. 1393).
person who deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect to the Art. 1393. Ratification may be effected expressly or tactly
business, or a particular branch of it, continuously and publicly, for a considerable it is understood that there is a tacit ratification if, with
time." 54 Also, "if a private corporation intentionally or negligently clothes its officers knowledge of the reason which renders the contract
or agents with apparent power to perform acts for it, the corporation will be estopped voidable and such reason having ceased, the person
to deny that such apparent authority in real, as to innocent third persons dealing in who has a right to invoke it should execute an act which
good faith with such officers or agents." 55 This "apparent authority may result from necessarily implies an intention to waive his right
(1) the general manner, by which the corporation holds out an officer or agent as
having power to act or, in other words, the apparent authority with which it clothes In the second case, this Court found:
him to act in general or (2) acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or without the scope of his In the case at bar, the practice of the corporation has been to allow its
ordinary powers. 56 general manager to negotiate and execute contracts in its copra
trading activities for and in NACOCO's behalf without prior board In any event, the option granted in. this case is without any consideration Article
approval. If the by-laws were to be literally followed, the board should 1324 of the Civil Code expressly provides that:
give its stamp of prior approval on all corporate contracts. But that
board itself, by its acts and through acquiescence, practically laid aside When the offerer has allowed the offeree a certain period to accept,
the by-laws requirement of prior approval. the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded
Under the given circumstances, the Kalaw contracts are valid upon a consideration, as something paid or promised.
corporate acts.
while Article 1749 of the same Code provides:
The inevitable conclusion then is that Exhibit "A" is an unenforceable contract under
Article 1317 of the Civil Code which provides as follows: A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
Art. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent An accepted unilateral promise to buy or to sell a determinate thing for
him. a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers, Accordingly, even if it were accepted, it can not validly bind the private
shall be unenforceable, unless it is ratified, expressly or impliedly, by respondent. 58
the person on whose behalf it, has been execrated, before it is revoked
by the other contracting party. The fourth ground is, however, meritorious.

The second ground is based on a wrong premise. It assumes, contrary to Our Section 8, Rule 8 of the Rules of Court provides:
conclusion above, that Exhibit "A" is a valid contract binding upon the private
respondent. It was effectively disapproved and rejected by the Board of Directors Sec. 8. How to contest genuineness of such documents — When an
which, at the same time, considered the amount of P243,000.00 received Mr. action or defense is founded upon a written instrument, copied in or
Maglana as payment for 10,000 bags of white cement, treated as an entirely attached in the corresponding pleading as provided in the preceding
different contract, and forthwith notified petitioner of its decision that "If within ten section, the genuineness and due execution of the instrument shall be
(10) days from date hereof we will not hear from you but you will withdraw cement at deemed admitted unless the adverse party, under oath, specifically
P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated denies them, and sets forth what he claims to be the facts; but this
June 7, 1973 issued by the Producers Bank of the Philippines, per instruction of the provision does not apply when the adverse party does not appear, to
Board." 57 Petitioner received the copy of this notification and thereafter accepted be a party to the instrument or when compliance with an order for an
without any protest the Delivery Receipt covering the 10,000 bags and the Official inspection of the original instrument is refused.
Receipt for the P243,000.00. The respondent Court thus correctly ruled that
petitioner had in fact agreed to a new transaction involving only 10,000 bags of white It is clear that the petitioner is not a party to any of the documents attached to the
cement. private respondent's Answer. Thus, the above quoted rule is not applicable. 59 While
the respondent Court, erred in holding otherwise, the challenged decision must,
The third ground must likewise fail. Exhibit "A" being unenforceable, the option to nevertheless, stand in view of the above disquisitions on the first to the third grounds
renew it would have no leg to stand on. The river cannot rise higher than its source. of the petition.
WHEREFORE, judgment is hereby rendered AFFIRMING the decision of Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational
respondent Court of Appeals in C.A. G.R. No. 61072-R promulgated on 21 corporation with fifteen (15) regular members, who also constitute the board of
December 1979. trustees. [4] During the annual members’ meeting held on April 6, 1998, there were only
eleven (11) [5] living member-trustees, as four (4) had already died. Out of the eleven, seven
(7) 6 attended the meeting through their respective proxies. The meeting was convened and
Cost against the petitioner.
chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued
that there was no quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia
Khoo, and Judith Tan were voted to replace the four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC), petitioners
maintained that the deceased member-trustees should not be counted in the computation of
G.R. No. 153468 August 17, 2006 the quorum because, upon their death, members automatically lost all their rights (including
the right to vote) and interests in the corporation.
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN,
JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for
PADILLA JR., EDUARDO P. LIZARES and GRACE CHRISTIAN HIGH lack of quorum. She held that the basis for determining the quorum in a meeting of members
SCHOOL, Petitioners, should be their number as specified in the articles of incorporation, not simply the number of
vs. living members. 8 She explained that the qualifying phrase "entitled to vote" in Section
PAUL SYCIP and MERRITTO LIM, Respondents. 24 9 of the Corporation Code, which provided the basis for determining a quorum for the
election of directors or trustees, should be read together with Section 89. 10
DECISION
The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it
PANGANIBAN, CJ.: prescribed the mode of filling vacancies in the board of trustees, must be interpreted in
conjunction with Section 29 12 of the Corporation Code. The SEC en banc denied the appeal
For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is of petitioners and affirmed the Decision of the hearing officer in toto. 13 It found to be
based on the number of outstanding voting stocks. For nonstock corporations, only those untenable their contention that the word "members," as used in Section 52 14 of the
who are actual, living members with voting rights shall be counted in determining the Corporation Code, referred only to the living members of a nonstock corporation. 15
existence of a quorum during members’ meetings. Dead members shall not be counted.
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and
The Case Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No
Special Power of Attorney had been attached to show his authority to sign for the rest of the
The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks petitioners.
the reversal of the January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals (CA)
in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal filed by Hence, this Petition. 16
petitioners with the CA. Allegedly, without the proper authorization of the other petitioners,
the Verification and Certification of Non-Forum Shopping were signed by only one of them -- Issues
Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.
Petitioners state the issues as follows:
The Facts
"Petitioners principally pray for the resolution of the legal question of whether or not in NON- Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that
STOCK corporations, dead members should still be counted in determination of quorum for Atty. Padilla was authorized to file the action on their behalf. 18
purposed of conducting the Annual Members’ Meeting.
In the interest of substantial justice, this initial procedural lapse may be excused. 19 There
"Petitioners have maintained before the courts below that the DEAD members should no appears to be no intention to circumvent the need for proper verification and certification,
longer be counted in computing quorum primarily on the ground that members’ rights are which are aimed at assuring the truthfulness and correctness of the allegations in the
‘personal and non-transferable’ as provided in Sections 90 and 91 of the Corporation Code Petition for Review and at discouraging forum shopping. 20 More important, the substantial
of the Philippines. merits of petitioners’ case and the purely legal question involved in the Petition should be
considered special circumstances 21 or compelling reasons that justify an exception to the
"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did strict requirements of the verification and the certification of non-forum shopping. 22
not even involve a non-stock corporation as petitioner GCHS.
Main Issue:
"The Honorable Court of Appeals on the other hand simply refused to resolve this question
and instead dismissed the petition for review on a technicality – the failure to timely submit Basis for Quorum
an SPA from the petitioners authorizing their co-petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to sign the petition on behalf of the rest of the Generally, stockholders’ or members’ meetings are called for the purpose of electing
petitioners. directors or trustees 23 and transacting some other business calling for or requiring the action
or consent of the shareholders or members, 24such as the amendment of the articles of
"Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not incorporation and bylaws, sale or disposition of all or substantially all corporate assets,
in accord with law particularly the pronouncements of this Honorable Court in Escorpizo v. consolidation and merger and the like, or any other business that may properly come before
University of Baguio (306 SCRA 497), Robern Development Corporation v. Quitain (315 the meeting.
SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have
been given the petition below and the merits of the case decided in petitioners’ favor." 17 Under the Corporation Code, stockholders or members periodically elect the board of
directors or trustees, who are charged with the management of the corporation. 25 The
In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the board, in turn, periodically elects officers to carry out management functions on a day-to-day
Petition below, on the basis of a defective Verification and Certification; and 2) whether dead basis. As owners, though, the stockholders or members have residual powers over
members should still be counted in the determination of the quorum, for purposes of fundamental and major corporate changes.
conducting the annual members’ meeting.
While stockholders and members (in some instances) are entitled to receive profits, the
The Court’s Ruling management and direction of the corporation are lodged with their representatives and
agents -- the board of directors or trustees. 26 In other words, acts of management pertain to
The present Petition is partly meritorious. the board; and those of ownership, to the stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of the stockholders or members. 27
Procedural Issue:
Conformably with the foregoing principles, one of the most important rights of a qualified
Verification and Certification of Non-Forum Shopping shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the
The Petition before the CA was initially flawed, because the Verification and Certification of corporate affairs. 28The right to choose the persons who will direct, manage and operate the
Non-Forum Shopping were signed by only one, not by all, of the petitioners; further, it failed corporation is significant, because it is the main way in which a stockholder can have a
to show proof that the signatory was authorized to sign on behalf of all of them. voice in the management of corporate affairs, or in which a member in a nonstock
corporation can have a say on how the purposes and goals of the corporation may be
achieved. 29 Once the directors or trustees are elected, the stockholders or members given proportion of the stock, it must be construed to mean the shares that have passed
relinquish corporate powers to the board in accordance with law. from the corporation, and that may be voted. 37

In the absence of an express charter or statutory provision to the contrary, the general rule Section 6 of the Corporation Code, in part, provides:
is that every member of a nonstock corporation, and every legal owner of shares in a stock
corporation, has a right to be present and to vote in all corporate meetings. Conversely, "Section 6. Classification of shares. – The shares of stock of stock corporations may be
those who are not stockholders or members have no right to vote. 30 Voting may be divided into classes or series of shares, or both, any of which classes or series of shares
expressed personally, or through proxies who vote in their representative may have such rights, privileges or restrictions as may be stated in the articles of
capacities. 31 Generally, the right to be present and to vote in a meeting is determined by the incorporation: Provided, That no share may be deprived of voting rights except those
time in which the meeting is held. 32 classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in
this Code: Provided, further, that there shall always be a class or series of shares which
Section 52 of the Corporation Code states: have complete voting rights.

"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by- xxxxxxxxx
laws, a quorum shall consist of the stockholders representing a majority of the outstanding
capital stock or a majority of the members in the case of non-stock corporations." "Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such shares shall nevertheless be entitled to vote on the following
In stock corporations, the presence of a quorum is ascertained and counted on the basis of matters:
the outstanding capital stock, as defined by the Code thus:
1. Amendment of the articles of incorporation;
"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding capital stock’ as
used in this Code, means the total shares of stock issued under binding subscription 2. Adoption and amendment of by-laws;
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares." (Underscoring supplied) 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporation property;
The Right to Vote in
4. Incurring, creating or increasing bonded indebtedness;
Stock Corporations
5. Increase or decrease of capital stock;
The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 It is
settled that unissued stocks may not be voted or considered in determining whether a 6. Merger or consolidation of the corporation with another corporation or other corporations;
quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock
of the corporation is voted to adopt a certain measure or act. Only stock actually issued and 7. Investment of corporate funds in another corporation or business in accordance with this
outstanding may be voted. 34 Under Section 6 of the Corporation Code, each share of stock Code; and
is entitled to vote, unless otherwise provided in the articles of incorporation or declared
delinquent 35 under Section 67 of the Code. 8. Dissolution of the corporation.
Neither the stockholders nor the corporation can vote or represent shares that have never "Except as provided in the immediately preceding paragraph, the vote necessary to approve
passed to the ownership of stockholders; or, having so passed, have again been purchased a particular corporate act as provided in this Code shall be deemed to refer only to stocks
by the corporation. 36 These shares are not to be taken into consideration in determining with voting rights."
majorities. When the law speaks of a
Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the In stock corporations, shareholders may generally transfer their shares. Thus, on the death
intention of the lawmakers was to base the quorum mentioned in Section 52 on the number of a shareholder, the executor or administrator duly appointed by the Court is vested with
of outstanding voting stocks. 38 the legal title to the stock and entitled to vote it. Until a settlement and division of the estate
is effected, the stocks of the decedent are held by the administrator or executor. 44
The Right to Vote in
On the other hand, membership in and all rights arising from a nonstock corporation are
Nonstock Corporations personal and non-transferable, unless the articles of incorporation or the bylaws of the
corporation provide otherwise. 45 In other words, the determination of whether or not "dead
In nonstock corporations, the voting rights attach to membership. 39 Members vote as members" are entitled to exercise their voting rights (through their executor or
persons, in accordance with the law and the bylaws of the corporation. Each member shall administrator), depends on those articles of incorporation or bylaws.
be entitled to one vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. 40 We hold that when the principle for determining the quorum for Under the By-Laws of GCHS, membership in the corporation shall, among others, be
stock corporations is applied by analogy to nonstock corporations, only those who are actual terminated by the death of the member. 46 Section 91 of the Corporation Code further
members with voting rights should be counted. provides that termination extinguishes all the rights of a member of the corporation, unless
otherwise provided in the articles of incorporation or the bylaws.
Under Section 52 of the Corporation Code, the majority of the members representing the
actual number of voting rights, not Applying Section 91 to the present case, we hold that dead members who are dropped from
the number or numerical constant that may originally be specified in the articles of the membership roster in the manner and for the cause provided for in the By-Laws of
incorporation, constitutes the quorum. 41 GCHS are not to be counted in determining the requisite vote in corporate matters or the
requisite quorum for the annual members’ meeting. With 11 remaining members, the
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase "majority quorum in the present case should be 6. Therefore, there being a quorum, the annual
vote of the members"; likewise Section 48 of the Corporation Code refers to 50 percent of members’ meeting, conducted with six 47 members present, was valid.
94 (the number of registered members of the association mentioned therein) plus one. The
best evidence of who are the present members of the corporation is the "membership book"; Vacancy in the
in the case of stock corporations, it is the stock and transfer book. 43
Board of Trustees
Section 25 of the Code specifically provides that a majority of the directors or trustees, as
fixed in the articles of incorporation, shall constitute a quorum for the transaction of As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation
corporate business (unless the articles of incorporation or the bylaws provide for a greater Code provides:
majority). If the intention of the lawmakers was to base the quorum in the meetings of
stockholders or members on their absolute number as fixed in the articles of incorporation, it "SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the
would have expressly specified so. Otherwise, the only logical conclusion is that the board of directors or trustees other than by removal by the stockholders or members or by
legislature did not have that intention. expiration of term, may be filled by the vote of at least a majority of the remaining directors
or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the
Effect of the Death stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in
of a Member or Shareholder office."

Having thus determined that the quorum in a members’ meeting is to be reckoned as the Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still
actual number of members of the corporation, the next question to resolve is what happens constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling of
in the event of the death of one of them. vacancies in the board by the remaining directors or trustees constituting a quorum is merely
permissive, not mandatory. 48 Corporations, therefore, may choose how vacancies in their DECISION
respective boards may be filled up -- either by the remaining directors constituting a quorum,
or by the stockholders or members in a regular or special meeting called for the purpose. 49 BRION, J.:

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its In this petition for review on certiorari,1 the parties raise a legal question on corporate
board of directors; that is, by a majority vote of the remaining members of the board. 50 governance: Can the members of a corporation’s board of directors elect another director to
fill in a vacancy caused by the resignation of a hold-over director?
While a majority of the remaining corporate members were present, however, the "election"
of the four trustees cannot be legally upheld for the obvious reason that it was held in an THE FACTUAL ANTECEDENTS
annual meeting of the members, not of the board of trustees. We are not unmindful of the
fact that the members of GCHS themselves also constitute the trustees, but we cannot On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle Verde
ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of
must be filled up by the remaining trustees. In other words, these remaining member- Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal
trustees must sit as a board in order to validly elect the new ones. (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee,
Augusto Sunico, and Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001,
Indeed, there is a well-defined distinction between a corporate act to be done by the board however, the requisite quorum for the holding of the stockholders’ meeting could not be
and that by the constituent members of the corporation. The board of trustees must act, not obtained. Consequently, the above-named directors continued to serve in the VVCC Board
individually or separately, but as a body in a lawful meeting. On the other hand, in their in a hold-over capacity.
annual meeting, the members may be represented by their respective proxies, as in the
contested annual members’ meeting of GCHS. On September 1, 1998, Dinglasan resigned from his position as member of the VVCC
Board. In a meeting held on October 6, 1998, the remaining directors, still constituting a
WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of the Court of quorum of VVCC’s nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy
Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the board of created by the resignation of Dinglasan.
trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in
the board, in accordance with this Decision. No pronouncement as to costs in this instance. A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC
Board. He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining
SO ORDERED. members of the VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the Securities and Exchange Commission
(SEC) and the Regional Trial Court (RTC), respectively. The SEC case questioning the
validity of Roxas’ appointment was docketed as SEC Case No. 01-99-6177. The RTC case
G.R. No. 151969 September 4, 2009 questioning the validity of Ramirez’ appointment was docketed as Civil Case No. 68726.

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was
AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines
FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board (Corporation Code). These provisions read:
of Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ,Petitioners,
vs. Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
VICTOR AFRICA, Respondent. corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from petition for review on certiorari, claiming that the sole issue in the present case involves a
among the members of the corporation, who shall hold office for one (1) year until their purely legal question.
successors are elected and qualified.
As framed by VVCC, the issue for resolution is whether the remaining directors of the
xxxx corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director.
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or by Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the
expiration of term, may be filled by the vote of at least a majority of the remaining directors resignation of a hold-over director is expressly granted to the remaining members of the
or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the corporation’s board of directors.
stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the
office. xxx. [Emphasis supplied.] board of directors caused by the expiration of a member’s term shall be filled by the
corporation’s stockholders. Correlating Section 29 with Section 23 of the same law, VVCC
Africa claimed that a year after Makalintal’s election as member of the VVCC Board in 1996, alleges that a member’s term shall be for one year and until his successor is elected
his [Makalintal’s] term – as well as those of the other members of the VVCC Board – should and qualified; otherwise stated, a member’s term expires only when his successor to the
be considered to have already expired. Thus, according to Africa, the resulting vacancy Board is elected and qualified. Thus, "until such time as [a successor is] elected or qualified
should have been filled by the stockholders in a regular or special meeting called for that in an annual election where a quorum is present," VVCC contends that "the term of [a
purpose, and not by the remaining members of the VVCC Board, as was done in this case. member] of the board of directors has yet not expired."

Africa additionally contends that for the members to exercise the authority to fill in vacancies As the vacancy in this case was caused by Makalintal’s resignation, not by the expiration of
in the board of directors, Section 29 requires, among others, that there should be an his term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.
unexpired term during which the successor-member shall serve. Since Makalintal’s term had
already expired with the lapse of the one-year term provided in Section 23, there is no more In support of its arguments, VVCC cites the Court’s ruling in the 1927 El Hogar6 case which
"unexpired term" during which Ramirez could serve. states:

Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of Owing to the failure of a quorum at most of the general meetings since the respondent has
Africa and declared the election of Ramirez, as Makalintal’s replacement, to the VVCC been in existence, it has been the practice of the directors to fill in vacancies in the
Board as null and void. directorate by choosing suitable persons from among the stockholders. This custom finds its
sanction in Article 71 of the By-Laws, which reads as follows:
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas
as member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested Art. 71. The directors shall elect from among the shareholders members to fill the vacancies
its intent to appeal from the SEC’s ruling, no petition was actually filed with the Court of that may occur in the board of directors until the election at the general meeting.
Appeals; thus, the appellate court considered the case closed and terminated and the SEC’s
ruling final and executory.5 xxxx

THE PETITION Upon failure of a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified. Unless the law or the
VVCC now appeals to the Court to assail the RTC’s January 23, 2002 partial decision for charter of a corporation expressly provides that an office shall become vacant at the
being contrary to law and jurisprudence. VVCC made a direct resort to the Court via a expiration of the term of office for which the officer was elected, the general rule is to allow
the officer to hold over until his successor is duly qualified. Mere failure of a corporation to
elect officers does not terminate the terms of existing officers nor dissolve the corporation. original term of office, nor is it a new term; the holdover period, however, constitutes part of
The doctrine above stated finds expression in article 66 of the by-laws of the respondent his tenure. Corollary, when an incumbent member of the board of directors continues to
which declares in so many words that directors shall hold office "for the term of one year or serve in a holdover capacity, it implies that the office has a fixed term, which has expired,
until their successors shall have been elected and taken possession of their offices." xxx. and the incumbent is holding the succeeding term.10

It results that the practice of the directorate of filling vacancies by the action of the After the lapse of one year from his election as member of the VVCC Board in 1996,
directors themselves is valid. Nor can any exception be taken to the personality of the Makalintal’s term of office is deemed to have already expired. That he continued to serve in
individuals chosen by the directors to fill vacancies in the body. [Emphasis supplied.] the VVCC Board in a holdover capacity cannot be considered as extending his term. To be
precise, Makalintal’s term of office began in 1996 and expired in 1997, but, by virtue of the
Africa, in opposing VVCC’s contentions, raises the same arguments that he did before the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his
trial court. resignation on November 10, 1998. This holdover period, however, is not to be considered
as part of his term, which, as declared, had already expired.
THE COURT’S RULING
With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of
We are not persuaded by VVCC’s arguments and, thus, find its petition unmeritorious. Section 2911 of the Corporation Code, must be filled by the stockholders of VVCC in a
regular or special meeting called for the purpose. To assume – as VVCC does – that the
To repeat, the issue for the Court to resolve is whether the remaining directors of a vacancy is caused by Makalintal’s resignation in 1998, not by the expiration of his term in
corporation’s Board, still constituting a quorum, can elect another director to fill in a vacancy 1997, is both illogical and unreasonable. His resignation as a holdover director did not
caused by the resignation of a hold-over director. The resolution of this legal issue is change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had
significantly hinged on the determination of what constitutes a director’s term of office. been created long before his resignation.

The holdover period is not part of the term of office of a member of the board of directors The powers of the corporation’s board of directors emanate from its stockholders

The word "term" has acquired a definite meaning in jurisprudence. In several cases, we VVCC’s construction of Section 29 of the Corporation Code on the authority to fill up
have defined "term" as the time during which the officer may claim to hold the office as of vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens the
right, and fixes the interval after which the several incumbents shall succeed one stockholders’ power to participate in the corporate governance by electing their
another.7 The term of office is not affected by the holdover.8 The term is fixed by statute and representatives to the board of directors. The board of directors is the directing and
it does not change simply because the office may have become vacant, nor because the controlling body of the corporation. It is a creation of the stockholders and derives its power
incumbent holds over in office beyond the end of the term due to the fact that a successor to control and direct the affairs of the corporation from them. The board of directors, in
has not been elected and has failed to qualify. drawing to themselves the powers of the corporation, occupies a position of trusteeship in
relation to the stockholders, in the sense that the board should exercise not only care and
Term is distinguished from tenure in that an officer’s "tenure" represents the term during diligence, but utmost good faith in the management of corporate affairs.12
which the incumbent actually holds office. The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons within or beyond the power of the incumbent. The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
Based on the above discussion, when Section 239 of the Corporation Code declares that election, and who have actually been elected by the stockholders, on an annual basis. Only
"the board of directors…shall hold office for one (1) year until their successors are elected in that way can the directors' continued accountability to shareholders, and the legitimacy of
and qualified," we construe the provision to mean that the term of the members of the board their decisions that bind the corporation's stockholders, be assured. The shareholder vote is
of directors shall be only for one year; their term expires one year after election to the office. critical to the theory that legitimizes the exercise of power by the directors or officers over
The holdover period – that time from the lapse of one year from a member’s election to the properties that they do not own.13
Board and until his successor’s election and qualification – is not part of the director’s
This theory of delegated power of the board of directors similarly explains why, under FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ
Section 29 of the Corporation Code, in cases where the vacancy in the corporation’s board and MINDANAO TERMINAL AND BROKERAGE SERVICES, INC., Petitioners,
of directors is caused not by the expiration of a member’s term, the successor "so elected to vs.
fill in a vacancy shall be elected only for the unexpired term of the his predecessor in office." VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO
The law has authorized the remaining members of the board to fill in a vacancy only in M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S.
specified instances, so as not to retard or impair the corporation’s operations; yet, in JAYME, ERNESTO S. JAYME, and ELIEZER B. DE JESUS, Respondents.
recognition of the stockholders’ right to elect the members of the board, it limited the period
during which the successor shall serve only to the "unexpired term of his predecessor in DECISION
office."
GARCIA, J.:
While the Court in El Hogar approved of the practice of the directors to fill vacancies in the
directorate, we point out that this ruling was made before the present Corporation Code was Assailed and sought to be set aside in this petition for review on certiorari is the
enacted14 and before its Section 29 limited the instances when the remaining directors can Decision1 dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 73827,
fill in vacancies in the board, i.e., when the remaining directors still constitute a quorum and reversing an earlier decision of the Regional Trial Court (RTC) of Davao City and
when the vacancy is caused for reasons other than by removal by the stockholders or by accordingly dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and in
expiration of the term.1avvphi1
behalf of the stockholders of co-petitioner Filipinas Port Services, Inc. (Filport, hereafter).

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy The case is actually an intra-corporate dispute involving Filport, a domestic corporation
occurring within the director’s term of office. When a vacancy is created by the expiration of engaged in stevedoring services with principal office in Davao City. It was initially instituted
a term, logically, there is no more unexpired term to speak of. Hence, Section 29 declares with the Securities and Exchange Commission (SEC) where the case hibernated and
that it shall be the corporation’s stockholders who shall possess the authority to fill in a remained unresolved for several years until it was overtaken by the enactment into law, on
vacancy caused by the expiration of a member’s term. 19 July 2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities
Regulation Code. From the SEC and consistent with R.A. No. 8799, the case was
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected transferred to the RTC of Manila, Branch 14, sitting as a corporate court. Subsequently,
Ramirez to replace Makalintal, there was no more unexpired term to speak of, as upon respondents’ motion, the case eventually landed at the RTC of Davao City where it
Makalintal’s one-year term had already expired. Pursuant to law, the authority to fill in the was docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor of
vacancy caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining the petitioners prompting respondents to go to the CA in CA-G.R. CV No. 73827. This time,
members of its board of directors. the respondents prevailed, hence, this petition for review by the petitioners.

WHEREFORE, we DENY the petitioners’ petition for review on certiorari, and AFFIRM the The relevant facts:
partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23,
2002, in Civil Case No. 68726. Costs against the petitioners. On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from 1968 until he lost
his bid for reelection as Filport’s president during the general stockholders’ meeting in 1991,
SO ORDERED. wrote a letter2 to the corporation’s Board of Directors questioning the board’s creation of the
following positions with a monthly remuneration of ₱13,050.00 each, and the election
thereto of certain members of the board, to wit:

Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)

G.R. No. 161886 March 16, 2007 Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director) In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite
demands made upon the respondent members of the board of directors to desist from
Asst. Vice-President for Administration - Henry Chua (Director) creating the positions in question and to account for the amounts incurred in creating the
same, the demands were unheeded. Cruz thus prayed that the respondent members of the
Special Asst. to the Chairman - Arsenio Lopez Chua (Director) board of directors be made to pay Filport, jointly and severally, the sums of money variedly
representing the damages incurred as a result of the creation of the offices/positions
Special Asst. to the President - Fortunato V. de Castro complained of and the aggregate amount of the questioned increased salaries.

In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover In their common Answer with Counterclaim,4 the respondents denied the allegations of
from those elected to the aforementioned positions the salaries they have received. mismanagement and materially averred as follows:

On 15 September 1992, the board met and took up Cruz’s letter. The records do not show 1. the creation of the executive committee and the grant of per diems for the
what specific action/actions the board had taken on the letter. Evidently, whatever attendance of each member are allowed under the by-laws of the corporation;
action/actions the board took did not sit well with Cruz.
2. the increases in the salaries/emoluments of the Chairman, Vice-President,
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among Treasurer and Assistant General Manager were well within the financial capacity of
which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), the corporation and well-deserved by the officers elected thereto; and
filed with the SEC a petition3 which he describes as a derivative suit against the herein
respondents who were then the incumbent members of Filport’s Board of Directors, for 3. the positions of AVPs for Corporate Planning, Operations, Finance and
alleged acts of mismanagement detrimental to the interest of the corporation and its Administration were already in existence during the tenure of Cruz as president of
shareholders at large, namely: the corporation, and were merely recreated by the Board, adding that all those
appointed to said positions of Assistant Vice Presidents, as well as the additional
1. creation of an executive committee in 1991 composed of seven (7) members of position of Special Assistants to the Chairman and the President, rendered services
the board with compensation of ₱500.00 for each member per meeting, an office to deserve their compensation.
which, to Cruz, is not provided for in the by-laws of the corporation and whose
function merely duplicates those of the President and General Manager; In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro,
while admittedly stockholders of Filport, have no authority nor standing to bring the so-called
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and "derivative suit" for and in behalf of the corporation; that respondent Mary Jean D. Co has
Assistant General Manager which increases are greatly disproportionate to the already ceased to be a corporate director and so with Fortunato V. de Castro, one of those
volume and character of the work of the directors holding said positions; holding an assailed position; and that no demand to cease and desist from further
committing the acts complained of was made upon the board. By way of affirmative
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate defenses, respondents asserted that (1) the petition is not duly verified by petitioner Filport
Planning, Operations, Finance and Administration, and the election thereto of board which is the real party-in-interest; (2) Filport, as represented by Cruz and Minterbro, failed to
members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry Chua, exhaust remedies for redress within the corporation before bringing the suit; and (3) the
respectively; and petition does not show that the stockholders bringing the suit are joined as nominal parties.
In support of their counterclaim, respondents averred that Cruz filed the alleged derivative
suit in bad faith and purely for harassment purposes on account of his non-reelection to the
4. creation of the additional positions of Special Assistants to the President and the
board in the 1991 general stockholders’ meeting.
Board Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to the
same, the directors elected/appointed thereto not doing any work to deserve the
monthly remuneration of ₱13,050.00 each. As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC
for a long period of time. With the enactment of R.A. No. 8799, the case was first turned
over to the RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on
respondents’ motion, it was eventually transferred to the RTC of Davao City whereat it was Intrigued, and quite understandably, by the fact that, in its decision, the CA, before
docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof. proceeding to address the merits of the appeal, prefaced its disposition with the statement
reading "[T]he appeal is bereft of merit,"7 thereby contradicting the very fallo of its own
On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it found decision and the discussions made in the body thereof, respondents filed with the appellate
that (1) Filport’s Board of Directors has the power to create positions not provided for in the court a Motion For Nunc Pro Tunc Order,8 thereunder praying that the phrase "[T]he appeal
by-laws of the corporation since the board is the governing body; and (2) the increases in is bereft of merit," be corrected to read "[T]he appeal is impressed with merit." In its
the salaries of the board chairman, vice-president, treasurer and assistant general manager resolution9 of 23 April 2004, the CA granted the respondents’ motion and accordingly
are reasonable, the trial court nonetheless rendered judgment against the respondents by effected the desired correction.
ordering the directors holding the positions of Assistant Vice President for Corporate
Planning, Special Assistant to the President and Special Assistant to the Board Chairman to Hence, petitioners’ present recourse.
refund to the corporation the salaries they have received as such officers "considering that
Filipinas Port Services is not a big corporation requiring multiple executive positions" and Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall
that said positions "were just created for accommodation." We quote the fallo of the trial formulate the issues as follows:
court’s decision.
1. Whether the CA erred in holding that Filport’s Board of Directors acted within its
WHEREFORE, judgment is rendered ordering: powers in creating the executive committee and the positions of AVPs for Corporate
Planning, Operations, Finance and Administration, and those of the Special
Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation Assistants to the President and the Board Chairman, each with corresponding
the total amount of salaries he received as assistant vice president for corporate planning; remuneration, and in increasing the salaries of the positions of Board Chairman,
and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the fourth Vice-President, Treasurer and Assistant General Manager; and
cause of action to restore to the corporation the salaries they each received as special
assistants respectively to the president and board chairman. In case of insolvency of any or 2. Whether the CA erred in finding that no evidence exists to prove that (a) the
all of them, the members of the board who created their positions are subsidiarily liable. positions of AVP for Corporate Planning, Special Assistant to the President and
Special Assistant to the Board Chairman were created merely for accommodation,
The counter claim is dismissed. and (b) the salaries/emoluments corresponding to said positions were actually paid
to and received by the directors appointed thereto.
From the adverse decision of the trial court, herein respondents went on appeal to the CA in
CA-G.R. CV No. 73827. For their part, respondents, aside from questioning the propriety of the instant petition as the
same allegedly raises only questions of fact and not of law, also put in issue the purported
In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the trial court derivative nature of the main suit initiated by petitioner Eliodoro C. Cruz allegedly in
that the creation of the positions of Assistant Vice President for Corporate Planning, Special representation of and in behalf of Filport and its stockholders.
Assistant to the President and Special Assistant to the Board Chairman was merely for
accommodation purposes, granted the respondents’ appeal, reversed and set aside the The petition is bereft of merit.
appealed decision of the trial court and accordingly dismissed the so-called derivative suit
filed by Cruz, et al., thus: It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of Court,
only questions of law may be raised and passed upon by the Court. Factual findings of the
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged CA are binding and conclusive and will not be reviewed or disturbed on appeal.10 Of course,
decision is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case the rule is not cast in stone; it admits of certain exceptions, such as when the findings of fact
No. 28,552-2001 with no pronouncement as to costs. of the appellate court are at variance with those of the trial court,11 as here. For this reason,
and for a proper and complete resolution of the case, we shall delve into the records and
SO ORDERED. reexamine the same.
The governing body of a corporation is its board of directors. Section 23 of the Corporation The officers of the corporation shall be a Chairman of the Board, President, a Vice-
Code12 explicitly provides that unless otherwise provided therein, the corporate powers of all President, a Secretary, a Treasurer, a General Manager and such other officers as the
corporations formed under the Code shall be exercised, all business conducted and all Board of Directors may from time to time provide, and these officers shall be elected to hold
property of the corporation shall be controlled and held by a board of directors. Thus, with office until their successors are elected and qualified. (Emphasis supplied.)
the exception only of some powers expressly granted by law to stockholders (or members,
in case of non-stock corporations), the board of directors (or trustees, in case of non-stock Likewise, the fixing of the corresponding remuneration for the positions in question is
corporations) has the sole authority to determine policies, enter into contracts, and conduct provided for in the same by-laws of the corporation, viz:
the ordinary business of the corporation within the scope of its charter, i.e., its articles of
incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of xxx The Board of Directors shall fix the compensation of the officers and agents of the
directors is restricted to the management of the regular business affairs of the corporation, corporation. (Emphasis supplied.)
unless more extensive power is expressly conferred.
Unfortunately, the bylaws of the corporation are silent as to the creation by its board of
The raison d’etre behind the conferment of corporate powers on the board of directors is not directors of an executive committee. Under Section 3515 of the Corporation Code, the
lost on the Court. Indeed, the concentration in the board of the powers of control of creation of an executive committee must be provided for in the bylaws of the corporation.
corporate business and of appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous, scattered and Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the
unfamiliar with the business of a corporation to conduct its business directly. And so the plan creation of the executive committee by the board of directors is illegal or unlawful. One
of corporate organization is for the stockholders to choose the directors who shall control reason is the absence of a showing as to the true nature and functions of said executive
and supervise the conduct of corporate business.13 committee considering that the "executive committee," referred to in Section 35 of the
Corporation Code which is as powerful as the board of directors and in effect acting for the
In the present case, the board’s creation of the positions of Assistant Vice Presidents for board itself, should be distinguished from other committees which are within the competency
Corporate Planning, Operations, Finance and Administration, and those of the Special of the board to create at anytime and whose actions require ratification and confirmation by
Assistants to the President and the Board Chairman, was in accordance with the regular the board.16 Another reason is that, ratiocinated by both the two (2) courts below, the Board
business operations of Filport as it is authorized to do so by the corporation’s by-laws, of Directors has the power to create positions not provided for in Filport’s bylaws since the
pursuant to the Corporation Code. board is the corporation’s governing body, clearly upholding the power of its board to
exercise its prerogatives in managing the business affairs of the corporation.
The election of officers of a corporation is provided for under Section 25 of the Code which
reads: As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz
himself, it was during his incumbency as Filport president that the executive committee in
Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a question was created, and that he was even the one who moved for the creation of the
corporation must formally organize by the election of a president, who shall be a director, a positions of the AVPs for Operations, Finance and Administration. By his acquiescence
treasurer who may or may not be a director, a secretary who shall be a resident and citizen and/or ratification of the creation of the aforesaid offices, Cruz is virtually precluded from
of the Philippines, and such other officers as may be provided for in the by-laws. (Emphasis suing to declare such acts of the board as invalid or illegal. And it makes no difference that
supplied.) he sues in behalf of himself and of the other stockholders. Indeed, as his voice was not
heard in protest when he was still Filport’s president, raising a hue and cry only now leads to
In turn, the amended Bylaws of Filport14 provides the following: the inevitable conclusion that he did so out of spite and resentment for his non-reelection as
president of the corporation.
Officers of the corporation, as provided for by the by-laws, shall be elected by the board of
directors at their first meeting after the election of Directors. xxx With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer
and Assistant General Manager which are supposedly disproportionate to the volume and
nature of their work, the Court, after a judicious scrutiny of the increase vis-à-vis the value of
the services rendered to the corporation by the officers concerned, agrees with the findings Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and
of both the trial and appellate courts as to the reasonableness and fairness thereof. conclusive on this Court.

Continuing, petitioners contend that the CA did not appreciate their evidence as to the There is, however, a factual matter over which the CA and the trial court parted ways. We
alleged acts of mismanagement by the then incumbent board. A perusal of the records, refer to the accommodation angle.
however, reveals that petitioners merely relied on the testimony of Cruz in support of their
bold claim of mismanagement. To the mind of the Court, Cruz’ testimony on the matter of The trial court was with petitioner Cruz in saying that the creation of the positions of the
mismanagement is bereft of any foundation. As it were, his testimony consists merely of three (3) AVPs for Corporate Planning, Special Assistant to the President and Special
insinuations of alleged wrongdoings on the part of the board. Without more, petitioners’ Assistant to the Board Chairman, each with a salary of ₱13,050.00 a month, was merely for
posture of mismanagement must fall and with it goes their prayer to hold the respondents accommodation purposes considering that Filport is not a big corporation requiring multiple
liable therefor. executive positions. Hence, the trial court’s order for said officers to return the amounts they
received as compensation.
But even assuming, in gratia argumenti, that there was mismanagement resulting to
corporate damages and/or business losses, still the respondents may not be held liable in On the other hand, the CA took issue with the trial court and ruled that Cruz’s
the absence, as here, of a showing of bad faith in doing the acts complained of. accommodation theory is not based on facts and without any evidentiary substantiation.

If the cause of the losses is merely error in business judgment, not amounting to bad faith or We concur with the line of the appellate court. For truly, aside from Cruz’s bare and self-
negligence, directors and/or officers are not liable.17 For them to be held accountable, the serving testimony, no other evidence was presented to show the fact of "accommodation."
mismanagement and the resulting losses on account thereof are not the only matters to be By itself, the testimony of Cruz is not enough to support his claim that accommodation was
proven; it is likewise necessary to show that the directors and/or officers acted in bad faith the underlying factor behind the creation of the aforementioned three (3) positions.
and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment
or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing It is elementary in procedural law that bare allegations do not constitute evidence adequate
of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of to support a conclusion. It is basic in the rule of evidence that he who alleges a fact bears
the nature of fraud.18 We have searched the records and nowhere do we find a "dishonest the burden of proving it by the quantum of proof required. Bare allegations, unsubstantiated
purpose" or "some moral obliquity," or "conscious doing of a wrong" on the part of the by evidence, are not equivalent to proof under the Rules of Court.19 The party having the
respondents that "partakes of the nature of fraud." burden of proof must establish his case by a preponderance of evidence.20

We thus extend concurrence to the following findings of the CA, affirmatory of those of the Besides, the determination of the necessity for additional offices and/or positions in a
trial court: corporation is a management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith or with malice. 1awphi1.nét

xxx As a matter of fact, it was during the term of appellee Cruz, as president and director,
that the executive committee was created. What is more, it was appellee himself who moved Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the
for the creation of the positions of assistant vice presidents for operations, for finance, and Court to determine the propriety or impropriety of the creation of offices therein and the
for administration. He should not be heard to complain thereafter for similar corporate acts. grant of salary increases to officers thereof. Such are corporate and/or business decisions
which only the corporation’s Board of Directors can determine.
The increase in the salaries of the board chairman, president, treasurer, and assistant
general manager are indeed reasonable enough in view of the responsibilities assigned to So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:
them, and the special knowledge required, to be able to effectively discharge their
respective functions and duties. Questions of policy or of management are left solely to the honest decision of the board as
the business manager of the corporation, and the court is without authority to substitute its
judgment for that of the board, and as long as it acts in good faith and in the exercise of
honest judgment in the interest of the corporation, its orders are not reviewable by the party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal
courts. party.23

In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the Here, the action below is principally for damages resulting from alleged mismanagement of
issues raised in the court of origin when it ruled on the absence of receipt of actual payment the affairs of Filport by its directors/officers, it being alleged that the acts of mismanagement
of the salaries/emoluments pertaining to the positions of Assistant Vice-President for are detrimental to the interests of Filport. Thus, the injury complained of primarily pertains to
Corporate Planning, Special Assistant to the Board Chairman and Special Assistant to the the corporation so that the suit for relief should be by the corporation. However, since the
President. Petitioners insist that the issue of nonpayment was never raised by the ones to be sued are the directors/officers of the corporation itself, a stockholder, like
respondents before the trial court, as in fact, the latter allegedly admitted the same in their petitioner Cruz, may validly institute a "derivative suit" to vindicate the alleged corporate
Answer With Counterclaim. injury, in which case Cruz is only a nominal party while Filport is the real party-in-interest.
For sure, in the prayer portion of petitioners’ petition before the SEC, the reliefs prayed were
We are not persuaded. asked to be made in favor of Filport.

By claiming that Filport suffered damages because the directors appointed to the assailed Besides, the requisites before a derivative suit can be filed by a stockholder are present in
positions are not doing anything to deserve their compensation, petitioners are saddled with this case, to wit:
the burden of proving that salaries were actually paid. Since the trial court, in effect, found
that the petitioners successfully proved payment of the salaries when it directed the a) the party bringing suit should be a shareholder as of the time of the act or
reimbursements of the same, respondents necessarily have to raise the issue on appeal. transaction complained of, the number of his shares not being material;
And the CA rightly resolved the issue when it found that no evidence of actual payment of
the salaries in question was actually adduced. Respondents’ alleged admission of the fact of b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
payment cannot be inferred from a reading of the pertinent portions of the parties’ respective board of directors for the appropriate relief but the latter has failed or refused to heed
initiatory pleadings. Respondents’ allegations in their Answer With Counterclaim that the his plea; and
officers corresponding to the positions created "performed the work called for in their
positions" or "deserve their compensation," cannot be interpreted to mean that they were c) the cause of action actually devolves on the corporation, the wrongdoing or harm
"actually paid" such compensation. Directly put, the averment that "one deserves one’s having been, or being caused to the corporation and not to the particular stockholder
compensation" does not necessarily carry the implication that "such compensation was bringing the suit.24
actually remitted or received." And because payment was not duly proven, there is no
evidentiary or factual basis for the trial court to direct respondents to make reimbursements Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to
thereof to the corporation. have its board of directors remedy what he perceived as wrong when he wrote a letter
requesting the board to do the necessary action in his complaint; and (3) the alleged wrong
This brings us to the respondents’ claim that the case filed by the petitioners before the was in truth a wrong against the stockholders of the corporation generally, and not against
SEC, which eventually landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz which directly stands to
derivative suit, as maintained by the petitioners. benefit from the suit. And while it is true that the complaining stockholder must show to the
satisfaction of the court that he has exhausted all the means within his reach to attain within
We sustain the petitioners. the corporation itself the redress for his grievances, or actions in conformity to his wishes,
nonetheless, where the corporation is under the complete control of the principal
Under the Corporation Code, where a corporation is an injured party, its power to sue is defendants, as here, there is no necessity of making a demand upon the directors. The
lodged with its board of directors or trustees. But an individual stockholder may be permitted reason is obvious: a demand upon the board to institute an action and prosecute the same
to institute a derivative suit in behalf of the corporation in order to protect or vindicate effectively would have been useless and an exercise in futility. In fine, we rule and so hold
corporate rights whenever the officials of the corporation refuse to sue, or when a demand that the petition filed with the SEC at the instance of Cruz, which ultimately found its way to
upon them to file the necessary action would be futile because they are the ones to be sued, the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which Cruz has
or because they hold control of the corporation.22 In such actions, the corporation is the real the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its
in all respects. shares to the public in order to raise funds allegedly to develop its properties and pay its
loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell
No pronouncement as to costs. its shares to the public by the Securities and Exchange Commission (SEC). To facilitate the
trading of its shares among investors, PALI sought to course the trading of its shares
SO ORDERED. through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said
stock exchange an application to list its shares, with supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's
application, recommended to the PSE's Board of Governors the approval of PALI's listing
application.
G.R. No. 125469 October 27, 1997 On February 14, 1996, before it could act upon PALI's application, the Board of Governors
of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late
PHILIPPINE STOCK EXCHANGE, INC., petitioner, President Marcos was the legal and beneficial owner of certain properties forming part of the
vs. Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE and that the Ternate Development Corporation, which is among the stockholders of PALI,
COMMISSION and PUERTO AZUL LAND, INC., respondents. likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio
for then President Marcos and now, effectively for his estate, and requested PALI's
application to be deferred. PALI was requested to comment upon the said letter.

TORRES, JR., J.: PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and
Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is
The Securities and Exchange Commission is the government agency, under the direct actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities
general supervision of the Office of the President, 1 with the immense task of enforcing the distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of
Revised Securities Act, and all other duties assigned to it by pertinent laws. Among its PALI. The Marcoses responded that their claim is not confined to the facilities forming part
inumerable functions, and one of the most important, is the supervision of all corporations, of the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting
partnerships or associations, who are grantees of primary franchise and/or a license or legal and beneficial ownership of other properties titled under the name of PALI.
permit issued by the government to operate in the Philippines. 2 Just how far this regulatory
authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential
is the issue in the case at bar. Commission on Good Government (PCGG) requesting for comments on the letters of the
PALI and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses
In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent received a Temporary Restraining Order on the same date, enjoining the Marcoses from,
Court of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and among others, "further impeding, obstructing, delaying or interfering in any manner by or any
Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the means with the consideration, processing and approval by the PSE of the initial public
private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the offering of PALI." The TRO was issued by Judge Martin S. Villarama, Executive Judge of the
way for the public offering of PALI's shares. RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.

The facts of the case are undisputed, and are hereby restated in sum. In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached
its decision to reject PALI's application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a
Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the Petition for Review (with Application for Writ of Preliminary Injunction and Temporary
application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in Restraining Order), assailing the above mentioned orders of the SEC, submitting the
the exercise of its supervisory and regulatory powers over stock exchanges under Section following as errors of the SEC:
6(j) of P.D. No. 902-A, review the PSE's action on PALI's listing application and institute
such measures as are just and proper under the circumstances. I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE
OF DISCRETION IN ISSUING THE ASSAILED ORDERS
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC
letter of PALI and directing the PSE to file its comments thereto within five days from its HAS NO POWER TO ORDER THE LISTING AND SALE OF
receipt and for its authorized representative to appear for an "inquiry" on the matter. On April SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED
22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11, AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE
1996 letter of PALI. ON LISTING APPLICATIONS;

On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The II. SEC COMMITTED SERIOUS ERROR AND GRAVE
dispositive portion of the said order reads: ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN
AN ARBITRARY AND ABUSIVE MANNER IN
WHEREFORE, premises considered, and invoking the Commissioner's DISAPPROVING PALI'S LISTING APPLICATION;
authority and jurisdiction under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-A, III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND
the decision of the Board of Governors of the Philippine Stock Exchange VOID FOR ALLOWING FURTHER DISPOSITION OF
denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside, PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM
and the PSE is hereby ordered to immediately cause the listing of the PALI PART OF NAVAL/MILITARY RESERVATION; AND
shares in the Exchange, without prejudice to its authority to require PALI to
disclose such other material information it deems necessary for the protection IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
of the investigating public. PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE
This Order shall take effect immediately. PROCESS CLAUSE OF THE CONSTITUTION.

SO ORDERED. On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, Opposition to Motion to Dismiss.
however denied by the Commission in its May 9, 1996 Order which states:
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's
WHEREFORE, premises considered, the Commission finds no compelling Petition for Review. Hence, this Petition by the PSE.
reason to reconsider its order dated April 24, 1996, and in the light of recent
developments on the adverse claim against the PALI properties, PSE should The appellate court had ruled that the SEC had both jurisdiction and authority to look into
require PALI to submit full disclosure of material facts and information to the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in
protect the investing public. In this regard, PALI is hereby ordered to amend relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b)5 of the Revised
its registration statements filed with the Commission to incorporate the full Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as
disclosure of these material facts and information. a corporation and as a stock exchange, the petitioner is subject to public respondent's
jurisdiction, regulation and control. Accepting the argument that the public respondent has
the authority merely to supervise or regulate, would amount to serious consequences, public character the moment it is covered by a title. As a matter of fact, the titles have long
considering that the petitioner is a stock exchange whose business is impressed with public been settled by a final judgment; and the final decree having been registered, they can no
interest. Abuse is not remote if the public respondent is left without any system of control. If longer be re-opened considering that the one year period has already passed. Lastly, the
the securities act vested the public respondent with jurisdiction and control over all determination of what standard to apply in allowing PALI's application for listing, whether the
corporations; the power to authorize the establishment of stock exchanges; the right to discretion method or the system of public disclosure adhered to by the SEC, should be
supervise and regulate the same; and the power to alter and supplement rules of the addressed to the Securities Commission, it being the government agency that exercises
exchange in the listing or delisting of securities, then the law certainly granted to the public both supervisory and regulatory authority over all corporations.
respondent the plenary authority over the petitioner; and the power of review necessarily
comes within its authority. On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for
Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals.
All in all, the court held that PALI complied with all the requirements for public listing, Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date,
affirming the SEC's ruling to the effect that: the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by
the PCGG's Petition for Intervention on October 21, 1996. A supplemental Comment was
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC
manner in disapproving the application of PALI for listing of its shares in the and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to
face of the following considerations: the PCGG's motion for leave to file petition for intervention, PALI filed its Comment thereto
on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
1. PALI has clearly and admittedly complied with the Listing Rules and full
disclosure requirements of the Exchange; On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent
PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997,
2. In applying its clear and reasonable standards on the suitability for listing of PALI filed its Rejoinder to the said consolidated reply of PSE.
shares, PSE has failed to justify why it acted differently on the application of
PALI, as compared to the IPOs of other companies similarly situated that PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the
were allowed listing in the Exchange; PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A,
the powers of the SEC over stock exchanges are more limited as compared to its authority
3. It appears that the claims and issues on the title to PALI's properties were over ordinary corporations. In connection with this, the powers of the SEC over stock
even less serious than the claims against the assets of the other companies exchanges under the Revised Securities Act are specifically enumerated, and these do not
in that, the assertions of the Marcoses that they are owners of the disputed include the power to reverse the decisions of the stock exchange. Authorities are in
properties were not substantiated enough to overcome the strength of a title abundance even in the United States, from which the country's security policies are
to properties issued under the Torrens System as evidence of ownership patterned, to the effect of giving the Securities Commission less control over stock
thereof; exchanges, which in turn are given more lee-way in making the decision whether or not to
allow corporations to offer their stock to the public through the stock exchange. This is in
4. No action has been filed in any court of competent jurisdiction seeking to accord with the "business judgment rule" whereby the SEC and the courts are barred from
nullify PALI's ownership over the disputed properties, neither has the intruding into business judgments of corporations, when the same are made in good faith.
government instituted recovery proceedings against these properties. Yet the the said rule precludes the reversal of the decision of the PSE to deny PALI's listing
import of PSE's decision in denying PALI's application is that it would be application, absent a showing of bad faith on the part of the PSE. Under the listing rules of
PALI, not the Marcoses, that must go to court to prove the legality of its the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to
ownership on these properties before its shares can be listed. accept or reject applications for listing. Thus, even if an issuer has complied with the PSE
listing rules and requirements, PSE retains the discretion to accept or reject the issuer's
In addition, the argument that the PALI properties belong to the Military/Naval Reservation listing application if the PSE determines that the listing shall not serve the interests of the
does not inspire belief. The point is, the PALI properties are now titled. A property losses its investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the
with corporations whose properties are under sequestration. A reading of Republic of interests of the investing public may be fully safeguard.
the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the Ternate Development Corporation (TDC) Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the
and the Monte del Sol Development Corporation (MSDC). are under sequestration by the SEC's challenged control authority over the petitioner PSE even as it provides that "the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court Commission shall have absolute jurisdiction, supervision, and control over all corporations,
is the "law of the case" between the Republic and TDC and MSDC. It categorically declares partnerships or associations, who are the grantees of primary franchises and/or a license or
that the assets of these corporations were sequestered by the PCGG on March 10, 1986 permit issued by the government to operate in the Philippines. . ." The SEC's regulatory
and April 4, 1988. authority over private corporations encompasses a wide margin of areas, touching nearly all
of a corporation's concerns. This authority springs from the fact that a corporation owes its
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its existence to the concession of its corporate franchise from the state.
properties can no longer be questioned, since certificates of title have been issued to PALI
and more than one year has since lapsed, is erroneous and ignores well settled The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from
jurisprudence on land titles. That a certificate of title issued under the Torrens System is a or be considered as necessary or incidental to the carrying out of the SEC's express power
conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is to insure fair dealing in securities traded upon a stock exchange or to ensure the fair
fundamental that forest lands or military reservations are non-alienable. Thus, when a title administration of such exchange. 7 It is, likewise, observed that the principal function of the
covers a forest reserve or a government reservation, such title is void. SEC is the supervision and control over corporations, partnerships and associations with the
end in view that investment in these entities may be encouraged and protected, and their
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of activities for the promotion of economic development. 8
"full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear
mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of
did not comply with the listing rules and disclosure requirements. In fact, PALI's documents the PSE to deny the application for listing in the stock exchange of the private respondent
supporting its application contained misrepresentations and misleading statements, and PALI. The SEC's action was affirmed by the Court of Appeals.
concealed material information. The matter of sequestration of PALI's properties and the fact
that the same form part of military/naval/forest reservations were not reflected in PALI's We affirm that the SEC is the entity with the primary say as to whether or not securities,
application. including shares of stock of a corporation, may be traded or not in the stock exchange. This
is in line with the SEC's mission to ensure proper compliance with the laws, such as the
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is Revised Securities Act and to regulate the sale and disposition of securities in the
clothed with the markings of a corporate entity, it functions as the primary channel through country. 9 As the appellate court explains:
which the vessels of capital trade ply. The PSE's relevance to the continued operation and
filtration of the securities transactions in the country gives it a distinct color of importance Paramount policy also supports the authority of the public respondent to
such that government intervention in its affairs becomes justified, if not necessarily. Indeed, review petitioner's denial of the listing. Being a stock exchange, the petitioner
as the only operational stock exchange in the country today, the PSE enjoys a monopoly of performs a function that is vital to the national economy, as the business is
securities transactions, and as such, it yields an immense influence upon the country's affected with public interest. As a matter of fact, it has often been said that
economy. the economy moves on the basis of the rise and fall of stocks being traded.
By its economic power, the petitioner certainly can dictate which and how
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to many users are allowed to sell securities thru the facilities of a stock
give special treatment to the administration and regulation of stock exchanges. 6 exchange, if allowed to interpret its own rules liberally as it may please.
Petitioner can either allow or deny the entry to the market of securities. To
These provisions, read together with the general grant of jurisdiction, and right of repeat, the monopoly, unless accompanied by control, becomes subject to
supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the abuse; hence, considering public interest, then it should be subject to
government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through as to the integrity of PALI as a stock issuer. The petitioner was in the right when it refused
the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has application of PALI, for a contrary ruling was not to the best interest of the general public.
entrusted to it the serious responsibility of enforcing all laws affecting corporations and other The purpose of the Revised Securities Act, after all, is to give adequate and effective
forms of associations not otherwise vested in some other government office. 10 protection to the investing public against fraudulent representations, or false promises, and
the imposition of worthless ventures. 14
This is not to say, however, that the PSE's management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
to engage in its proposed and duly approved business. One of the PSE's main concerns, as detrimental to legitimate business, thus:
such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights
pertaining to corporations, including the right to sue and be sued, to hold property in its own The Securities Act, often referred to as the "truth in securities" Act, was
name, to enter (or not to enter) into contracts with third persons, and to perform all other designed not only to provide investors with adequate information upon which
legal acts within its allocated express or implied powers. to base their decisions to buy and sell securities, but also to protect legitimate
business seeking to obtain capital through honest presentation against
A corporation is but an association of individuals, allowed to transact under an assumed competition from crooked promoters and to prevent fraud in the sale of
corporate name, and with a distinct legal personality. In organizing itself as a collective securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p.
body, it waives no constitutional immunities and perquisites appropriate to such a body. 11 As 14).
to its corporate and management decisions, therefore, the state will generally not interfere
with the same. Questions of policy and of management are left to the honest decision of the As has been pointed out, the effects of such an act are chiefly (1) prevention
officers and directors of a corporation, and the courts are without authority to substitute their of excesses and fraudulent transactions, merely by requirement of that their
judgment for the judgment of the board of directors. The board is the business manager of details be revealed; (2) placing the market during the early stages of the
the corporation, and so long as it acts in good faith, its orders are not reviewable by the offering of a security a body of information, which operating indirectly through
courts. 12 investment services and expert investors, will tend to produce a more
accurate appraisal of a security, . . . Thus, the Commission may refuse to
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant permit a registration statement to become effective if it appears on its face to
authority to reverse the PSE's decision in matters of application for listing in the market, the be incomplete or inaccurate in any material respect, and empower the
SEC may exercise such power only if the PSE's judgment is attended by bad faith. In Board Commission to issue a stop order suspending the effectiveness of any
of Liquidators vs. Kalaw,13 it was held that bad faith does not simply connote bad judgment registration statement which is found to include any untrue statement of a
or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing material fact or to omit to state any material fact required to be stated therein
of wrong. It means a breach of a known duty through some motive or interest of ill will, or necessary to make the statements therein not misleading. (Idem).
partaking of the nature of fraud.
Also, as the primary market for securities, the PSE has established its name and goodwill,
In reaching its decision to deny the application for listing of PALI, the PSE considered and it has the right to protect such goodwill by maintaining a reasonable standard of
important facts, which, in the general scheme, brings to serious question the qualification of propriety in the entities who choose to transact through its facilities. It was reasonable for
PALI to sell its shares to the public through the stock exchange. During the time for the PSE, therefore, to exercise its judgment in the manner it deems appropriate for its
receiving objections to the application, the PSE heard from the representative of the late business identity, as long as no rights are trampled upon, and public welfare is safeguarded.
President Ferdinand E. Marcos and his family who claim the properties of the private
respondent to be part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, In this connection, it is proper to observe that the concept of government absolutism is a
an order of sequestration has been issued covering the properties of PALI, and suit for thing of the past, and should remain so.
reconveyance to the state has been filed in the Sandiganbayan Court. How the properties
were effectively transferred, despite the sequestration order, from the TDC and MSDC to The observation that the title of PALI over its properties is absolute and can no longer be
Rebecco Panlilio, and to the private respondent PALI, in only a short span of time, are not assailed is of no moment. At this juncture, there is the claim that the properties were owned
yet explained to the Court, but it is clear that such circumstances give rise to serious doubt by TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco
Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of
to the Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by the registration of a security:
the petitioner that these properties belong to naval and forest reserves, and therefore
beyond private dominion. If any of these claims is established to be true, the certificates of — The Commission may reject a registration statement and refuse to issue a
title over the subject properties now held by PALI map be disregarded, as it is an permit to sell the securities included in such registration statement if it finds
established rule that a registration of a certificate of title does not confer ownership over the that —
properties described therein to the person named as owner. The inscription in the registry,
to be effective, must be made in good faith. The defense of indefeasibility of a Torrens Title (1) The registration statement is on its face incomplete or inaccurate in any
does not extend to a transferee who takes the certificate of title with notice of a flaw. material respect or includes any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make the
In any case, for the purpose of determining whether PSE acted correctly in refusing the statements therein not misleading; or
application of PALI, the true ownership of the properties of PALI need not be determined as
an absolute fact. What is material is that the uncertainty of the properties' ownership and (2) The issuer or registrant —
alienability exists, and this puts to question the qualification of PALI's public offering. In sum,
the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of (i) is not solvent or not in sound financial condition;
approving the application for listing in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a corporation entity, whose business (ii) has violated or has not complied with the provisions of this
judgments are respected in the absence of bad faith. Act, or the rules promulgated pursuant thereto, or any order of
the Commission;
The question as to what policy is, or should be relied upon in approving the registration and
sale of securities in the SEC is not for the Court to determine, but is left to the sound (iii) has failed to comply with any of the applicable
discretion of the Securities and Exchange Commission. In mandating the SEC to administer requirements and conditions that the Commission may, in the
the Revised Securities Act, and in performing its other functions under pertinent laws, the
public interest and for the protection of investors, impose
Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate before the security can be registered;
such rules and regulations as it may consider appropriate in the public interest for the
enforcement of the said laws. The second paragraph of Section 4 of the said law, on the
(iv) has been engaged or is engaged or is about to engage in
other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold,
fraudulent transaction;
transferred or in any other manner conveyed to the public, unless registered in accordance
with the rules and regulations that shall be promulgated in the public interest and for the
protection of investors by the Commission. Presidential Decree No. 902-A, on the other (v) is in any way dishonest or is not of good repute; or
hand, provides that the SEC, as regulatory agency, has supervision and control over all
corporations and over the securities market as a whole, and as such, is given ample (vi) does not conduct its business in accordance with law or is
authority in determining appropriate policies. Pursuant to this regulatory authority, the SEC engaged in a business that is illegal or contrary to government
has manifested that it has adopted the policy of "full material disclosure" where all rules and regulations.
companies, listed or applying for listing, are required to divulge truthfully and accurately, all
material information about themselves and the securities they sell, for the protection of the (3) The enterprise or the business of the issuer is not shown to be sound or to
investing public, and under pain of administrative, criminal and civil sanctions. In connection be based on sound business principles;
with this, a fact is deemed material if it tends to induce or otherwise effect the sale or
purchase of its securities. 15 While the employment of this policy is recognized and (4) An officer, member of the board of directors, or principal stockholder of
sanctioned by the laws, nonetheless, the Revised Securities Act sets substantial and the issuer is disqualified to be such officer, director or principal stockholder;
procedural standards which a proposed issuer of securities must satisfy. 16 Pertinently, or
(5) The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the prejudice of the
public interest or as a fraud upon the purchasers or investors. (Emphasis
Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the
full disclosure method in the registration of securities is, therefore, untenable. As it is, the
Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed
to support the propriety of the issue of its shares with unfailing clarity, thereby lending
support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its
stock exchange. This does not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for public offerings of
corporations wishing to do so. However, the SEC must recognize and implement the
mandate of the law, particularly the Revised Securities Act, the provisions of which cannot
be amended or supplanted by mere administrative issuance.

In resume, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review on Certiorari. The Decisions of the Court of Appeals and the Securities
and Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the
decision of the Philippine Stock Exchange to deny the application for listing of the private
respondent Puerto Azul Land, Inc.

SO ORDERED.