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[G.R. No. 60502. July 16, 1991.] PEDRO LOPEZ DEE, petitioner, vs.

SECURITIES AND EXCHANGE COMMISSION, HEARING OFFICER EMMANUEL SISON, NAGA TELEPHONE CO., INC., COMMUNICATION SERVICES, INC., LUCIANO MAGGAY, AUGUSTO FEDERIS, NILDA RAMOS, FELIPA JAVALERA, DESIDERIO SAAVEDRA, respondents. [G.R. No. 63922. July 16, 1991.] JUSTINO DE JESUS, SR., PEDRO LOPEZ DEE, JULIO LOPEZ DEE, and VICENTE TORDILLA, JR., petitioners, vs. INTERMEDIATE APPELLATE COURT, LUCIANO MAGGAY, NILDA I. RAMOS, DESIDERIO SAAVEDRA, AUGUSTO FEDERIS, ERNESTO MIGUEL, COMMUNICATION SERVICES, INC., and NAGA TELEPHONE COMPANY, INC., respondents. Vicente P. Tordilla, Jr. for respondent Naga Telephone Company. SYLLABUS

1.CORPORATION LAW; SECURITIES AND EXCHANGE COMMISSION; POWERS AND JURISDICTION; SCOPE. In order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationship: (a) between corporation, partnership or association and the public; (b) between the corporation, partnership, or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state insofar as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners, or associates themselves (Union Glass & Container Corp. vs. SEC, 126 SCRA 31 [1983]). The jurisdiction of the SEC is limited to matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with internal affairs of such entities P.D. 902-A does not confer jurisdiction to SEC over all matters affecting corporations (Pereyra vs. IAC, 181 SCRA 244 [1990]; Sales vs. SEC, 169 SCRA 121 [1989]). The jurisdiction of the SEC in SEC Case No. 1748 is limited to deciding the controversy in the election of the directors and officers of Natelco. Thus, the SEC was correct when it refused to rule on whether the issuance of the shares of Natelco stocks to CSI violated Sec. 20 (h) of the Public Service Act. 2.ID.; ID.; STOCKHOLDERS; POWER TO ISSUE SHARES OF STOCKS LODGED IN THE BOARD OF DIRECTORS. While the group of Luciano Maggay was in control of Natelco by virtue of the restraining order issued in G.R. NO. 50885, the Maggay Board issued 113,800 shares of stock to CSI. Petitioner said that the Maggay Board, in

issuing said shares without notifying Natelco stockholders, violated their right of pre-emption to the unissued shares. The questioned issuance of the 113,800 stocks is not invalid even assuming that it was made without notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders meeting is required to consider it because additional issuance of shares of stocks does not need approval of the stockholders. Consequently, no preemptive right of Natelco stockholders was violated by the issuance of the 113,800 shares to CSI. 3.REMEDIAL LAW; CIVIL PROCEDURE; TRIAL COURTS HAVE NO POWER TO INTERFERE WITH THE ORDERS OF SECURITIES AND EXCHANGE COMMISSION. In the case of Philippine Pacific Fishing Co., Inc. vs. Luna, 112 SCRA 604, 613 [1983], this Tribunal stated clearly the following rule: "Nowhere does the law (P.D. No. 902-A) empower any Court of First Instance to interfere with the orders of the Commission (SEC). Not even on grounds of due process or jurisdiction. The Commission is, conceding arguendo a possible claim of respondents, at the very least, a co-equal body with the Courts of First Instance. Even as such co-equal, one would have no power to control the other. But the truth of the matter is that only the Supreme Court can enjoin and correct any actuation of the Commission." Accordingly, it is clear that since the trial judge in the lower court (CFI of Camarines Sur) did not have jurisdiction in issuing the questioned restraining order, disobedience thereto did not constitute contempt, as it is necessary that the order be a valid and

legal one. It is an established rule that the court has no authority to punish for disobedience of an order issued without authority (Chanco v. Madrilejos, 9 Phil. 356; Angel Jose Realty Corp. v. Salao, et al., 76 Phil. 201). 4.ID.; COURTS; POWER TO PUNISH CONTEMPT; SHOULD BE EXERCISED ON THE PRESERVATIVE AND NOT VINDICTIVE PRINCIPLE. It is well-settled that the power to punish for contempt of court should be exercised on the preservative and not on the vindictive principle. Only occasionally should the court invoke its inherent power in order to retain that respect without which the administration of justice must falter or fail (Rivera v. Florendo, 144 SCRA 643, 662-663 [1986]; Lipata v. Tutaan 124, SCRA 880 [1983]). DECISION PARAS, J :
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These are petitions for certiorari with preliminary injunction and/or restraining order which seek to annul and set aside in: (1) G.R. No. 60502, the order * of the hearing officer dated May 4, 1982, setting the date for the election of the directors to be held by the stockholders on May 22, 1982, in SEC Case No. 1748 entitled "Pedro Lopez Dee v. Naga Telephone Co., Inc. et al."; and (2) G.R. No. 63922, the decision ** of the Intermediate Appellate Court dated April 14, 1983 which annulled the judgment of the trial court on the contempt charge against the private respondents in G.R. No. SP-

14846-R, entitled "Luciano Maggay, et al. v. Hon. Delfin Vir Sunga, et al." As gathered from the records, the facts of these cases are as follows: Naga Telephone Company, Inc. was organized in 1954, the authorized capital was P100,000.00. In 1974 Naga Telephone Co., Inc. (Natelco for short) decided to increase its authorized 'capital to P3,000,000.00. As required by the Public Service Act, Natelco filed an application for the approval of the increased authorized capital with the then Board of Communications under BOC Case No. 74-84. On January 8, 1975, a decision was rendered in said case, approving the said application subject to certain conditions, among which was:
"3.That the issuance of the shares of stocks will be for a period of one year from the date hereof, 'after which no further issues will be made without previous authority from this Board."

Pursuant to the approval given by the then Board of Communications, Natelco filed its Amended Articles of Incorporation with the Securities and Exchange Commission (SEC for short). When the amended articles were filed with the SEC, the original authorized capital of P100,000.00 was already paid. Of the increased capital of P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was fully paid. The capital stock of Natelco was divided into 213,000 common shares and 87,000 preferred shares, both at a

par value of P10.00 per share. On April 12, 1977, Natelco entered into a contract with Communication Services, Inc. (CSI for short) for the "manufacture, supply, delivery and installation" of telephone equipment. In accordance with this contract, Natelco issued 24,000 shares of common stocks to CSI on the same date as part of the downpayment. On May 5, 1979, another 12,000 shares of common stocks were issued to CSI. In both instances, no prior authorization from the Board of Communications, now the National Telecommunications Commission, was secured pursuant to the conditions imposed by the decision in BOC Case NO. 74-84 aforecited (Rollo, Vol. III, Memorandum for private respondent Natelco, pp. 814-816). On May 19, 1979, the stockholders of the Natelco held their annual stockholders' meeting to elect their seven directors to their Board of Directors, for the year 19791980. In this election Pedro Lopez Dee (Dee for short) was unseated as Chairman of the Board and President of the Corporation, but was elected as one of the directors, together with his wife, Amelia Lopez Dee (Rollo, Vol. III, Memorandum for private respondents, p. 985; p. 2).
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In the election CSI was able to gain control of Natelco when the latter's legal counsel, Atty. Luciano Maggay (Maggay for short) won a seat in the Board with the help of CSI. In the reorganization Atty. Maggay became president (Ibid., Memorandum for Private Respondent Natelco, p. 811). The following were elected in the May 19,1979 election:

Atty. Luciano Maggay, Mr. Augusto Federis, Mrs. Nilda Ramos, Ms. Felipa Javalera, Mr. Justino de Jesus, Sr., Mr. Pedro Lopez Dee and Mrs. Amelia C. Lopez Dee. The last three named directors never attended the meetings of the Maggay Board. The members of the Maggay Board who attended its meetings were Maggay, Federis, Ramos and Javalera. The last who were and are CSI representatives (Ibid., p. 812). Petitioner Dee having been unseated in the election, filed a petition in the SEC docketed as SEC Case No. 1748, questioning the validity of the elections of May 19, 1979 upon the main ground that there was no valid list of stockholders through which the right to vote could be determined (Rollo, Vol. I, pp. 254-262-A). As prayed for in the petition (Ibid., p. 262), a restraining order was issued by the SEC placing petitioner and the other officers of the 1978-1979 Natelco Board in hold-over capacity (Rollo, Vol. II, Reply, p. 667). The SEC restraining order was elevated to the Supreme Court in G.R. No. 50885 where the enforcement of the SEC restraining order was restrained. Private respondents therefore, replaced the hold-over officers (Rollo, Vol. II, p. 897). During the tenure of the Maggay Board, from June 22, 1979 to March 10, 1980, it did not reform the contract of April 12, 1977, and entered into another contract with CSI for the supply and installation of additional equipment but also issued to CSI 113,800 shares of common stock (Ibid., p. 812).

The shares of common stock issued to CSI are as follows:


NO. OF SHARESDATE ISSUED 24,000 sharesApril 12, 1977 12,000 sharesMay 5, 1979 28,000 sharesOctober 2, 1979 28,500 sharesNovember 5, 1979 20,000 sharesNovember 14, 1979 20,000 sharesJanuary 7, 1980

16,500 sharesJanuary 26, 1980 149,000 shares (Ibid., pp. 816-817). ===========

Subsequently, the Supreme Court dismissed the petition in G.R. No. 50885 upon the ground that the same was premature and the Commission should be allowed to conduct its hearing on the controversy. The dismissal of the petition resulted in the unseating of the Maggay group from the board of directors of Natelco in a "holdover" capacity (Rollo, Vol. II, p. 533). In the course of the proceedings in SEC Case No. 1748, respondent hearing officer issued an order on June 23, 1981, declaring: (1) that CSI is a stockholder of Natelco and, therefore, entitled to vote; (2) that unexplained 16,858 shares of Natelco appear to have been issued in

excess to CSI which should not be allowed to vote; (3) that 82 shareholders with their corresponding number of shares shall be allowed to vote; and (4) consequently, ordering the holding of special stockholder' meeting to elect the new members of the Board of Directors for Natelco based on the findings made in the order as to who are entitled to vote (Rollo, Vol. I, pp. 288-299).
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From the foregoing order dated June 23, 1981, petitioner Dee filed a petition for certiorari/appeal with the SEC en banc. The petition appeal was docketed as SEC-AC NO. 036. Thereafter, the Commission en banc rendered a decision on April 5, 1982, the dispositive part of which reads:
"Now therefore, the Commission en banc resolves to sustain the order of the Hearing Officer; to dismiss the petition/appeal for lack of merit; and order new elections as the Hearing Officer shall set after consultations with Natelco officers. For the protection of minority stockholders and in the interest of fair play and justice, the Hearing Officer shall order the formation of a special committee of three, one from the respondents (other than Natelco), one from petitioner, and the Hearing Officer as Chairman to supervise the election. "It remains to state that the Commission en banc cannot pass upon motions belatedly filed by petitioner and respondent Natelco to introduce newly discovered evidence any such evidence may be introduced at hearings

on the merits of SEC Case No. 1748. "SO ORDERED." (Rollo, Vol. I, p. 24).

On April 21, 1982, petitioner filed a motion for reconsideration (Rollo, Vol. I, pp. 25-30). Likewise, private respondent Natelco filed its motion for reconsideration dated April 21, 1982 (Ibid., pp. 32-51). Pending resolution of the motions for reconsideration, on May 4, 1982, respondent hearing officer without waiting for the decision of the commission en banc, to become final and executory rendered an order stating that the election for directors would be held on May 22, 1982 (Ibid., pp. 300-301). On May 20, 1982, the SEC en banc denied the motions for reconsideration (Rollo, Vol. II, pp. 763-765). Meanwhile on May 20, 1982 (G.R. No. 63922), petitioner Antonio Villasenor (as plaintiff) filed Civil Case No. 1507 with the Court of First Instance of Camarines Sur, Naga City, against private respondents and co-petitioners, de Jesus, Tordilla and the Dees', all defendants therein, which was raffled to Branch I, presided over by Judge Delfin Vir. Sunga (Rollo, G.R. No. 63922; pp. 25-30). Villasenor claimed that he was an assignee of an option to repurchase 36,000 shares of common stocks of Natelco under a Deed of Assignment executed in his favor (Rollo, p. 31). The defendants therein (now private respondents), principally the Maggay group, allegedly refused to allow the repurchase of said stocks when petitioner Villasenor offered to defendant CSI the repurchase of said stocks by tendering payment of its

price (Rollo, p. 26 and p. 78). The complaint therefore, prayed for the allowance to repurchase the aforesaid stocks and that the holding of the May 22, 1982 election of directors and officers of Natelco be enjoined (Rollo, pp. 28-29). A restraining order dated May 21, 1982 was issued by the lower court commanding desistance from the scheduled election until further orders (Rollo, p. 32).

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Nevertheless, on May 22, 1982, as scheduled, the controlling majority of the stockholders of the Natelco defied the restraining order, and proceeded with the elections, under the supervision of the SEC representatives (Rollo, Vol. III, p. 985); p. 10; G.R. No. 60502). On May 25, 1982, the SEC recognized the fact that elections were duly held, and proclaimed that the following are the "duly elected directors" of the Natelco for the term 1982-1983:
1.Felipa T. Javalera 2.Nilda I. Ramos 3.Luciano Maggay 4.Augusto Federis 5.Daniel J. Ilano 6.Nelin J. Ilano, Sr. 7.Ernesto A. Miguel.

And, the following are the recognized officers to wit:

1.PresidentLuciano Maggay 2.Vice-PresidentNilda I. Ramos 3.SecretaryDesiderio Saavedra 4.TreasurerFelipa Javalera 5.AuditorDaniel Ilano (Rollo, Vol. I, pp. 302-303)

Despite service of the order of May 25, 1982, the Lopez Dee group headed by Messrs. Justino De Jesus and Julio Lopez Dee kept insisting no elections were held and refused to vacate their positions (Rollo, Vol. III, p. 985; p. 11). On May 28, 1982, the SEC issued another order directing the hold-over directors and officers to turn over their respective posts to the newly elected directors and officers and directing the Sheriff of Naga City, with the assistance of PC and INP of Naga City, and other law enforcement agencies of the City or of the Province of Camarines Sur, to enforce the aforesaid order (Rollo, Vol. II, pp. 577-578).
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On May 29, 1982, the Sheriff of Naga City, assisted by law enforcement agencies, installed the newly elected directors and officers of the Natelco, and the hold-over officers peacefully vacated their respective offices and turned-over their functions to the new officers (Rollo, Vol. III, p. 985; pp. 12-13). On June 2, 1982, a charge for contempt was filed by petitioner Villasenor alleging that private respondents

have been claiming in press conferences and over the radio airlanes that they actually held and conducted elections on May 22, 1982 in the City of Naga and that they have a new set of officers, and that such acts of herein private respondents constitute contempt of court (G.R. 63922; Rollo, pp. 35-37). On September 7, 1982, the lower court rendered judgment on the contempt charge, the dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered: "1.Declaring respondents, CSI, Nilda Ramos, Luciano Maggay, Desiderio Saavedra, Augusto Federis and Ernesto Miguel, guilty of contempt of court, and accordingly punished with imprisonment of six (6) months and to pay fine of P1,000.00 each: and "2.Ordering respondents, CSI, Nilda Ramos, Luciano Maggay, Desiderio Saavedra, Augusto Federis and Ernesto Miguel, and those now occupying the positions of directors and officers of NATELCO to vacate their respective positions therein, and ordering them to reinstate the hold-over directors and officers of NATELCO, such as Pedro Lopez Dee as President, Justino de Jesus, Sr., as Vice President, Julio Lopez Dee as Treasurer and Vicente Tordilla, Jr. as Secretary, and others referred to as holdover directors and officers of NATELCO in the order dated May 28, 1982 of SEC Hearing

Officer Emmanuel Sison, in SEC Case No. 1748 (Exh. 6), by way of RESTITUTION, and consequently, ordering said respondents to turn over all records, property and assets of NATELCO to said hold-over directors and officers." (Ibid., Rollo, p. 49).

The trial judge issued an order dated September 10, 1982 directing the respondents in the contempt charge to "comply strictly, under pain of being subjected to imprisonment until they do so" (Ibid., p. 50). The order also commanded the Deputy Provincial Sheriff, with the aid of the PC Provincial Commander of Camarines Sur and the INP Station Commander of Naga City to "physically remove or oust from the offices or positions of directors and officers of NATELCO, the aforesaid respondents (herein private respondents) x x x and to reinstate and maintain, the hold-over directors and officers of NATELCO referred to in the order dated May 28, 1982 of SEC Hearing Officer Emmanuel Sison." (Ibid.). Private respondents filed on September 17, 1982, a petition for certiorari and prohibition with preliminary injunction or restraining order against the CFI Judge of Camarines Sur, Naga City and herein petitioners, with the then Intermediate Appellate Court which issued a resolution ordering herein petitioners to comment on the petition, which was complied with, and at the same time temporarily refrained from implementing and or enforcing the questioned judgment and order of the lower court (Rollo, p. 77, Decision of CA, p. 2).

On April 14, 1983, the then Intermediate Appellate Court, rendered a decision, the dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered as follows: "1.Annuling the judgment dated September 7, 1982 rendered by respondent judge on the contempt charge, and his order dated September 10, 1982, implementing said judgment; "2.Ordering the 'hold-over' directors and officers of NATELCO to vacate their respective offices; "3.Directing respondents to restore or reestablish petitioners (private respondents in this case) who were ejected on May 22, 1982 to their respective offices in the NATELCO, . . .; "4.Prohibiting whoever may be the successor of respondent Judge from interfering with the proceedings of the Securities and Exchange Commission in SEC-AC No. 036; xxx xxx xxx (Rollo, p. 88).

The order of re-implementation was issued, and, finally, the Maggay group has been restored as the officers of the Natelco (Rollo, G.R. No. 60502, p. 985; p. 37). Hence, these petitions involve the same parties and

practically the same issues. Consequently, in the resolution of the Court En Banc dated August 23, 1983, G.R. No. 63922 was consolidated with G.R. No. 60502. In G.R. No. 60502 In a resolution issued by the Court En Banc dated March 22, 1983, the Court gave due course to the petition and required the parties to submit their respective memoranda (Rollo, Resolution, p. 638-A; Vol. II). In G.R. No. 60502 The main issues in this case are: (1)Whether or not the Securities and Exchange Commission has the power and jurisdiction to declare null and void shares of stock issued by NATELCO to CSI for violation of Sec. 20 (h) of the Public Service Act; (2)Whether or not the issuance of 113 ,800 shares of Natelco to CSI, made during the pendency of SEC Case No. 1748 in the Securities and Exchange Commission was valid;
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(3)Whether or not Natelco stockholders have a right of preemption to the 113,800 shares in question; and(4) Whether or not the private respondents were duly elected to the Board of Directors of Natelco at

an election held on May 22, 1982. In G.R. No. 63922 The crucial issue to be resolved is whether or not the trial judge has jurisdiction to restrain the holding of an election of officers and directors of a corporation. The petitions are devoid of merit. In G.R. No. 60502 I It is the contention of petitioner that the Securities and Exchange Commission En Banc committed grave abuse of discretion when, in its decision dated April 5, 1982, in SEC-AC No. 036, it refused to declare void the shares of stock issued by Natelco to CSI allegedly in violation of Sec. 20 (h) of the Public Service Act. This section requires prior administrative approval of any transfer or sale of shares of stock of any public service which vest in the transferee more than forty percentum of the subscribed capital of the said public service. Section 5 of P.D. No. 902-A, as amended, enumerates the jurisdiction of the Securities and Exchange Commission:
"Sec. 5.In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over Corporations, partnerships and other forms of associations, registered with it as expressly granted under the existing laws and decrees, it shall have original and exclusive jurisdiction to hear and

decide cases involving: "a)Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and or of the stockholders, partners, members of associations or organizations registered with the Commission. (b)Controversies arising out of intracorporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; "c)Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. "d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due

or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree." (As added by PD 1758).

In other words, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between corporation, partnership or association and the public; (b) between the corporation, partnership, or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state insofar as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners, or associates themselves (Union Glass & Container Corp. vs. SEC, 126 SCRA 31 [1983]).
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The jurisdiction of the SEC is limited to matters intrinsically connected with the regulation of corporations, partnerships and associations and those dealing with internal affairs of such entities; P.D. 902-A does not confer jurisdiction to SEC over all matters affecting corporations (Pereyra vs. IAC, 181 SCRA 244 [1990]; Sales vs. SEC, 169 SCRA 121 [1989]). The jurisdiction of the SEC in SEC Case No. 1748 is limited to deciding the controversy in the election of the directors and officers of Natelco. Thus, the SEC was correct when it refused to rule on whether the issuance of the shares of Natelco stocks to CSI violated Sec. 20 (h) of the Public Service Act.

The SEC ruling as to the issue involving the Public Service Act, Section 20 (h), asserts that the Commission En Banc is not empowered to grant much less cancel franchise for telephone and communications, and therefore has no authority to rule that the issuance and sale of shares would in effect constitute a violation of Natelco's secondary franchise. It would be in excess of jurisdiction on our part to decide that a violation of our public service laws has been committed. The matter is better brought to the attention of the appropriate body for determination. Neither can the SEC provisionally decide the issue because it is only vested with the power to grant or revoke the primary corporate franchise. The SEC is empowered by P.D. 902-A to decide intracorporate controversies and that is precisely the only issue in this case. II The issuance of 113,800 shares of Natelco stock to CSI made during the pendency of SEC Case No. 1748 in the Securities and Exchange Commission was valid. The findings of the SEC En Banc as to the issuance of the 113,800 shares of stock was stated as follows:
"But the issuance of 113,800 shares were (sic) pursuant to a Board Resolution and stockholders' approval prior to May 19, 1979 when CSI was not yet in control of the Board or of the voting shares. There is distinction between an order to issue shares on or before May 19, 1979 and actual issuance of the shares after May 19, 1979. The actual

issuance, it is true, came during the period when CSI was in control of voting shares and the Board (if they were in fact in control) but only pursuant to the original Board and stockholders' orders, not on the initiative to the new Board, elected May 19, 1979, which petitioners are questioning. The Commission en banc finds it difficult to see how the one who gave the orders can turn around and impugn the implementation of the orders he had previously given. The reformation of the contract is understandable for Natelco lacked the corporate funds to purchase the CSI equipment. "xxx xxx xxx "Appellant had raised the issue whether the issuance of 113,800 shares of stock during the incumbency of the Maggay Board which was allegedly CSI controlled, and while the case was sub judice, amounted to unfair and undue advantage. This does not merit consideration in the absence of additional evidence to support the proposition."

In effect, therefore, the stockholders of Natelco approved the issuance of stock to CSI. III While the group of Luciano Maggay was in control of Natelco by virtue of the restraining order issued in G.R. No. 50885, the Maggay Board issued 113,800 shares of stock to CSI. Petitioner said that the Maggay Board, in

issuing said shares without notifying Natelco stockholders, violated their right of pre-emption to the unissued shares.
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This Court in Benito vs. SEC, et al., has ruled that:


"Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he was not able to exercise his right of pre-emption over the unissued shares. However, the general rule is that preemptive right is recognized only with respect to new issues of shares, and not with respect to additional issues of originally authorized shares. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later reoffered, he cannot therefore (sic) claim a dilution of interest (Benito vs. SEC, et al., 123 SCRA 722)."

The questioned issuance of the 113,800 stocks is not invalid even assuming that it was made without notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a corporation is lodged in the board of directors and no stockholders meeting is required to consider it because additional issuance of shares of stocks does not need approval of the stockholders. Consequently, no pre-emptive right of

Natelco stockholders was violated by the issuance of the 113,800 shares to CSI. IV Petitioner insists that no meeting and election were held in Naga City on May 22, 1982 as directed by respondent Hearing Officer. This fact is shown by the Sheriff's return of a restraining order issued by the Court of First Instance of Camarines Sur in Case No. 1505 entitled "Antonio Villasenor v. Communications Service Inc., et al." (Rollo, Vol. I, p. 309). There is evidence of the fact that the Natelco special stockholders' meeting and election of members of the Board of Directors of the corporation were held at its office in Naga City on May 22, 1982 as shown when the Hearing Officer issued an order on May 25, 1982, declaring the stockholders named therein as corporate officers duly elected for the term 1982-1983. More than that, private respondents were in fact charged with contempt of court and found guilty for holding the election on May 22, 1982, in defiance of the restraining order issued by Judge Sunga (Rollo, Vol. II, p. 750). It is, therefore, very clear from the records that an election was held on May 22, 1982 at the Natelco Offices in Naga City and its officers were duly elected, thereby rendering the issue of election moot and academic, not to mention the fact that the election of the Board of Directors/Officers has been held annually, while this case was dragging for almost a decade.
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The contempt charge against herein private respondents was predicated on their failure to comply with the restraining order issued by the lower court on May 21, 1982, enjoining them from holding the election of officers and directors of Natelco scheduled on May 22, 1982. The SEC en banc, in its decision of April 5, 1982, directed the holding of a new election which, through a conference attended by the hold-over directors of Natelco accompanied by their lawyers and presided by a SEC hearing officer, was scheduled on May 22, 1982 (Rollo, p. 59). Contrary to the claim of petitioners that the case is within the jurisdiction of the lower court as it does not involve an intra-corporate matter but merely a claim of a private party of the right to repurchase common shares of stock of Natelco and that the restraining order was. not meant to stop the election duly called for by the SEC, it is undisputed that the main objective of the lower court's order of May 21, 1982 was precisely to restrain or stop the holding of said election of officers and directors of Natelco, a matter purely within the exclusive jurisdiction of the SEC (P.D. No. 902A, Section 5). The said restraining order reads in part:
". . . A temporary restraining order is hereby issued, directing defendants (herein respondents), their agents, attorneys as well as any and all persons, whether public officers or private individuals to desist from conducting and holding, in any manner whatsoever, an election of the directors and officers of the Naga Telephone Co. (Natelco) . . ." (Rollo, p. 32).

Indubitably, the aforesaid restraining order, aimed not only to prevent the stockholders of Natelco from conducting the election of its directors and officers, but it also amounted to an injunctive relief against the SEC, since it is clear that even "public officers" (such as the Hearing Officer of the SEC) are commanded to desist from conducting or holding the election "under pain of punishment of contempt of court" (Ibid.) The fact that the SEC or any of its officers has not been cited for contempt, along with the stockholders of Natelco, who chose to heed the lawful order of the SEC to go on with the election as scheduled by the latter, is of no moment, since it was precisely the acts of herein private respondents done pursuant to an order lawfully issued by an administrative body that have been considered as contemptuous by the lower court prompting the latter to cite and punish them for contempt (Rollo, p. 48). Noteworthy is the pertinent portion of the judgment of the lower court which states:
"Certainly, this Court will not tolerate, or much less countenance, a mere Hearing Officer of the Securities and Exchange Commission, to render a restraining order issued by it (said Court) within its jurisdiction, nugatory and ineffectual and abet disobedience and even defiance by individuals and entities of the same . . ." (Rollo, p. 48).

Finally, in the case of Philippine Pacific Fishing Co., Inc. vs. Luna, 112 SCRA 604, 613 [1983], this Tribunal stated

clearly the following rule:


"Nowhere does the law (P.D No. 902-A) empower any Court of First Instance to interfere with the orders of the Commission (SEC). Not even on grounds of due process or jurisdiction. The Commission is, conceding arguendo a possible claim of respondents, at the very least, a co-equal body with the Courts of First Instance. Even as such coequal, one would have no power to control the other. But the truth of the matter is that only the Supreme Court can enjoin and correct any actuation of the Commission."

Accordingly, it is clear that since the trial judge in the lower court (CFI of Camarines Sur) did not have jurisdiction in issuing the questioned restraining order, disobedience thereto did not constitute contempt, as it is necessary that the order be a valid and legal one. It is an established rule that the court has no authority to punish for disobedience of an order issued without authority (Chanco v. Madrilejos, 9 Phil. 356; Angel Jose Realty Corp. v. Galao, et al., 76 Phil. 201). Finally, it is well-settled that the power to punish for contempt of court should be exercised on the preservative and not on the vindictive principle. Only occasionally should the court invoke its inherent power in order to retain that respect without which the administration of justice must falter or fail (Rivera v. Florendo, 144 SCRA 643, 662-663 [1986]; Lipata v. Tutaan, 124 SCRA 880 [1983]).

PREMISES CONSIDERED, both petitions are hereby DISMISSED for lack of merit. SO ORDERED.

[G.R. No. 146667. January 23, 2007.] JOHN F. McLEOD, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN TEXTILE MILLS, INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS, INC.), PATRICIO L. LIM, and ERIC HU, respondents. DECISION CARPIO, J :
p

The Case This is a petition for review 1 to set aside the Decision 2 dated 15 June 2000 and the Resolution 3 dated 27 December 2000 of the Court of Appeals in CA-G.R. SP No. 55130. The Court of Appeals affirmed with modification the 29 December 1998 Decision 4 of the National Labor Relations Commission (NLRC) in NLRC NCR 02-00949-95. The Facts The facts, as summarized by the Labor Arbiter and adopted by the NLRC and the Court of Appeals, are as follows:
On February 2, 1995, John F. McLeod filed a

complaint for retirement benefits, vacation and sick leave benefits, non-payment of unused airline tickets, holiday pay, underpayment of salary and 13th month pay, moral and exemplary damages, attorney's fees plus interest against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu. In his Position Paper, complainant alleged that he is an expert in textile manufacturing process; that as early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles, Inc. (UTEX); that he was promoted to Senior Manager and worked for UTEX till 1980 under its President, respondent Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent Filsyn having controlling interest; that complainant was absorbed by Peggy Mills as its Vice President and Plant Manager of the plant at Sta. Rosa, Laguna; that at the time of his retirement complainant was receiving P60,000.00 monthly with vacation and sick leave benefits; 13th month pay, holiday pay and two round trip business class tickets on a Manila-London-Manila itinerary every three years which is convertible to cas[h] if unused; that in January 1986, respondents failed to pay vacation and leave credits and requested complainant to wait as it was short of funds but the same remain unpaid at present; that complainant is entitled to such

benefit as per CBA provision (Annex "A"); that respondents likewise failed to pay complainant's holiday pay up to the present; that complainant is entitled to such benefits as per CBA provision (Annex "B"); that in 1989 the plant union staged a strike and in 1993 was found guilty of staging an illegal strike; that from 1989 to 1992 complainant was entitled to 4 round trip business class plane tickets on a Manila-London-Manila itinerary but this benefit not (sic) its monetary equivalent was not given; that on August 1990 the respondents reduced complainant's monthly salary of P60,000.00 by P9,900.00 till November 1993 or a period of 39 months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per agreement (Annex "D") and this was renamed as Sta. Rosa Textile with Patricio Lim as Chairman and President; that complainant worked for Sta. Rosa until November 30 that from time to time the owners of Far Eastern consulted with complainant on technical aspects of reoperation of the plant as per correspondence (Annexes "D-1" and "D-2"); that when complainant reached and applied retirement age at the end of 1993, he was only given a reduced 13th month pay of P44,183.63, leaving a balance of P15,816.87; that thereafter the owners of Far Eastern Textiles decided for cessation of operations of Sta. Rosa Textiles; that on two occasions,

complainant wrote letters (Annexes "E-1" to "E-2") to Patricio Lim requesting for his retirement and other benefits; that in the last quarter of 1994 respondents offered complainant compromise settlement of only P300,000.00 which complainant rejected; that again complainant wrote a letter (Annex "F") reiterating his demand for full payment of all benefits and to no avail, hence this complaint; and that he is entitled to all his money claims pursuant to law. On the other hand, respondents in their Position Paper alleged that complainant was the former Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills closed operations due to irreversible losses at the end of July 1992 but the corporation still exists at present; that its assets were acquired by Sta. Rosa Textile Corporation which was established in April 1992 but still remains non-operational at present; that complainant was hired as consultant by Sta. Rosa Textile in November 1992 but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles are separate legal entities and have no employer relationship with complainant; that respondent Patricio Lim is the President and Board Chairman of Sta. Rosa Textile Corporation; that respondent Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that complainant has no cause of action against Filsyn, Far Eastern Textile

Ltd., Sta. Rosa Textile Corporation and Eric Hu; that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile and not as private individual; that while complainant was Vice President and Plant Manager of Peggy Mills, the union staged a strike up to July 1992 resulting in closure of operations due to irreversible losses as per Notice (Annex "1"); that complainant was relied upon to settle the labor problem but due to his lack of attention and absence the strike continued resulting in closure of the company; and losses to Sta. Rosa which acquired its assets as per their financial statements (Annexes "2" and "3"); that the attendance records of complainant from April 1992 to November 1993 (Annexes "4" and "5") show that he was either absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing counterclaims for damages in the total amount of P36,757.00 against complainant; that complainant's monthly salary at Peggy Mills was P50,495.00 and not P60,000.00; that Peggy Mills, does not have a retirement program; that whatever amount complainant is entitled should be offset with the counterclaims; that complainant worked only for 12 years from 1980 to 1992; that complainant was only hired as a consultant and not an employee by Sta. Rosa Textile;

that complainant's attendance record of absence and two hours daily work during the period of the strike wipes out any vacation/sick leave he may have accumulated; that there is no basis for complainant's claim of two (2) business class airline tickets; that complainant's pay already included the holiday pay; that he is entitled to holiday pay as consultant by Sta. Rosa; that he has waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th month pay as consultant; and that he is not entitled to moral and exemplary damages and attorney's fees. In his Reply, complainant alleged that all respondents being one and the same entities are solidarily liable for all salaries and benefits and complainant is entitled to; that all respondents have the same address at 12/F B.A. Lepanto Building, Makati City; that their counsel holds office in the same address; that all respondents have the same offices and key personnel such as Patricio Lim and Eric Hu; that respondents' Position Paper is verified by Marialen C. Corpuz who knows all the corporate officers of all respondents; that the veil of corporate fiction may be pierced if it is used as a shield to perpetuate fraud and confuse legitimate issues; that complainant never accepted the change in his position from Vice-President and Plant Manager to consultant and it is incumbent upon respondents to prove that

he was only a consultant; that the Deed of Dation in Payment with Lease (Annex "C") proves that Sta. Rosa took over the assets of Peggy Mills as early as June 15, 1992 and not 1995 as alleged by respondents; that complainant never resigned from his job but applied for retirement as per letters (Annexes "E-1", "E-2" and "F"); that documents "G", "H" and "I" show that Eric Hu is a top official of Peggy Mills that the closure of Peggy Mills cannot be the fault of complainant; that the strike was staged on the issue of CBA negotiations which is not part of the usual duties and responsibilities as Plant Manager; that complainant is a British national and is prohibited by law in engaging in union activities; that as per Resolution (Annex "3") of the NLRC in the proper case, complainant testified in favor of management; that the alleged attendance record of complainant was lifted from the logbook of a security agency and is hearsay evidence; that in the other attendance record it shows that complainant was reporting daily and even on Saturdays; that his limited hours was due to the strike and cessation of operations; that as plant manager complainant was on call 24 hours a day; that respondents must pay complainant the unpaid portion of his salaries and his retirement benefits that cash voucher No. 17015 (Annex "K") shows that complainant drew the monthly salary of P60,000.00 which was reduced to P50,495.00

in August 1990 and therefore without the consent of complainant; that complainant was assured that he will be paid the deduction as soon as the company improved its financial standing but this assurance was never fulfilled; that Patricio Lim promised complainant his retirement pay as per the latter's letters (Annexes "E-1", "E-2" and "F"); that the law itself provides for retirement benefits; that Patricio Lim by way of Memorandum (Annex "M") approved vacation and sick leave benefits of 22 days per year effective 1986; that Peggy Mills required monthly paid employees to sign an acknowledgement that their monthly compensation includes holiday pay; that complainant was not made to sign this undertaking precisely because he is entitled to holiday pay over and above his monthly pay; that the company paid for complainant's two (2) round trip tickets to London in 1983 and 1986 as reflected in the complainant's passport (Annex "N"); that respondents claim that complainant is not entitled to 13th month pay but paid in 1993 and all the past 13 years; that complainant is entitled to moral and exemplary damages and attorney's fees; that all doubts must be resolved in favor of complainant; and that complainant reserved the right to file perjury cases against those concerned.

In their Reply, respondents alleged that except for Peggy Mills, the other respondents are not proper persons in interest due to the lack of employer-employee relationship between them and complainant; that undersigned counsel does not represent Peggy Mills, Inc. In a separate Position Paper, respondent Peggy Mills alleged that complainant was hired on February 10, 1991 as per Board Minutes (Annex "A"); that on August 19, 1987, the workers staged an illegal strike causing cessation of operations on July 21, 1992; that respondent filed a Notice of Closure with the DOLE (Annex "B"); that all employees were given separation pay except for complainant whose task was extended to December 31, 1992 to wind up the affairs of the company as per vouchers (Annexes "C" and "C-1"); that respondent offered complainant his retirement benefits under RA 7641 but complainant refused; that the regular salaries of complainant from closure up to December 31, 1992 have offset whatever vacation and sick leaves he accumulated; that his claim for unused plane tickets from 1989 to 1992 has no policy basis, the company's formula of employees monthly rate x 314 days over 12 months already included holiday pay; that complainant's unpaid portion of the 13th month pay in 1993 has no basis because he was only an employee up to December 31,

1992; that the 13th month pay was based on his last salary; and that complainant is not entitled to damages. 5

On 3 April 1998, the Labor Arbiter rendered his decision with the following dispositive portion:
WHEREFORE, premises considered, We hold all respondents as jointly and solidarily liable for complainant's money claims as adjudicated above and computed below as follows: Retirement Benefits (one month salaryfor every year of service)6/8011/30/93 = 14 yearsP60,000 x 14.0 mos.P840,000.00 Vacation and Sick Leave (3 yrs.)P2,000.00 x 22 days x 3 yrs.132,000.00 Underpayment of Salaries (3 yrs.)P60,000-P50,495 = P9,505P9,505 x 36.0 mos.342,180.00 Holiday Pay (3 yrs.)P2,000 x 30 days60,000.00 Underpayment of 13th month pay (1993) 15,816.87 Moral Damages3,000,000.00 Exemplary Damages1,000,000.00 10% Attorney's Fees138,999.68

TOTALP5,528,996.55 Unused Airline Tickets (3 yrs.)(To be converted in Peso upon payment)$2,450.00 x 3.0 [yrs.]$7,350.00 SO ORDERED.
6

Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc. (FETMI), Sta. Rosa Textiles, Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu appealed to the NLRC. The NLRC rendered its decision on 29 December 1998, thus:
WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and SET ASIDE and a new one is entered ORDERING respondent Peggy Mills, Inc. to pay complainant his retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a salary rate of P50,495.00 a month. All other claims are DISMISSED for lack of merit. SO ORDERED.
7

John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC denied in its Resolution of 30 June 1999. 8 McLeod thus filed a petition for certiorari before the Court of Appeals assailing the decision and resolution of the NLRC. 9 The Ruling of the Court of Appeals

On 15 June 2000, the Court of Appeals rendered judgment as follows:


WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby AFFIRMED with the MODIFICATION that respondent Patricio Lim is jointly and solidarily liable with Peggy Mills, Inc., to pay the following amounts to petitioner John F. McLeod: 1.retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a salary rate of P50,495, a month; 2.moral damages in the amount of one hundred thousand (P100,000.00) Pesos; 3.exemplary damages in the amount of fifty thousand (P50,000.00) Pesos; and 4.attorney's fees equivalent to 10% of the total award. No costs is awarded. SO ORDERED.
10

The Court of Appeals rejected McLeod's theory that all respondent corporations are the same corporate entity which should be held solidarily liable for the payment of his monetary claims.

The Court of Appeals ruled that the fact that (1) all respondent corporations have the same address; (2) all were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty. Escano holds office at respondent corporations' address; and (4) all respondent corporations have common officers and key personnel, would not justify the application of the doctrine of piercing the veil of corporate fiction. The Court of Appeals held that there should be clear and convincing evidence that SRTI, FETMI, and Filsyn were being used as alter ego, adjunct or business conduit for the sole benefit of Peggy Mills, Inc. (PMI), otherwise, said corporations should be treated as distinct and separate from each other. The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has six incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E. A. Picasso, and Walter Euyang. On the other hand, the Articles of Incorporation of Filsyn show that it has 10 incorporators, namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh, Ramon A. Yulo, Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael Maningas, and Benigno Zialcita, Jr. The Court of Appeals pointed out that PMI and Filsyn have only two interlocking incorporators and directors, namely, Patricio and Carlos Palanca, Jr. Reiterating the ruling of this Court in Laguio v. NLRC, 11 the Court of Appeals held that mere substantial identity of the incorporators of two corporations does not

necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in Payment with Lease, it was clear that SRTI did not assume the liabilities PMI incurred before the execution of the contract. The Court of Appeals held that McLeod failed to substantiate his claim that all respondent corporations should be treated as one corporate entity. The Court of Appeals thus upheld the NLRC's finding that no employer-employee relationship existed between McLeod and respondent corporations except PMI. The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be exonerated from any liability, there being no proof of malice or bad faith on his part. The Court of Appeals, however, ruled that McLeod was entitled to recover from PMI and Patricio, the company's Chairman and President. The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMI's financial obligation to McLeod. The Court of Appeals stated that, on several occasions, despite his approval, Patricio refused and ignored to pay McLeod's retirement benefits. The Court of Appeals stated that the delay lasted for one year prompting McLeod to initiate legal action. The Court of Appeals stated that although PMI offered to pay McLeod his retirement benefits, this offer for P300,000 was still below the "floor limits" provided by law. The Court of Appeals held that an employee could demand

payment of retirement benefits as a matter of right. The Court of Appeals stated that considering that PMI was no longer in operation, its "officer should be held liable for acting on behalf of the corporation." The Court of Appeals also ruled that since PMI did not have a retirement program providing for retirement benefits of its employees, Article 287 of the Labor Code must be followed. The Court of Appeals thus upheld the NLRC's finding that McLeod was entitled to retirement pay equivalent to 22.5 days for every year of service from 1980 to 1992 based on a salary rate of P50,495 a month. The Court of Appeals held that McLeod was not entitled to payment of vacation, sick leave and holiday pay because as Vice President and Plant Manager, McLeod is a managerial employee who, under Article 82 of the Labor Code, is not entitled to these benefits. The Court of Appeals stated that for McLeod to be entitled to payment of service incentive leave and holidays, there must be an agreement to that effect between him and his employer. Moreover, the Court of Appeals rejected McLeod's argument that since PMI paid for his two round-trip tickets Manila-London in 1983 and 1986, he was also "entitled to unused airline tickets." The Court of Appeals stated that the fact that PMI granted McLeod "free transport to and from Manila and London for the year 1983 and 1986 does not ipso facto characterize it as regular that would establish a prevailing company

policy." The Court of Appeals also denied McLeod's claims for underpayment of salaries and his 13th month pay for the year 1994. The Court of Appeals upheld the NLRC's ruling that it could be deduced from McLeod's own narration of facts that he agreed to the reduction of his compensation from P60,000 to P50,495 in August 1990 to November 1993. The Court of Appeals found the award of moral damages for P50,000 in order because of the "stubborn refusal" of PMI and Patricio to respect McLeod's valid claims. The Court of Appeals also ruled that attorney's fees equivalent to 10% of the total award should be given to McLeod under Article 2208, paragraph 2 of the Civil Code. 12 Hence, this petition. The Issues McLeod submits the following issues for our consideration:
1.Whether the challenged Decision and Resolution of the 14th Division of the Court of Appeals promulgated on 15 June 2000 and 27 December 2000, respectively, in CA-G.R. SP No. 55130 are in accord with law and jurisprudence; 2.Whether an employer-employee relationship exists between the private

respondents and the petitioner for purposes of determining employer liability to the petitioner; 3.Whether the private respondents may avoid their financial obligations to the petitioner by invoking the veil of corporate fiction; 4.Whether petitioner is entitled to the relief he seeks against the private respondents; 5.Whether the ruling of [this] Court in Special Police and Watchman Association (PLUM) Federation v. National Labor Relations Commission cited by the Office of the Solicitor General is applicable to the case of petitioner; and 6.Whether the appeal taken by the private respondents from the Decision of the labor arbiter meets the mandatory requirements recited in the Labor Code of the Philippines, as amended.
13

The Court's Ruling The petition must fail. McLeod asserts that the Court of Appeals should not have upheld the NLRC's findings that he was a managerial employee of PMI from 20 June 1980 to 31

December 1992, and then a consultant of SRTI up to 30 November 1993. McLeod asserts that if only for this "brazen assumption," the Court of Appeals should not have sustained the NLRC's ruling that his cause of action was only against PMI. These assertions do not deserve serious consideration. Records disclose that McLeod was an employee only of PMI. 14 PMI hired McLeod as its acting Vice President and General Manager on 20 June 1980. 15 PMI confirmed McLeod's appointment as Vice President/Plant Manager in the Special Meeting of its Board of Directors on 10 February 1981. 16 McLeod himself testified during the hearing before the Labor Arbiter that his "regular employment" was with PMI. 17 When PMI's rank-and-file employees staged a strike on 19 August 1989 to July 1992, PMI incurred serious business losses. 18 This prompted PMI to stop permanently plant operations and to send a notice of closure to the Department of Labor and Employment on 21 July 1992. 19 PMI informed its employees, including McLeod, of the closure. 20 PMI paid its employees, including managerial employees, except McLeod, their unpaid wages, sick leave, vacation leave, prorated 13th month pay, and separation pay. Under the compromise agreement between PMI and its employees, the employer-employee relationship between them ended on 25 November 1992.
21

Records also disclose that PMI extended McLeod's

service up to 31 December 1992 "to wind up some affairs" of the company. 22 McLeod testified on crossexamination that he received his last salary from PMI in December 1992. 23 It is thus clear that McLeod was a managerial employee of PMI from 20 June 1980 to 31 December 1992. However, McLeod claims that after FETMI purchased PMI in January 1993, he "continued to work at the same plant with the same responsibilities" until 30 November 1993. McLeod claims that FETMI merely renamed PMI as SRTI. McLeod asserts that it was for this reason that when he reached the retirement age in 1993, he asked all the respondents for the payment of his benefits. 24 These assertions deserve scant consideration. What took place between PMI and SRTI was dation in payment with lease. Pertinent portions of the contract that PMI and SRTI executed on 15 June 1992 read:
WHEREAS, PMI is indebted to the Development Bank of the Philippines ("DBP") and as security for such debts (the "Obligations") has mortgaged its real properties covered by TCT Nos. T-38647, T37136, and T-37135, together with all machineries and improvements found thereat, a complete listing of which is hereto attached as Annex "A" (the "Assets"); WHEREAS, by virtue of an intergovernmental agency arrangement, DBP transferred the Obligations, including the

Assets, to the Asset Privatization Trust ("APT") and the latter has received payment for the Obligations from PMI, under APT's Direct Debt Buy-Out ("DDBO") program thereby causing APT to completely discharge and cancel the mortgage in the Assets and to release the titles of the Assets back to PMI; WHEREAS, PMI obtained cash advances from SRTC in the total amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00) (the "Advances") to enable PMI to consummate the DDBO with APT, with SRTC subrogating APT as PMI's creditor thereby; WHEREAS, in payment to SRTC for PMI's liability, PMI has agreed to transfer all its rights, title and interests in the Assets by way of a dation in payment to SRTC, provided that simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions stated hereunder; xxx xxx xxx NOW THEREFORE, for and in consideration of the foregoing premises, and of the terms and conditions hereinafter set forth, the parties hereby agree as follows: 1.CESSION. In consideration of the amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00), PMI hereby cedes,

conveys and transfers to SRTC all of its rights, title and interest in and to the Assets by way of a dation in payment. 25 (Emphasis supplied)

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling corporation fraudulently enters into the transaction to escape liability for those debts. 26 None of the foregoing exceptions is present in this case. Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of P210,000,000. We are not convinced that PMI fraudulently transferred these assets to escape its liability for any of its debts. PMI had already paid its employees, except McLeod, their money claims. There was also no merger or consolidation of PMI and SRTI. Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation. It is a combination by agreement between two or more corporations by which

their rights, franchises, and property are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of the original corporations. Merger, on the other hand, is a union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation survives and continues the combined business. The parties to a merger or consolidation are called constituent corporations. In consolidation, all the constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In both cases, however, there is no liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation acquires all their properties, rights and franchises and their stockholders usually become its stockholders. The surviving or consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of whether the creditors have consented or not to such merger or consolidation. 27 In the present case, there is no showing that the subject dation in payment involved any corporate merger or consolidation. Neither is there any showing of those indicative factors that SRTI is a mere instrumentality of PMI. Moreover, SRTI did not expressly or impliedly agree to assume any of PMI's debts. Pertinent portions of the

subject Deed of Dation in Payment with Lease provide, thus:


2.WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and represents the following: xxx xxx xxx (e)PMI shall warrant that it will hold SRTC or its assigns, free and harmless from any liability for claims of PMI's creditors, laborers, and workers and for physical injury or injury to property arising from PMI's custody, possession, care, repairs, maintenance, use or operation of the Assets except ordinary wear and tear; 28 (Emphasis supplied)

Also, McLeod did not present any evidence to show the alleged renaming of "Peggy Mills, Inc." to "Sta. Rosa Textiles, Inc." Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity. Respondent corporations assert that SRTI hired McLeod as consultant after PMI stopped operations. 29 On the other hand, McLeod asserts that he was respondent corporations' employee from 1980 to 30 November 1993. 30 However, McLeod failed to present any proof of employer-employee relationship between him and Filsyn, SRTI, or FETMI. McLeod testified, thus:

ATTY. ESCANO: Do you have any employment contract with Far Eastern Textile? WITNESS: It is my belief up the present time. ATTY. AVECILLA: May I request that the witness be allowed to go through his Annexes, Your Honor. ATTY. ESCANO: Yes, but I want a precise answer to that question. If he has an employment contract with Far Eastern Textile? WITNESS: Can I answer it this way, sir? There is not a valid contract but I was under the impression taking into consideration that the closeness that I had at Far Eastern Textile is enough during that period of time of the development of Peggy Mills to reorganize a staff. I was under the basic impression that they might still retain my status as Vice President and Plant Manager of the company. ATTY. ESCANO: But the answer is still, there is no employment contract in your

possession appointing you in any capacity by Far Eastern? WITNESS: There was no written contract, sir. xxx xxx xxx ATTY. ESCANO: So, there is proof that you were in fact really employed by Peggy Mills? WITNESS: Yes, sir. ATTY. ESCANO: Of course, my interest now is to whether or not there is a similar document to present that you were employed by the other respondents like Filsyn Corporation? WITNESS: I have no document, sir. ATTY. ESCANO: What about Far Eastern Textile Mills? WITNESS: I have no document, sir. ATTY. ESCANO: And Sta. Rosa Textile Mills?

WITNESS: There is no document, sir.


31

xxx xxx xxx ATTY. ESCANO: QYes. Let me be more specific, Mr. McLeod. Do you have a contract of employment from Far Eastern Textiles, Inc.? ANo, sir. QWhat about Sta. Rosa Textile Mills, do you have an employment contract from this company?

ANo, sir.
xxx xxx xxx QAnd what about respondent Eric Hu. Have you had any contract of employment from Mr. Eric Hu? ANot a direct contract but I was taken in and I told to take over this from Mr. Eric Hu. Automatically, it confirms that Mr. Eric Hu, in other words, was under the control of Mr. Patricio Lim at that period of time. QNo documents to show, Mr. McLeod? ANo. No documents, sir.
32

McLeod could have presented evidence to support his

allegation of employer-employee relationship between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment letters or employment contracts, payrolls, organization charts, SSS registration, personnel list, as well as testimony of co-employees, may serve as evidence of employee status. 33 It is a basic rule in evidence that parties must prove their affirmative allegations. While technical rules are not strictly followed in the NLRC, this does not mean that the rules on proving allegations are entirely ignored. Bare allegations are not enough. They must be supported by substantial evidence at the very least. 34 However, McLeod claims that "for purposes of determining employer liability, all private respondents are one and the same employer" because: (1) they have the same address; (2) they are all engaged in the same business; and (3) they have interlocking directors and officers. 35 This assertion is untenable. A corporation is an artificial being invested by law with a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. 36 While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies only when such

corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, 37 or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 38 To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot be presumed. 39 Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the corporate veil. Respondent corporations may be engaged in the same business as that of PMI, but this fact alone is not enough reason to pierce the veil of corporate fiction. 40 In Indophil Textile Mill Workers Union v. Calica, Court ruled, thus:
41 the

In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private respondent Company. While we do not discount the possibility of the similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses

of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic. 42 (Emphasis supplied)

Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg., Paseo de Roxas, Makati City, 43 can be explained by the two companies' stipulation in their Deed of Dation in Payment with Lease that "simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions stated hereunder." 44 As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg., Paseo de Roxas, Makati City, 45 while FETMI held office at 18F, Tun Nan Commercial Building, 333 Tun Hwa South Road, Sec. 2, Taipei, Taiwan, R.O.C. 46 Hence, they did not have the same address as that of PMI. That respondent corporations have interlocking incorporators, directors, and officers is of no moment. The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos Palanca, Jr. 47 While Patricio was Director and Board Chairman of Filsyn, SRTI, and PMI, 48 he was never an officer of FETMI.

Eric Hu, on the other hand, was Director of Filsyn and SRTI. 49 He was never an officer of PMI. Marialen C. Corpuz, Filsyn's Finance Officer, 50 testified on cross-examination that (1) among all of Filsyn's officers, only she was the one involved in the management of PMI; (2) only she and Patricio were the common officers between Filsyn and PMI; and (3) Filsyn and PMI are "two separate companies." 51 Apolinario L. Posio, PMI's Chief Accountant, testified that "SRTI is a different corporation from PMI." 52 At any rate, the existence of interlocking incorporators, directors, and officers is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations. 53 In Del Rosario v. NLRC, 54 the Court ruled that substantial identity of the incorporators of corporations does not necessarily imply fraud. In light of the foregoing, and there being no proof of employer-employee relationship between McLeod and respondent corporations and Eric Hu, McLeod's cause of action is only against his former employer, PMI. On Patricio's personal liability, it is settled that in the absence of malice, bad faith, or specific provision of law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. 55 To reiterate, a corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people

comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities. 56 Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable for their corporate action. 57 Considering that McLeod failed to prove any of the foregoing exceptions in the present case, McLeod cannot hold Patricio solidarily liable with PMI. The records are bereft of any evidence that Patricio acted with malice or bad faith. Bad faith is a question of fact and is evidentiary. Bad faith does not connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious wrongdoing. It means breach of a known duty through some ill motive or interest. It partakes of the nature of fraud. 58 In the present case, there is nothing substantial on record to show that Patricio acted in bad faith in terminating McLeod's services to warrant Patricio's

personal liability. PMI had no other choice but to stop plant operations. The work stoppage therefore was by necessity. The company could no longer continue with its plant operations because of the serious business losses that it had suffered. The mere fact that Patricio was president and director of PMI is not a ground to conclude that he should be held solidarily liable with PMI for McLeod's money claims. The ruling in A.C. Ransom Labor Union-CCLU v. NLRC, 59 which the Court of Appeals cited, does not apply to this case. We quote pertinent portions of the ruling, thus:
(a)Article 265 of the Labor Code, in part, expressly provides: "Any worker whose employment has been terminated as a consequence of an unlawful lockout shall be entitled to reinstatement with full backwages." Article 273 of the Code provides that: "Any person violating any of the provisions of Article 265 of this Code shall be punished by a fine of not exceeding five hundred pesos and/or imprisonment for not less than one (1) day nor more than six (6) months." (b)How can the foregoing provisions be implemented when the employer is a corporation? The answer is found in Article 212 (c) of the Labor Code which provides: "(c)'Employer' includes any person

acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except when acting as employer." The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM is an artificial person, it must have an officer who can be presumed to be the employer, being the "person acting in the interest of (the) employer" RANSOM. The corporation, only in the technical sense, is the employer. The responsible officer of an employer corporation can be held personally, not to say even criminally, liable for non-payment of back wages. That is the policy of the law. xxx xxx xxx (c)If the policy of the law were otherwise, the corporation employer can have devious ways for evading payment of back wages. In the instant case, it would appear that RANSOM, in 1969, foreseeing the possibility or probability of payment of back wages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their case. RANSOM actually ceased

operations on May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial Relations was promulgated against RANSOM. 60 (Emphasis supplied)

Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio, does not obtain in the present case. In Santos v. NLRC, 61 the Court held, thus:
It is true, there were various cases when corporate officers were themselves held by the Court to be personally accountable for the payment of wages and money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation could be held personally liable for nonpayment of backwages for "(i)f the policy of the law were otherwise, the corporation employer (would) have devious ways for evading payment of backwages." In the absence of a clear identification of the officer directly responsible for failure to pay the backwages, the Court considered the President of the corporation as such officer. The case was cited in Chua vs. NLRC in holding personally liable the vice-president of the company, being the highest and most ranking official of the corporation next to the President who was dismissed for the latter's

claim for unpaid wages. A review of the above exceptional cases would readily disclose the attendance of facts and circumstances that could rightly sanction personal liability on the part of the company officer. In A.C. Ransom, the corporate entity was a family corporation and execution against it could not be implemented because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. The doctrine of "piercing the veil of corporate fiction" was thus clearly appropriate. Chua likewise involved another family corporation, and this time the conflict was between two brothers occupying the highest ranking positions in the company. There were incontrovertible facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in the easing out from the company of one of the brothers by the other. The basic rule is still that which can be deduced from the Court's pronouncement in Sunio vs. National Labor Relations Commission; thus: We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible

error. The Assistant Regional Director's Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (1/2) interest of said corporation, and his alleged arbitrary dismissal of private respondents. Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents' back salaries. 62 (Emphasis supplied)

Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction is

used to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. Neither Article 212 (c) nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally liable for the debts of the corporation. As this Court ruled in H.L. Carlos Construction, Inc. v. Marina Properties Corporation: 63
We concur with the CA that these two respondents are not liable. Section 31 of the Corporation Code (Batas Pambansa Blg. 68) provides: "Section 31.Liability of directors, trustees or officers. Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith . . . shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders and other persons." The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c) they incur conflict of interest, resulting in damages to the corporation, its stockholders or other

persons. The records are bereft of any evidence that Typoco acted in bad faith with gross or inexcusable negligence, or that he acted outside the scope of his authority as company president. The unilateral termination of the Contract during the existence of the TRO was indeed contemptible for which MPC should have merely been cited for contempt of court at the most and a preliminary injunction would have then stopped work by the second contractor. Besides, there is no showing that the unilateral termination of the Contract was null and void. 64

McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday pay. Article 82, Title I, Book Three of the Labor Code, on Working Conditions and Rest Periods, provides:
Coverage. The provisions of this title shall apply to employees in all establishments and undertakings whether for profit or not, but not to government employees, managerial employees, field personnel, members of the family of the employer who are dependent on him for support, domestic helpers, persons in the personal service of another, and workers who are paid by results as determined by the Secretary of Labor in appropriate regulations. As used herein, "managerial employees" refer

to those whose primary duty consists of the management of the establishment in which they are employed or of a department or subdivision thereof, and to other officers or members of the managerial staff. (Emphasis supplied)

As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from the coverage of Title I, Book Three of the Labor Code. McLeod is entitled to payment of vacation leave and sick leave only if he and PMI had agreed on it. The payment of vacation leave and sick leave depends on the policy of the employer or the agreement between the employer and employee. 65 In the present case, there is no showing that McLeod and PMI had an agreement concerning payment of these benefits. McLeod's assertion of underpayment of his 13th month pay in December 1993 is unavailing. 66 As already stated, PMI stopped plant operations in 1992. McLeod himself testified that he received his last salary from PMI in December 1992. After the termination of the employeremployee relationship between McLeod and PMI, SRTI hired McLeod as consultant and not as employee. Since McLeod was no longer an employee, he was not entitled to the 13th month pay. 67 Besides, there is no evidence on record that McLeod indeed received his alleged "reduced 13th month pay of P44,183.63" in December 1993. 68 Also unavailing is McLeod's claim that he was entitled to the "unpaid monetary equivalent of unused plane tickets

for the period covering 1989 to 1992 in the amount of P279,300.00." 69 PMI has no company policy granting its officers and employees expenses for trips abroad. 70 That at one time PMI reimbursed McLeod for his and his wife's plane tickets in a vacation to London 71 could not be deemed as an established practice considering that it happened only once. To be considered a "regular practice," the giving of the benefits should have been done over a long period, and must be shown to have been consistent and deliberate. 72 In American Wire and Cable Daily Rated Employees Union v. American Wire and Cable Co., Inc., 73 the Court held that for a bonus to be enforceable, the employer must have promised it, and the parties must have expressly agreed upon it, or it must have had a fixed amount and had been a long and regular practice on the part of the employer. In the present case, there is no showing that PMI ever promised McLeod that it would continue to grant him the benefit in question. Neither is there any proof that PMI and McLeod had expressly agreed upon the giving of that benefit. McLeod's reliance on Annex M 74 can hardly carry the day for him. Annex M, which is McLeod's letter addressed to "Philip Lim, VP Administration," merely contains McLeod's proposals for the grant of some benefits to supervisory and confidential employees. Contrary to McLeod's allegation, Patricio did not sign the letter. Hence, the letter does not embody any agreement between McLeod and the management that would entitle McLeod to his

money claims. Neither can McLeod's assertions find support in Annex U. 75 Annex U is the Agreement which McLeod and Universal Textile Mills, Inc. executed in 1959. The Agreement merely contains the renewal of the service agreement which the parties signed in 1956. McLeod cannot successfully pretend that his monthly salary of P60,000 was reduced without his consent. McLeod testified that in 1990, Philip Lim explained to him why his salary would have to be reduced. McLeod said that Philip told him that "they were short in finances; that it would be repaid." 76 Were McLeod not amenable to that reduction in salary, he could have immediately resigned from his work in PMI. McLeod knew that PMI was then suffering from serious business losses. In fact, McLeod testified that PMI was not able to operate from August 1989 to 1992 because of the strike. Even before 1989, as Vice President of PMI, McLeod was aware that the company had incurred "huge loans from DBP." 77 As it happened, McLeod continued to work with PMI. We find it pertinent to quote some portions of Apolinario Posio's testimony, to wit:
QYou also stated that before the period of the strike as shown by annex "K" of the reply filed by the complainant which was I think a voucher, the salary of Mr. McLeod was roughly P60,000.00 a month?

AYes, sir. QAnd as shown by their annex "L" to their reply, that this was reduced to roughly P50,000.00 a month? AYes, sir. QYou stated that this was indeed upon the instruction by the Vice-President of Peggy Mills at that time and that was Mr. Philip Lim, would you not? AYes, sir. QOf your own personal knowledge, can you say if this was, in fact, by agreement between Mr. Philip Lim or any other officers of Peggy Mills and Mr. McLeod? AIf I recall it correctly, I assume it was an agreement, verbal agreement with, between Mr. Philip Lim and Mr. McLeod, because the voucher that we prepared was actually acknowledged by Mr. McLeod, the reduced amount was acknowledged by Mr. McLeod thru the voucher that we prepared. QIn other words, Mr. Witness, you mean to tell us that Mr. McLeod continuously received the reduced amount of P50,000.00 by signing the voucher and receiving the amount in question? AYes, sir.

QAs far as you remember, Mr. Posio, was there any complaint by Mr. McLeod because of this reduced amount of his salary at that time? AI don't have any personal knowledge of any complaint, sir. QAt least, that is in so far as you were concerned, he said nothing when he signed the voucher in question? AYes, sir. QNow, you also stated that the reason for what appears to be an agreement between Peggy Mills and Mr. McLeod in so far as the reduction of his salary from P60,000.00 to P50,000.00 a month was because he would have a reduced number of working days in view of the strike at Peggy Mills, is that right? AYes, sir. QAnd that this was so because on account of the strike, there was no work to be done in the company? AYes, sir.
78

xxx xxx xxx QNow, you also stated if you remember during the first time that you testified that in the beginning, the monthly salary of the complainant was

P60,000.00, is that correct? AYes, sir. QAnd because of the long period of the strike, when there was no work to be done, by agreement with the complainant, his monthly salary was adjusted to only P50,495 because he would not have to report for work on Saturday. Do you remember having made that explanation? AYes, sir. QYou also stated that the complainant continuously received his monthly salary in the adjusted amount of P50,495.00 monthly signing the necessary vouchers or pay slips for that without complaining, is that not right, Mr. Posio? AYes, sir.
79

Since the last salary that McLeod received from PMI was P50,495, that amount should be the basis in computing his retirement benefits. McLeod must be credited only with his service to PMI as it had a juridical personality separate and distinct from that of the other respondent corporations. Since PMI has no retirement plan, 80 we apply Section 5, Rule II of the Rules Implementing the New Retirement Law which provides:

5.1In the absence of an applicable agreement or retirement plan, an employee who retires pursuant to the Act shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year. 5.2Components of One-half (1/2) Month Salary. For the purpose of determining the minimum retirement pay due an employee under this Rule, the term "one-half month salary" shall include all of the following: (a)Fifteen (15) days salary of the employee based on his latest salary rate. . . .

With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is entitled to a retirement pay equivalent to 1/2 month salary for every year of service based on his latest salary rate of P50,495 a month. There is no basis for the award of moral damages. Moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive. 81 From the records of the case, the Court finds no ultimate facts to support a conclusion of bad faith on the part of PMI.

Records disclose that PMI had long offered to pay McLeod his money claims. In their Comment, respondents assert that they offered to pay McLeod the sum of P840,000, as "separation benefits, and not P300,000, if only to buy peace and to forestall any complaint" that McLeod may initiate before the NLRC. McLeod admitted at the hearing before the Labor Arbiter that PMI has made this offer
ATTY. ESCANO: . . . According to your own statement in your Position Paper and I am referring to page 8, your unpaid retirement benefit for fourteen (14) years of service at P60,000.00 per year is P840,000.00, is that correct? WITNESS: That is correct, sir. ATTY. ESCANO: And this amount is correct P840,000.00, according to your Position Paper? WITNESS: That is correct, sir. ATTY. ESCANO: The question I want to ask is, are you aware that this amount was offered to you sometime last year through your own lawyer, my good friend, Atty. Avecilla,

who is right here with us? WITNESS: I was aware, sir. ATTY. ESCANO: So this was offered to you, is that correct? WITNESS: I was told that a fixed sum of P840,000.00 was offered. ATTY. ESCANO: And, of course, the reason, if I may assume, that you declined this offer was that, according to you, there are other claims which you would like to raise against the Respondents which, by your impression, they were not willing to pay in addition to this particular amount? WITNESS: Yes, sir.

ATTY. ESCANO:
The question now is, if the same amount is offered to you by way of retirement which is exactly what you stated in your own Position Paper, would you accept it or not? WITNESS:

Not on the concept without all the basic benefits due me, I will refuse. 82 xxx xxx xxx ATTY. ROXAS: QYou mentioned in the cross-examination of Atty. Escano that you were offered the separation pay in 1994, is that correct, Mr. Witness? WITNESS: AI was offered a settlement of P300,000.00 for complete settlement and that was I think in January or February 1994, sir. ATTY. ESCANO: No. What was mentioned was the amount of P840,000.00. WITNESS: What did you say, Atty. Escano? ATTY. ESCANO: The amount that I mentioned was P840,000.00 corresponding to the . . . WITNESS: May I ask that the question be clarified, your Honor? ATTY. ROXAS: QYou mentioned that you were offered for

the settlement of your claims in 1994 for P840,000.00, is that right, Mr. Witness? ADuring that period in time, while the petition in this case was ongoing, we already filed a case at that period of time, sir. There was a discussion. To the best of my knowledge, they are willing to settle for P840,000.00 and based on what the Attorney told me, I refused to accept because I believe that my position was not in anyway due to a compromise situation to the benefits I am entitled to. 83

Hence, the awards for exemplary damages and attorney's fees are not proper in the present case.

84

That respondent corporations, in their appeal to the NLRC, did not serve a copy of their memorandum of appeal upon PMI is of no moment. Section 3 (a), Rule VI of the NLRC New Rules of Procedure provides:
Requisites for Perfection of Appeal. (a) The appeal shall be filed within the reglementary period as provided in Section 1 of this Rule; shall be under oath with proof of payment of the required appeal fee and the posting of a cash or surety bond as provided in Section 5 of this Rule; shall be accompanied by a memorandum of appeal . . . and proof of service on the other party of such appeal. (Emphasis supplied)

The "other party" mentioned in the Rule obviously refers to the adverse party, in this case, McLeod. Besides, Section 3, Rule VI of the Rules which requires, among others, proof of service of the memorandum of appeal on the other party, is merely a rundown of the contents of the required memorandum of appeal to be submitted by the appellant. These are not jurisdictional requirements.
85

WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of Appeals in CA-G.R. SP No. 55130, with the following MODIFICATIONS: (a) the retirement pay of John F. McLeod should be computed at 1/2 month salary for every year of service for 12 years based on his salary rate of P50,495 a month; (b) Patricio L. Lim is absolved from personal liability; and (c) the awards for moral and exemplary damages and attorney's fees are deleted. No pronouncement as to costs. SO ORDERED.

[G.R. No. 117897. May 14, 1997.] ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE COMMISSION, petitioners, vs. COURT OF APPEALS and IGLESIA NI CRISTO, respondents. Blo Umpar Adiong for petitioners. Cuevas de la Cuesta & De las Alas for private respondent. SYLLABUS 1.REMEDIAL LAW; CIVIL PROCEDURE; EFFECT OF JUDGMENTS; RES JUDICATA; DUAL ASPECTS IN ACTIONS IN PERSONAM; BAR BY PRIOR JUDGMENT AND CONCLUSIVENESS OF JUDGMENT. Section 49 (b) of the Revised Rules of Court lays down the dual aspects of res judicata in actions in personam. Section 49(b) enunciates the first concept of res judicata known as "bar by prior judgment," whereas, Section 49(c) is referred to as "conclusiveness of judgment." There is "bar by former judgment" when, between the first case where the judgment was rendered, and the second case where such judgment is invoked, there is identity of parties, subject matter and cause of action. When the three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the subsequent action. But where between the first case

wherein judgment is rendered and the second case wherein such judgment is invoked, there is only identity of parties but there as is no identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as to matters merely involved therein. This is what is termed "conclusiveness of judgment." 2.ID.; ID.; ID.; ID.; ID.; ID.; NOT APPLICABLE IN CASE AT BAR. Neither of the concepts of res judicata find relevant application in the case at bench. While there may be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was only made an ancillary party in G.R. No. 107751 as intervenor. It was never originally a principal party thereto. It must be noted that intervention is not an independent action, but is merely collateral, accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or subsidiary, to the case between the original parties. It is only in the present case, actually, where the IDP-Tamano Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties in both cases. In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G. R. No. 107751, was entitled, "Iglesia Ni Cristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," the

IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of Trustees in that case. Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a "bar by former judgment" will still not set in on the ground that the cause of action in the two cases are different. The cause of action in G. R. No. 107751 is the surrender of the owner's duplicate copy of the transfer certificates of title to the rightful possessor thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-INC Deed of Absolute Sale. Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC has the better right of possession over the owner's duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause grave and irreparable injustice to IDP witch never gave its consent to the sale, thru a legitimate Board of Trustees. In any case, while it is true that the principle of res judicata is a fundamental component of our judicial system, it should be disregarded if its rigid application would involve the sacrifice of justice to technicality. 3.COMMERCIAL LAW; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION; AUTHORITY TO DECIDE

THE LEGITIMATE BOARD OF TRUSTEES OF IDP. There can be no question as to the authority of the SEC to pass upon the issue as to who among the different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A. If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning it can also declare who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case. No. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null and void. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of IDP property. 4.CIVIL LAW; CONTRACTS; REQUISITES; CONSENT; WANTING IN CASE AT BAR. Article 1318 of the New Civil Code lays down the essential requisites of contracts. All these elements must be present to constitute a valid contract. For, where even one is absent, the contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and where it is wanting, the contract is nonexistent. In this case, the IDP, owner of the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.

DECISION HERMOSISIMA, JR., J :


p

The subject of this petition for review is the Decision of the public respondent Court of Appeals, 1 dated October 28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission (SEC, for short) in SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent Iglesia Ni Cristo (INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group (IDP, for short).
LLphil

The following facts appear of record. Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for, the construction of a "Mosque (prayer place, Madrasah (Arabic School), and other religious infrastructures" so as to facilitate the effective practice of Islamic faith in the area. 2 Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an area

of 49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both registered in the name of IDP. It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its Articles of Incorporation:
Senator Mamintal Tamano Congressman Ali Dimaporo Congressman Salipada Pendatun Dean Cesar Adib Majul Sultan Harun Al-Rashid Lucman Delegate Ahmad Alonto Commissioner Datu Mama Sinsuat Mayor Aminkadra Abubakar
6 5

According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name of IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the 1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman AlRashid Lucman flew to the Middle East to escape political persecution. Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty.

Firdaussi Abbas. Both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups, came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board members to be null and void. The dispositive portion of the SEC Decision reads:
"WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners 7 and respondents 8 as null and void for being violative of the Articles of Incorporation of petitioner corporation. With the nullification of the election of the respondents, the approved by-laws which they certified to this Commission as members of the Board of Trustees must necessarily be likewise declared null and void. However, before any election of the members of the Board of Trustees could be conducted, there must be an approved by-laws to govern the internal government of the association including the conduct of election. And since the election of both petitioners and respondents have been declared null and void, a vacuum is created as to who should adopt the by-laws and certify its adoption. To remedy this unfortunate situation that the association has found itself in, the members of the petitioning corporation are hereby authorized to prepare and adopt their bylaws for submission to the Commission. Once approved, an election of the members of the

Board of Trustees shall immediately be called pursuant to the approved by-laws. SO ORDERED."

Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision, and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the Carpizo Group 10 attempted to submit a set of by-laws, the SEC found that, aside from that Engineer Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering the adoption of the by-laws likewise null and void. On April 20, 1989, without having been properly elected as new members of the Board of Trustees of IDP, the Carpizo Group caused to be signed an alleged Board Resolution 11 of the IDP, authorizing the sale of the subject two parcels of land to the private respondent INC for a consideration of P22,343,400.00, which sale was evidenced by a Deed of Absolute Sale 12 dated April 20, 1989. On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No 4012, seeking to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP.

Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to clear the property of squatters and deliver complete and full physical possession thereof to INC. Likewise, INC filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of Deeds of Quezon City the owner's duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the aforementioned two parcels of land, so that the sale in INC's favor may be registered and new titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo Group. The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter alia:
"xxx xxx xxx 2.That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against Mr. Farouk Carpizo, et, al., who, through false schemes and machinations, succeeded in executing the Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is the subject of the case at bar;

3.That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence, Intervenor's legal interest in the instant case. A copy of the said case is hereto attached as Annex 'A';
cdtai

4.That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally represent the Islamic Directorate of the Philippines; xxx xxx xxx."
13

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC. 14 Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioner's motion to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the SEC. 15 Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the IDPCarpizo Group to comply with its obligation under the Deed of Sale of clearing the subject lots of squatters and

of delivering the actual possession thereof to INC.

16

Thereupon Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-6937, treated INC as the rightful owner of the real properties and disposed as follows:
"WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff 17 the owner's copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of Absolute Sale in the latter's name and the annotation of the mortgage executed in her favor by herein defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to plaintiff. SO ORDERED."
18

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to deliver the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT26520 (176616) to the Register of Deeds of Quezon City for the purposes stated in the Order of March 2, 1992."
19

Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R. No. SP-27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on October 28, 1992. 20 Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No. 107751.

In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this wise:
"1.Declaring the by-laws submitted by the respondents 21 as unauthorized, and hence, null and void. 2.Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc. 22 null and void. 3.Declaring the election of the Board of Directors 23 of the corporation from 1986 to 1991 as null and void; 4.Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of the IDP null and void. No pronouncement as to cost. SO ORDERED."
24

Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012, but the same was denied on account of the fact that the decision of the case had become final and executory, no appeal having been taken therefrom. 25 INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil action for certiorari, docketed as CA-G.R. SP No 33295. On October 28, 1994, the court a quo promulgated a

Decision in CA-G.R. SP No. 33295 granting INC's petition. The portion of the SEC Decision in SEC Case No. 4012 which declared the sale of the two (2) lots in question to INC as void was ordered set aside by the Court of Appeals. Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994, submitting that the Court of Appeals gravely erred in: 1)Not upholding the jurisdiction of the SEC to declare the nullity of the sale; 2)Encouraging multiplicity of suits; and 3)Not applying the principles of estoppel and laches. 26 While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon petition and affirmed the October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owner's duplicate copies of TCT Nos. RT26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City so that the Deed of Absolute Sale in INC's favor may be properly registered. Before we rule upon the main issue posited in this petition, we would like to point out that our disposition in G.R. No. 107751 entitled, "Ligon v. Court of Appeal," promulgated on June 1, 1995, in no wise constitutes res

judicata such that the petition under consideration would be barred if it were the case. Quite the contrary, the requisites of res judicata do not obtain in the case at bench. Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in personam, to wit:
"Effect of judgment. The effect of a judgment or final order rendered by a court or judge of the Philippines, having jurisdiction to pronounce the judgment or order; may be as follows: xxx xxx xxx (b)In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive between the parties and their successors in interest by title subsequent to the commencement of the action or special proceeding, litigating for the same thing and under the same title and in the same capacity; (c)In any other litigation between the same parties or their successors in interest, that only is deemed to have been adjudged in a former judgment which appears upon its face to have been so adjudged, or which was

actually and necessarily included therein or necessary thereto."

Section 49(b), enunciates the first concept of res judicata known as "bar by prior judgment," whereas, Section 49(c) is referred to as "conclusiveness of judgment." There is "bar by former judgment" when, between the first case where the judgment was rendered, and the second case where such judgment is invoked, there is identity of parties, subject matter and cause of action. When the three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered and the second case wherein such judgment is invoked, there is only identity of parties but there is no identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as to matters merely involved therein. This is what is termed "conclusiveness of judgment." 27 Neither of these concepts of res judicata find relevant application in the case at bench. While there may be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group was only made an

ancillary party in G.R. No. 107751 as intervenor. 28 It was never originally a principal party thereto. It must be noted that intervention is not an independent action, but is merely collateral, accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or subsidiary to the case between the original parties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R. No. 107751 for purposes of applying the principle of res judicata since the contrary goes against the true import of the action of intervention as a mere subsidiary proceeding without an independent life apart from the principal action as well as the intrinsic character of the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid of the right of the original party. 30 It is only the present case, actually, where the IDPTamano Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties in both cases.
llcd

In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," 31 the IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for Specific Performance with Damages, a mere action in personam, did not become final and executory insofar as the true IDP is concerned since petitioner corporation, for want of legitimate representation, was effectively

deprived of its day in court in said case. Res inter alios judicatae nullum aliis praejudicium faciunt. Matters adjudged in cause do not prejudice those who were not parties to it. 32 Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he is a stranger. 33 Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a "bar by former judgment" will still not set in on the ground that the cause of action in the two cases are different. The cause of action in G.R. No. 107751 is the surrender of the owner's duplicate copy of the transfer certificates of title to the rightful possessor thereof, whereon the cause of action in the present case is the validity of the Carpizo Group-INC Deed of Absolute Sale. Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC has the better right of possession over the owner's duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause grave and irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of Trustees. In any case, while it is true that the principle of res

judicata is a fundamental component of our judicial system, it should be disregarded if its rigid application would involve the sacrifice of justice to technicality. 34 The main question though in this petition is: Did the Court of Appeals commit reversible error in setting aside that portion of the SEC's Decision in SEC Case No. 4012 which declared the sale of two (23 parcels of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void? We rule in the affirmative. There can be no question as to the authority of the SEC to pass upon the issue as to who among the different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by virtue of Section 3 and 5(c) of Presidential Decree No. 902-A:
"Section 3.The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines . . ." xxx xxx xxx Section 5.In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under

existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: xxx xxx xxx c)Controversies in the selection or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations. . . ."

If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null and void. 35 By this ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of IDP property. It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to pass upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687, 36 in a suit between the Carpizo Group and the Abbas Group, already declared the election of the Carpizo Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the Articles of Incorporation. 37 Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake Board.

Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora property, allegedly in the name of the IDP, have to be struck down for having been done without the consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the essential requisites of contracts:
"There is no contract unless the following requisites concur: (1)Consent of the contracting parties; (2)Object certain which is the subject matter of the contract; (3)Cause of the obligation which is established."

All these elements must be present to constitute a valid contract. For, where even one is absent, the contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and where it is wanting, the contract is non-existent. 38 In this case, the IDP, owner of the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever. The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's failure to

comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the corporation:
"Sec. 40.Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-third (2/3) of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided

in this Code.

LLjur

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. xxx xxx xxx

The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These twin requirements were no met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale were, from all indications, not bona fide members of the IDP as they were made to appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation including the eight (8) members of the Board of Trustees. 39 All told, the disputed Deed of Absolute Sale executed by

the fake Carpizo Board and private respondent INC was intrinsically void ab initio. Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made outside of its jurisdiction, the same not being an intracorporate dispute. The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of consent of the IDP, owner of the subject property. No end of substantial justice will be served if we reverse the SEC's conclusion on the matter, and remand the case to the regular courts for further litigation over an issue which is already determinable based on what we have in the records. It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board of Trustees in Civil Case No. Q-90-6937, a case for Specific Performance with Damages between INC and the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been granted ample opportunity before the regional trial court to shed light on the true status of the Carpizo Board and settled the matter as to the validity of the sale then and there. But INC, wanting to acquire the property at all costs and threatened by the participation of the legitimate IDP Board in the civil suit, argued for the denial of the motion averring inter alia, that the issue sought to be litigated by the movant is intra-corporate in nature and outside

the jurisdiction of the regional trial court. 40 As a result, the motion for intervention was denied. When the Decision in SEC Case No. 4012 came out nullifying the sale, INC came forward, this time, quibbling over the issue that it is the regional trial court, and not the SEC, which has jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot put a premium on this clever legal maneuverings of private respondent which, if countenanced, would result in a failure of justice. Furthermore, the Court observes that the INC bought the questioned property from the Carpizo Group without even seeing the owner's duplicate copy of the titles covering the property. This is very strange considering that the subject lot is a large piece of real property in Quezon City worth millions, and that under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer for value is that the vendee at least sees the owner's duplicate copy of the title and relies upon the same. 41 The private respondent, presumably knowledgeable on the aforesaid workings of the Torrens System, did not take heed of this and nevertheless went through with the sale with undue haste. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even being presented with the owner's copy of the titles casts very serious doubt on the rightfulness of its position as vendee in the transaction. WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated October

28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of Quezon City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already been made. If new titles have been issued in the name of Iglesia Ni Cristo, the Register of Deeds is hereby ordered to cancel the same, and issue new ones in the name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to private respondent whatever amount has been initially paid by INC as consideration for the property with legal interest, if the same was actually received by IDP, Otherwise, INC may run after Engineer Farouk Carpizo and his group for the amount of money paid. SO ORDERED.

[G.R. No. 142936. April 17, 2002.] PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners, vs. ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent. Salvador Luy for petitioners. Renecio Espiritu for private respondent. SYNOPSIS Respondent filed an action against petitioners for the unpaid balance on electrical services it previously rendered to Pampanga Sugar Mill (PASUMIL). Respondent alleged that petitioners became liable to them when the former acquired the assets of, took over, and operated PASUMIL. The Court disagreed with respondent. The following precludes the piercing of the corporate veil in the case at bar: Other than the fact that petitioners acquired the assets of PASUMIL, there was no showing that their control over it warrants the disregard of corporate personalities, there was no evidence that their juridical personality was used to commit fraud or to do a wrong, or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person; respondent was not defrauded or injured when petitioners acquired the assets of

PASUMIL. Neither is there merger nor consolidation with respect to PASUMIL and PNB. SYLLABUS 1.REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; PETITION FOR REVIEW; QUESTIONS OF FACT MAY NOT RE RAISED THEREIN; EXCEPTION IS WHEN THERE IS MISAPPRECIATION OF EVIDENCE. As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court. To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals. After a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated the evidence presented. Overlooked by the CA were certain relevant facts that would justify a conclusion different from that reached in the assailed Decision. 2.COMMERCIAL LAW; PRIVATE CORPORATIONS; WHERE CORPORATION PURCHASED THE ASSETS OF ANOTHER CORPORATION, THE FORMER WILL NOT BE LIABLE TO THE DEBTS OF THE LATTER; EXCEPTIONS. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of

the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts.
SCHATc

3.ID.; ID.; CORPORATION; ELUCIDATED. A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. This is basic. 4.ID.; ID.; DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION; WHEN PROPER. Equally wellsettled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons. Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. This Court has pierced the

corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or to cover up an otherwise blatant violation of the prohibition against forum-shopping. Only in these and similar instances may the veil be pierced and disregarded. 5.ID.; ID.; ID.; ELEMENTS; NOT PRESENT IN CASE AT BAR. The question of whether a corporation is a mere alter ego is one of fact. Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control not mere stock control, but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of. We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities. Second, there is no evidence that their juridical personality was used to commit a fraud or to do a

wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person. Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL. Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. However, it utterly failed to discharge this burden; it failed to establish by competent evidence that petitioner's separate corporate veil had been used to conceal fraud, illegality or inequity. The CA erred in affirming the trial court's lifting of the corporate mask. The CA did not point to any fact evidencing bad faith on the part of PNB and its transferee. The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime. None of the foregoing exceptions was shown to exist in the present case. On the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow. 6.ID.; ID.; CONSOLIDATION OR MERGER OF CORPORATIONS; REQUISITES; NOT PRESENT IN CASE AT BAR. A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. The merger, however, does not become effective upon the mere agreement of the constituent corporations. Since a merger or

consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations. In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code was not followed.
AEIcSa

DECISION PANGANIBAN, J :
p

Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMIL's contractual debts to respondent.

Statement of the Case Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 57610. The decretal portion of the challenged Decision reads as follows: "WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2 The Facts The factual antecedents of the case are summarized by the Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and operating under the laws of the Philippines, with office and principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing and operating under the laws of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm of the PNB, with office and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills

(PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general construction for the repairs and/or construction of different kinds of machineries and buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for the plaintiff to perform the following, to wit '(a)Construction of one (1) power house building; '(b)Construction of three (3) reinforced concrete foundation for three (3) units

350 KW diesel engine generating set[s]; '(c)Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets; '(d)Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s]; '(e)Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe provided those stated units are completely supplied with their accessories; '(f)Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage canals, excavation, and earth fillings all for the total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as Annex 'A' and made an integral part of this complaint;' that aside from the work contract mentionedabove, the defendant PASUMIL required the plaintiff to perform extra work, and provide electrical equipment and spare parts, such as: '(a)Supply of electrical devices;

'(b)Extra mechanical works; '(c)Extra fabrication works; '(d)Supply of materials and consumable items; '(e)Electrical shop repair; '(f)Supply of parts and related works for turbine generator; '(g)Supply of electrical equipment for machinery; '(h)Supply of diesel engine parts and other related works including fabrication of parts.' that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as shown in the Certification of the chief accountant of the PNB, a machine copy of which is appended as Annex 'C' of the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff of P14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the plaintiff their just, valid and

demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL, and these defendants all benefited from the works, and the electrical, as well as the engineering and repairs, performed by the plaintiff; that because of the failure and refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorney's fees. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit: '(1)Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14% from the time the obligation falls due and demandable;

'(2)Condemning the defendants to pay attorney's fees amounting to 25% of the amount claim; '(3)Ordering the defendants to pay the costs of the suit.' "The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the complaint failed to state sufficient allegations to establish a cause of action against both defendants, inasmuch as there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214. "The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that court directed the defendants to file their answer to the complaint within 15 days. "In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit: 'That the complaint does not state a sufficient cause of action against the

defendant NASUDECO because: (a) NASUDECO is not . . . privy to the various electrical construction jobs being sued upon by the plaintiff under the present complaint; (b) the taking over by NASUDECO of the assets of defendant PASUMIL was solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the said letter of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the problems concerning the same.' "By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation expenses in the amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO

prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of attorney's fees as well as exemplary damages. "In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint states no cause of action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the alleged services rendered by the plaintiff to the defendant PASUMIL upon which plaintiff's suit is erected, was rendered long before PNB took possession of the assets of the defendant PASUMIL under LOI No. 189A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its operations in time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNB's management and operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but only to those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15,

1975, the PNB and the Development Bank of the Philippines (DBP) entered into a 'Redemption Agreement' whereby DBP sold, transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of PASUMIL, as shown in Annex 'C' which is made an integral part of the answer; (6) that again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and under the above 'Redemption Agreement.' This is shown in Annex 'D' which is also made an integral part of the answer; [7] that as a consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased to manage and operate the abovementioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate obligations of PASUMIL, including the alleged obligation upon which this present suit was brought; and [9] that, at most, what was granted to PNB in this respect was the authority to

'make a study of and submit recommendation on the problems concerning the claims of PASUMIL creditors,' under sub-par. 5 LOI No. 311. "In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this case, hence it is entitled to claim attorney's fees in the amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorney's fees, aside from exemplary damages in such amount that the court may seem just and equitable in the premises. "Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial Court. "After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads: 'WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT

CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former the following: '1.The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from September 25, 1980 until fully paid; '2.The sum of P102,724.76 as attorney's fees; and, '3.Costs. 'SO ORDERED. 'Manila, Philippines, September 4, 1986. '(SGD) ERNESTO S. TENGCO 'Ju dge '"
3

Ruling of the Court of Appeals Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising therefrom. 4

Hence, this Petition.

Issues In their Memorandum, petitioners raise the following errors for the Court's consideration:
"I The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has not been legally extinguished or terminated, simply because of petitioners['] take-over of the management and operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311. "II The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415." 6

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to respondent. This Court's Ruling The Petition is meritorious. Main Issue: Liability for Corporate Debts As a general rule, questions of fact may not be raised in

a petition for review under Rule 45 of the Rules of Court. 7 To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals. 8 After a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated the evidence presented. 9 Overlooked by the CA were certain relevant facts that would justify a conclusion different from that reached in the assailed Decision. 10 Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latter's foreclosed assets did not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly and severally held liable for PASUMIL's unpaid obligation. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts. 11 Piercing the Corporate

Veil Not Warranted A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. 12 It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. 13 This is basic. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. 14 For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled 15 only when it becomes a shield for fraud, illegality or inequity committed against third persons. 16 Hence, any application of the doctrine of piercing the corporate veil should be done with caution. 17 A court should be mindful of the milieu where it is to be applied. 18 It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. 19 The wrongdoing must be clearly and convincingly established; it cannot be presumed. 20 Otherwise, an injustice that was never unintended may result from an erroneous application. 21 This Court has pierced the corporate veil to ward off a judgment credit, 22 to avoid inclusion of corporate assets as part of the estate of the decedent, 23 to escape

liability arising from a debt, 24 or to perpetuate fraud and/or confuse legitimate issues 25 either to promote or to shield unfair objectives 26 or to cover up an otherwise blatant violation of the prohibition against forumshopping. 27 Only in these and similar instances may the veil be pierced and disregarded. 28 The question of whether a corporation is a mere alter ego is one of fact. 29 Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control not mere stock control, but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of. 30 We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities. 31 Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or

instrumentality of another entity or person. 32 Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL. 33 Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. 34 However, it utterly failed to discharge this burden; 35 it failed to establish by competent evidence that petitioner's separate corporate veil had been used to conceal fraud, illegality or inequity. 36 While we agree with respondent's claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily traced to PASUMIL, 37 we are not convinced that the transfer of the latter's assets to petitioners was fraudulently entered into in order to escape liability for its debt to respondent. 38 A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest bidder at the public auction conducted. 39 The bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than 20 percent of the total outstanding obligation. 40 Thus, DBP had not only a right, but also a duty under the law to foreclose the subject properties. 41 Pursuant to LOI No. 189-A 42 as amended by LOI No. 311, 43 PNB acquired PASUMIL's assets that DBP had foreclosed and purchased in the normal course.

Petitioner bank was likewise tasked to manage temporarily the operation of such assets either by itself or through a subsidiary corporation. 44 PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. 3135. 45 These assets were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption Agreement 46 PNB, as successor-ininterest, stepped into the shoes of DBP as PASUMIL's creditor. 47 By way of a Deed of Assignment, 48 PNB then transferred to NASUDECO all its rights under the Redemption Agreement. In Development Bank of the Philippines v. Court of Appeals, 49 we had the occasion to resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque Mining's unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining to justify the piercing of the corporate veil. In the instant case, the CA erred in affirming the trial court's lifting of the corporate mask. 50 The CA did not point to any fact evidencing bad faith on the part of PNB and its transferee. 51 The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime. 52 None of the foregoing exceptions was shown to exist in the present case. 53 On the contrary, the lifting of the corporate veil would result

in manifest injustice. This we cannot allow. No Merger or Consolidation Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a corporation. A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. 54 The merger, however, does not become effective upon the mere agreement of the constituent corporations. 55 Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. 56 For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required. 57 These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations. 58

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code 59 was not followed. In fact, PASUMIL's corporate existence, as correctly found by the CA, had not been legally extinguished or terminated. 60 Further, prior to PNB's acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the former's obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another P14,000. Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. 61 LOI No. 11 explicitly provides that PNB shall study and submit recommendations on the claims of PASUMIL's creditors. 62 Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondent's insistence to the contrary. 63 WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs.
DHTCaI

SO ORDERED.

[G.R. No. L-21601. December 28, 1968.] NIELSON & COMPANY, INC., plaintiffappellant, vs. LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee. SYLLABUS 1.REMEDIAL LAW; APPEAL; QUESTION OF FACT OR LAW NOT RAISED IN THE LOWER COURT MAY NOT BE RAISED ON APPEAL; INSTANT CASE. In the pleadings filed by defendant Lepanto in the lower court and its memorandum and brief on appeal it never asserted the theory that it has the right to terminate the management contract because that contract is one of agency which it could terminate at will. While it is true that in its ninth and tenth special affirmative defenses, it has the right to terminate the management contract in question, that plea of its right to terminate was not based upon the ground that the relation between defendant and plaintiff was that of principal and agent but upon the ground that plaintiff had allegedly not complied with certain terms of the management contract. If defendant had thought of considering the management contract as one of agency it could have amended its answer by stating exactly its position. It could have asserted its theory of agency in its memorandum for the lower and in its brief on appeal. This, defendant did not do. It is the rule, and the settled doctrine that a party cannot change his theory on appeal, that is, that a party cannot raise in the appellate

court any question of law or of fact that was not raised in the court below or which was not within the issue made by the parties in their pleadings. 2.CIVIL LAW; SPECIAL CONTRACTS; AGENCY DISTINGUISHED FROM LEASE OF SERVICES. In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer while the agent represents his principal. Agency is a preparatory contract as agency "does not stop with the agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease services contemplate only material (non-juridical) acts." 3.ID.; ID.; CONTRACT IN INSTANT CASE IS FOR LEASE OF SERVICES. It appears that the principal and paramount undertaking of plaintiff under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking these other undertakings being dependent upon the work on the development of the mine and the operation

of the mill. In the performance of this principal undertaking plaintiff was not in any way executing juridical acts for defendant, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking plaintiff was not acting as an agent of defendant Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation. 4.ID.; ID.; ID.; DEFENDANT MAY NOT TERMINATE CONTRACT AT WILL. In the instant case, paragraph XI of the contract provides: ". . . Nielson agrees that Lepanto may cancel this agreement at any time upon ninety days written notice, in the event that Nielson for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to prosecute the operation and development of the properties herein described, in good faith and in accordance with the approved mining practice" defendant could not terminate the agreement at will. Under the provision, it could terminate or cancel the agreement by giving notice of termination 90 days in advance only in the event that plaintiff should prosecute in bad faith and not in accordance with approved mining practice the operation and development of the mining properties of defendant. Defendant could not terminate the agreement if plaintiff should cease to prosecute the operation and development of the mining properties by reason of acts of God, strike and other causes beyond the control of plaintiff. It is, therefore, by express stipulation of the

parties, the management contract in question is not revocable at will of defendant. This management contract is not a contract of agency as defined in Article 1700 of the Old Civil Code, but a contract of lease of service as defined in Article 1544 of the same code. This contract can not be unilaterally revoked by defendant. 5.ID.; ID.; ID.; EXTENSION OF CONTRACT EQUAL TO PERIOD OF SUSPENSION. The nature of the contract for management and operation of mines justifies the interpretation of the force majeure clause, that a period equal to the period of suspension due to force majeure should be added to the original term of the contract by way of an extension. We, therefore, reiterate the ruling in our decision that since the management contract in the instant case was suspended from February 1942 to June 26, 1948, from the latter the contract had yet five years to go. 6.ID.; ID.; ID.; ID.; PLAINTIFF LIMITED TO MANAGEMENT FEES FOR PERIOD OF EXTENSION. Since the management contract had been extended for 5 years, or 60 months, from June 27, 1948 to June 26, 1953, and the cause of action of plaintiff to claim for its compensation during that period of extension had not prescribed, it follows that plaintiff should be awarded the management fees during the whole period of extension plus the 10% of the value of the dividends declared during the said period of extension the 10% of the depletion reserve that was set up, and the 10% of any amount expended out of surplus earnings for capital account.

7.ID.; PRESCRIPTION; INAPPLICABILITY THEREOF IN INSTANT CASE. The claim accrued on December 31, 1941, and the right to commence an action thereon started on January 1, 1942. The action on this claim did not prescribe although the complaint was filed on February 6, 1958 - or after a lapse of 16 years, 1 month and 5 days because of the operation of moratorium law. The moratorium period of 8 years, 2 months and 8 days should be deducted from the period that had elapsed since the accrual of the cause of action to the date of the filing of the complaint, so that there is a period of less than 8 years to be reckoned for the purpose of prescription. 8.ID.; EXECUTIVE ORDER NUMBER 32, MORATORIUM LAW. Executive Order No. 32 covered all debts and monetary obligation on contract before the war (or before December 1941) and those contracted subsequent to Dec. 8, 1941 and during the Japanese occupation. RA No. 342, approved on July 26, 1948, lifted the moratorium provided for in Executive Order No. 32 on pre-war (or pre-Dec. 8, 1941) debts of debtors who had not filed war damage claims with the United States War Damage Commission. In other words, after the effectivity of RA No. 342, the debt moratorium was limited (1) to debts and other monetary obligations which were contracted after Dec. 8, 1941 and during the Japanese occupation, and (2) to those pre-war (or preDec. 8, 1941) debts and other monetary claims. That was the situation up to May 18, 1953 when this Court declared RA No. 342 unconstitutional. It has been held by this Court, however, that from March 10, 1945 when

Executive Order No. 32 was issued, to May 18, 1953 when RA No. 342 was declared unconstitutional or a period of 8 years, 2 months and 8 days the debt moratorium was in force, and had the effect of suspending the period of prescription. 9.MERCANTILE LAW; CORPORATIONS; SHARES OF STOCK; ISSUANCE THEREOF. From Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2) property and (3) undistributed profits. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If the shares of stocks are issued in exchange of cash or Property then those shares do not fall under the category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property because services is equivalent to property. Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. 10.ID.; ID.; STOCK DIVIDEND, DEFINED. A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the

shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par. When a corporation issues stock dividends, it shows that the corporations' accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from the surplus to assets and no longer available for actual distribution. 11.ID.; ID.; DIVIDEND. The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside, and declared by the directors of the corporation as a dividend, and duly ordered by the directory, or by the stockholders at a corporate meeting to be divided or distributed among the stockholders according to their respective interests. 12.ATTORNEYS; ATTORNEYS FEES; AWARD OF ATTORNEYS FEES IS WITHIN THE SOUND DISCRETION OF THE COURT. The matter of the award of attorneys

fees is within the sound discretion of this court. In our decision We have stated the reason why the award of P50,000.00 for attorney's fees is considered by this Court as reasonable. DECISION ZALDIVAR, J :
p

Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion for reconsideration is based on two sets of grounds the first set consisting of four principal grounds, and the second set consisting of five alternative grounds, as follows:
Principal Grounds: 1.The court erred in overlooking and failing to apply the proper law applicable to the agency or management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920 of the new), by virtue of which said agency was effectively revoked and terminated in 1945 when, as stated in paragraph 20 of the complaint, "defendant voluntarily . . . prevented plaintiff from resuming management and operation of said mining properties." 2.The court erred in holding that paragraph II of the management contract (Exhibit C) suspended the period of said contract.

3.The court erred in reversing the ruling of the trial judge, based on well-settled jurisprudence of this Supreme Court, that the management agreement was only suspended but not extended on account of the war. 4The court erred in reversing the finding of the trial judge that Nielson's action had prescribed, but considering only the first claim and ignoring the prescriptibility of the other claims. Alternative Grounds: 5.The court erred in holding that the period of suspension of the contract on account of the war lasted from February 1942 to June 26, 1948. 6.Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the month of January, 1942; and (c) the full contract price for the extended period of sixty months, since these damages were neither demanded nor proved and, in any case, not allowable under the general law of damages. 7.Assuming arguendo that appellant is entitled to any relief, the court erred in ordering appellee to issue and deliver to appellant shares of stock together with fruits thereof.

8.The court erred in awarding to appellant an undetermined amount of shares of stock and/or cash, which award cannot be ascertained and executed without further litigation. 9.The court erred in rendering judgment for attorney's fees.

We are going to dwell on these grounds in the order they are presented. 1.In its first principal ground Lepanto claims that its own counsel and this Court had overlooked the real nature of the management contract entered into by and between Lepanto and Nielson, and the law that is applicable on said contract. Lepanto now asserts for the first time and this is done in a motion for reconsideration that the management contract in question is a contract of agency such that it has the right to revoke and terminate the said contract, as it did terminate the same, under the law of agency, and particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code) We have taken note that Lepanto is advancing a new theory. We have carefully examined the pleadings filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did it assert the theory that it has the right to terminate the management contract because that contract is one of agency which it could terminate at will. While it is true that in its ninth and tenth special affirmative defenses, in its answer in the court below, Lepanto pleaded that it had the right to terminate the management contract in question, that

plea of its right to terminate was not based upon the ground that the relation between Lepanto and Nielson was that of principal and agent but upon the ground that Nielson had allegedly not complied with certain terms of the management contract. If Lepanto had thought of considering the management contract as one of agency it could have amended its answer by stating exactly its position. It could have asserted its theory of agency in its memorandum for the lower court and in its brief on appeal. This, Lepanto did not do. It is the rule, and the settled doctrine of this Court, that a party cannot change his theory on appeal that is, that a party cannot raise in the appellate court any question of law or of fact that was not raised in the court below or which was not within the issue made by the parties in their pleadings (Section 19, Rule 49 of the old Rules of Court, and also Section 18 of the new Rules of Court; Hautea vs. Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884, February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil. 49) At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the proceedings, this Court cannot sustain the same. Lepanto contends that the management contract in question (Exhibit C) is one of agency because: (1) Nielson was to manage and operate the mining properties and mill on behalf, and for the account, of Lepanto; and (2) Nielson was authorized to represent

Lepanto in entering, on Lepanto's behalf, into contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores mined. All these, Lepanto claims, show that Nielson was, by the terms of the contract, destined to execute juridical acts not on its own behalf but on behalf of Lepanto under the control of the Board of Directors of Lepanto "at all times". Hence Lepanto claims that the contract is one of agency. Lepanto then maintains that an agency is revocable at the will of the principal (Article 1733 of the Old Civil Code) regardless of any term or period stipulated in the contract, and it was in pursuance of that right that Lepanto terminated the contract in 1945 when it took over and assumed exclusive management of the work previously entrusted to Nielson under the contract. Lepanto finally maintains that Nielson as an agent is not entitled to damages since the law gives to the principal the right to terminate the agency at will. Because of Lepanto's new theory We consider it necessary to determine the nature of the management contract whether it is a contract of agency or a contract of lease of services. Incidentally, we have noted that the lower court, in the decision appealed from, considered the management contract as a contract of lease of services. Article 1709 of the Old Civil Code, defining contract of agency, provides:
"By the contract of agency, one person binds himself to render some service or do something for the account or at the request

of another."

Article 1544, defining contract of lease of service, provides:


"In a lease of work or services, one of the parties binds himself to make or construct something or to render a service to the other for a price certain."

In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer, while the agent represents his principal. Manresa, in his "Commentarios al Codigo Civil Espaol" (1931, Tomo IX, pp. 372-373), points out that the element of representation distinguishes agency from lease of services, as follows:
"Nuestro art. 1.709 como el art 1.984 del Codigo de Napoleon y cuantos textos legales citamos en las concordancias, expresan claramente esta idea de la representacin, 'hacer alguna cosa por cuenta o encargo de otra' dice nuestro Codigo; 'poder de hacer alguna cosa para el mandante o en su nombre' dice el Codigo de Napoleon, y en tales palabras aparece vivo y luminoso el concepto y la teoria de la representacion, tan fecunda en enseanzas, que a su sola luz es como se explican las diferencias que separan

el mandato del arrendamiento de servicios, de los contratos inominados, del consejo y de la gestion de negocios. "En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se trabaja, en verdad, para el dueo que remunera la labor, pero ni se le representa ni se obra en su nombre . . ."

On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil Code has defined the contract of agency in more explicit terms, as follows:
"By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter."

There is another obvious distinction between agency and lease of services. Agency is a preparatory contract, as agency "does not stop with the agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277)

In the light of the interpretations we have mentioned in the foregoing paragraphs, let us now determine the nature of the management contract in question. Under the contract, Nielson had agreed, for a period of five years, with the right to renew for a like period, to explore, develop and operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may be found therein and to market the metallic products recovered therefrom which may prove to be marketable, as well as to render for Lepanto other services specified in the contract. We gather from the contract that the work undertaken by Nielson was to take complete charge, subject at all times to the general control of the Board of Directors of Lepanto, of the exploration and development of the mining claims, of the hiring of a sufficient and competent staff and of sufficient and capable laborers, of the prospecting and development of the mine, of the erection and operation of the mill, and of the beneficiation and marketing of the minerals found on the mining properties; and in carrying out said obligation Nielson should proceed diligently and in accordance with the best mining practice. In connection with its work Nielson was to submit reports, maps, plans and recommendations with respect to the operation and development of the mining properties, make recommendations and plans on the erection or enlargement of any existing mill, dispatch mining engineers and technicians to the mining properties as from time to time may reasonably be required to investigate and make recommendations without cost or

expense to Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment and other necessary purchases by Lepanto, provided, however, that no purchase shall be made without the prior approval of Lepanto; and provided further, that no commission shall be claimed or retained by Nielson on such purchase"; and "to submit all requisition for supplies, all contracts and arrangement with engineers, and staff and all matters requiring the expenditures of money, present or future, for prior approval by Lepanto; and also to make contracts subject to the prior approval of Lepanto for the sale and marketing of the minerals mined from said properties, when said products are in a suitable condition for marketing." 1 It thus appears that the principal and paramount undertaking of Nielson under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation.

It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent. Lepanto contends that the management contract in question being one of agency it had the right to terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find, however, a provision in the management contract which militates against this stand of Lepanto. Paragraph XI of the contract provides:
"Both parties to this agreement fully recognize that the terms of this Agreement are made possible only because of the faith or confidence that the Officials of each company have in the other; therefore, in order to assure that such confidence and faith shall abide and continue, NIELSON agrees that LEPANTO may cancel this Agreement at any time upon ninety (90) days written notice, in the event that NIELSON for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to prosecute the operation and development of the properties herein

described, in good faith and in accordance with approved mining practice."

It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement by giving notice of termination ninety days in advance only in the event that Nielson should prosecute in bad faith and not in accordance with approved mining practice the operation and development of the mining properties of Lepanto. Lepanto could not terminate the agreement if Nielson should cease to prosecute the operation and development of the mining properties by reason of acts of God, strike and other causes beyond the control of Nielson. The phrase "Both parties to this agreement fully recognize that the terms of this agreement are made possible only because of the faith and confidence of the officials of each company have in the other" in paragraph XI of the management contract does not qualify the relation between Lepanto and Nielson as that of principal and agent based on trust and confidence, such that the contractual relation may be terminated by the principal at any time that the principal loses trust and confidence in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of the management contract. Thus, in the annual report for 1936 2 , submitted by Mr. C. A. Dewit, President of Lepanto, to its' stockholders, under date of March 15, 1937, we read the following:

"To the Stockholders: xxx xxx xxx "The incorporation of our Company was effected as a result of negotiations with Messrs. Nielson & Co., Inc., and an offer by these gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August 11, 1936, reading as follows: 'Messrs. Cookes and Lednicky,' 'Present. 'Re: Mankayan Copper Mines. 'GENTLEMEN: 'After an examination of your property by our engineers, we have decided to offer as we hereby offer to underwrite the entire issue of stock of a corporation to be formed for the purpose of taking over said properties, said corporation to have an authorized capital of P1,750,000.00, of which P700,000.00 will be issued in escrow to the claimowners in exchange for their claims, and the balance of P1,050,000.00 we will sell to the public at par or take ourselves. 'The arrangement will be under the following conditions: '1.The subscriptions for cash shall be

payable 50% at time of subscription and the balance subject to the call of the Board of Directors of the proposed corporation. '2.We shall have an underwriting and brokerage commission of 10% of the P1,050,000.00 to be sold for cash to the public, said commission to be payable from the first payment of 50% on each subscription. '3.We will bear the cost of preparing and mailing any prospectus that may be required, but no such prospectus will be sent out until the text thereof has been first approved by the Board of Directors of the proposed corporation. '4.That after the organization of the corporation, all operating contract be entered into between ourselves and said corporation, under the terms which the property will be developed and mined and a mill erected, under our supervision, our compensation to be P2,000.00 per month until the property is put on a profitable basis and P2,500.00 per month plus 10% of the net profits for a period of five years thereafter.` '5.That we shall have the option to renew said operating contract for an

additional period of five years, on the same basis as the original contract, upon the expiration thereof. 'It is understood that the development and mining operations on said property, and the erection of the mill thereon, and the expenditures therefore, shall be subject to the general control of the Board of Directors of the proposed corporation, and, in case you accept this proposition, that a detailed operating contract will be entered into, covering the relationships between the parties. Yours very truly,( Sgd.) L. R. Nielso n'" "Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took subscriptions for One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our Company and their underwriting and brokerage commission has been paid. More than fifty per cent of these subscriptions have been paid to the Company in cash. The claimowners have transferred their claims to the Corporation, but the P700,000.00 in stock which they are to receive therefor, is as yet

held in escrow. "Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the Management of the property under the control of the Board of Directors. A modification in the Management Contract was made with the consent of all the then stockholders, in virtue of which the compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill construction began. The formal Management Contract was not entered into until January 30, 1937." xxx xxx xxx "Manila, March 15, 1937 (Sgd.) "C.A. DeWitt "President"

We can gather from the foregoing statements in the annual report for 1936, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost

its trust and confidence in Nielson. The contention of Lepanto that it had terminated the management contract in 1945, following the liberation of the mines from Japanese control, because the relation between it and Nielson was one of agency and as such it could terminate the agency at will, is, therefore, untenable. On the other hand, it can be said that, in asserting that it had terminated or cancelled the management contract in 1945, Lepanto had thereby violated the express terms of the management contract. The management contract was renewed to last until January 31, 1947, so that the contract had yet almost two years to go upon the liberation of the mines in 1945. There is no showing that Nielson had ceased to prosecute the operation and development of the mines in good faith and in accordance with approved mining practice which would warrant the termination of the contract upon ninety days written notice. In fact there was no such written notice of termination. It is an admitted fact that Nielson ceased to operate and develop the mines because of the war a cause beyond the control of Nielson. Indeed, if the management contract in question was intended to create a relationship of principal and agent between Lepanto and Nielson, paragraph XI of the contract should not have been inserted because, as provided in Article 1733 of the old Civil Code, agency is essentially revocable at the will of the principal - that means, with or without cause. But precisely said

paragraph XI was inserted in the management contract to provide for the cause for its revocation. The provision of paragraph XI must be given effect. In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all, 3 and if some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. 4 It is Our considered view that by express stipulation of the parties, the management contract in question is not revocable at the will of Lepanto. We rule that this management contract is not a contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of services as defined in Article 1544 of the same Code. This contract can not be unilaterally revoked by Lepanto. The first ground of the motion for reconsideration should, therefore, be brushed aside. 2.In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this Court erred, in holding that paragraph II of the management contract suspended the period of said contract, in holding that the agreement was not only suspended but was extended on account of the war, and in holding that the period of suspension on account of the war lasted from February, 1942 to June 26, 1948. We are going to discuss these three grounds together because they are inter-related. In Our decision we have dwelt lengthily on the points

that the management contract was suspended because of the war, and that the period of the contract was extended for the period equivalent to the time when Nielson was unable to perform the work of mining and milling because of the adverse effects of the war on the work of mining and milling. It is the contention of Lepanto that the happening of those events, and the effects of those events, simply suspended the performance of the obligations by either party in the contract, but did not suspend the period of the contract, much less extended the period of the contract. We have conscientiously considered the arguments of Lepanto in support of these three grounds, but We are not persuaded to reconsider the rulings that We made in Our decision. We want to say a little more on these points, however. Paragraph II of the management contract provides as follows:
"In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure, war, insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event or cause reasonably beyond the control of NIELSON and which adversely affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or breach of the terms of this Agreement, the same shall remain in suspense, wholly or partially during the terms of such

inability."(Italics supplied)

A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of any of the events enumerated therein, which adversely affects the work of mining and milling, the agreement is deemed suspended for as long as Nielson is unable to perform its work of mining and milling because of the adverse effects of the happening of the event on the work of mining and milling. During the period when the adverse effects on the work of mining and milling exist, neither party in the contract would be held liable for noncompliance of its obligation under the contract. In other words, the operation of the contract is suspended for as long as the adverse effects of the happening of any of those events had impeded or obstructed the work of mining and milling. An analysis of the phraseology of the above-quoted paragraph II of the management contract readily supports the conclusion that it is the agreement, or the contract, that is suspended. The phrase "the same" can refer to no other than the term "Agreement" which immediately precedes it. The "Agreement" may be wholly or partially suspended, and this situation will depend on whether the event wholly or partially affected adversely the work of mining and milling. In the instant case, the war had adversely affected and wholly at that the work of mining and milling. We have clearly stated in Our decision the circumstances brought about by the war which caused the whole or total suspension of the agreement or of the management contract. LEPANTO itself admits that the management contract

was suspended. We quote from the brief of LEPANTO:


"Probably, what Nielson meant was, it was prevented by Lepanto to assume again the management of the mine in 1945, at the precise time when defendant was at the feverish phase of rehabilitation and although the contract had already been suspended." (Lepanto's Brief, p. 9) ". . . it was impossible, as a result of the destruction of the mine, for the plaintiff to manage and operate the same and because, as provided in the agreement, the contract was suspended by reason of the war." (Lepanto's Brief, pp. 9-10) "Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or force majeure, such as war, adversely affects the work of mining and milling." (Lepanto's Brief, p. 49)

Lepanto is correct when it said that the obligations under the contract were suspended upon the happening of any of the events enumerated in paragraph II of the management contract. Indeed, those obligations were suspended because the contract itself was suspended. When we talk of a contract that has been suspended we certainly mean that the contract temporarily ceased to be operative, and the contract becomes operative again upon the happening of a condition or when a situation obtains which warrants the termination of the suspension of the contract.

In Our decision We pointed out that the agreement in the management contract would be suspended when two conditions concur, namely: (1) the happening of the event constituting a force majeure that was reasonably beyond the control of Nielson, and (2) that the event constituting the force majeure adversely affected the work of mining and milling. The suspension, therefore, would last not only while the event constituting the force majeure continued to occur but also for as long as the adverse effects of the force majeure on the work of mining and milling had not been eliminated. Under the management contract the happening alone of the event constituting the force majeure which did not affect adversely the work of mining and milling would not suspend the period of the contract. It is only when the two conditions concur that the period of the agreement is suspended. It is not denied that because of the war, in February 1942, the mine, the original mill, the original power plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto, were destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is not denied that for the duration of the war Nielson could not undertake the work of mining and milling. When the mines were liberated from the enemy in August, 1945, the condition of the mines, the mill, the power plant and other installations, was not the same as in February 1942 when they were ordered destroyed by the US army. Certainly, upon the liberation of the mines from the enemy, the work of mining and milling could not be undertaken by Nielson

under the same favorable circumstances that obtained before February 1942. The work of mining and milling, as undertaken by Nielson in January, 1942, could not be resumed by Nielson soon after liberation because of the adverse effects of the war, and this situation continued until June of 1948. Hence, the suspension of the management contract did not end upon the liberation of the mines in August, 1945. The mines and the mill and the installations, laid waste by the ravages of war, had to be reconstructed and rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse effects of the war on the work of mining and milling had ended, because it was on that date that the operation of the mines and the mill was resumed. The period of suspension should, therefore, be reckoned from February 1942 until June 26, 1948, because it was during this period that the war and the adverse effects of the war on the work of mining and milling had lasted. The mines and the installations had to be rehabilitated because of the adverse effects of the war. The work of rehabilitation started soon after the liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as stated in Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948 marked the official return to operation of this company at its properties at Mankayan, Mountain province, Philippines" (Exh. F-1). Lepanto would argue that if the management contract was suspended at all the suspension should cease in August of 1945, contending that the effects of the war

should cease upon the liberation of the mines from the enemy. This contention cannot be sustained, because the period of rehabilitation was still a period when the physical effects of the war the destruction of the mines and of all the mining installations adversely affected, and made impossible, the work of mining and milling. Hence, the period of the reconstruction and rehabilitation of the mines and the installations must be counted as part of the period of suspension of the contract. Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the mines because soon after the liberation of the mines Nielson insisted to resume the management work, and that Nielson was under obligation to reconstruct the mill in the same way that it was under obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to resume its management work after liberation, but this was only for the purpose of restoring the mines, the mill, and other installations to their operating and producing condition as of February 1942 when they were ordered destroyed. It is not shown by any evidence in the record, that Nielson had agreed, or would have agreed, that the period of suspension of the contract would end upon the liberation of the mines. This is so because, as found by this Court, the intention of the parties in the management contract, and as understood by them, the management contract was suspended for as long as the adverse effects of the force majeure on the work of mining and milling had not been removed, and the contract would be extended for as

long as it was suspended. Under the management contract Nielson had the obligation to erect and operate the mill, but not to re-erect or reconstruct the mill in case of its destruction by force majeure. It is the considered view of this Court that it would not be fair to Nielson to consider the suspension of the contract as terminated upon the liberation of the mines because then Nielson would be placed in a situation whereby it would have to suffer the adverse effects of the war on the work of mining and milling. The evidence shows that as of January 1942 the operation of the mines under the management of Nielson was already under beneficial conditions, so much so that dividends were already declared by Lepanto for the years 1939, 1940 and 1941. To make the management contract immediately operative after the liberation of the mines from the Japanese, at the time when the mines and all its installations were laid waste as a result of the war, would be to place Nielson in a situation whereby it would lose all the benefits of what it had accomplished in placing the Lepanto mines in profitable operation before the outbreak of the war in December, 1941. The record shows that Nielson started its management operation way back in 1936, even before the management contract was entered into. As early as August 1936 Nielson negotiated with Messrs. C.I. Cookes and V.L. Lednicky for the operation of the Mankayan mines and it was the result of those negotiations that Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto, and that after the formation of the corporation (Lepanto) Nielson immediately assumed the

management of the mining properties of Lepanto. It was not until January 30, 1937 when the management contract in question was entered into between Lepanto and Nielson (Exhibit A). A contract for the management and operation of mines calls for a speculative and risky venture on the part of the manager-operator. The manager-operator invests its technical know-how, undertakes back-breaking efforts and tremendous spade-work, so to say, in the first years of its management and operation of the mines, in the expectation that the investment and the efforts employed might be rewarded later with success. This expected success may never come. This had happened in the very case of the Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various persons and entities of different nationalities, including Lednicky himself, invested all their money and failed. The manager-operator may not strike sufficient ore in the first, second, third, or fourth year of the management contract, or he may not strike ore even until the end of the fifth year. Unless the manager-operator strikes sufficient quantity of ore he cannot expect profits or reward for his investment and efforts. In the case of Nielson, its corps of competent engineers, geologists, and technicians begun working on the Mankayan mines of Lepanto since the latter part of 1936, and continued their work without success and profit through 1937, 1938, and the earlier part of 1939. It was only in December of 1939 when the efforts of Nielson started to be rewarded when Lepanto realized profits and the first dividends were declared. From that time on Nielson

could expect profit to come to it as in fact Lepanto declared dividends for 1940 and 1941 if the development and operation of the mines and the mill would continue unhampered. The operation, and the expected profits, however, would still be subject to hazards due to the occurrence of fortuitous events, fires, earthquakes, strikes, war, etc., constituting force majeure, which would result in the destruction of the mines and the mill. One of these diverse causes, or one after the other, may consume the whole period of the contract, and if it should happen that way the manageroperator would reap no profit to compensate for the first years of spade-work and investment of efforts and knowhow. Hence, in fairness to the manager-operator, so that he may not be deprived of the benefits of the work he had accomplished, the force majeure clause is incorporated as a standard clause in contracts for the management and operation of mines. The nature of the contract for the management and operation of mines justifies the interpretation of the force majeure clause, that a period equal to the period of suspension due to force majeure should be added to the original term of the contract by way of an extension. We, therefore, reiterate the ruling in Our decision that the management contract in the instant case was suspended from February, 1942 to June 26, 1948, and that from the latter date the contract had yet five years to go. 3.In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in reversing the finding of the trial court that Nielson's action has

prescribed, by considering only the first claim and ignoring the prescriptibility of the other claims. This ground of the motion for reconsideration has no merit. In Our decision We stated that the claims of Nielson are based on a written document, and, as such, the cause of action prescribes in ten years. 5 Inasmuch as there are different claims which accrued on different dates the prescriptive periods for all the claims are not the same. The claims of Nielson that have been awarded by this Court are itemized in the dispositive part of the decision. The first item of the awards in Our decision refers to Nielson's compensation in the sum of P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in December, 1941. As We have stated in Our decision, this claim accrued on December 31, 1941, and the right to commence an action thereon started on January 1, 1942. We declared that the action on this claim did not prescribe although the complaint was filed on February 6, 1958 or after a lapse of 16 years, 1 month and 5 days because of the operation of the moratorium law. We declared that under the applicable decisions of this Court 6 the moratorium period of 8 years, 2 months and 8 days should be deducted from the period that had elapsed since the accrual of the cause of action to the date of the filing of the complaint, so that there is a period of less than 8 years to be reckoned for the purpose of prescription. This claim of Nielson is covered by Executive Order No.

32, issued on March 10, 1945, which provides as follows:


"Enforcement of payments of all debts and other monetary obligations payable in the Philippines, except debts and other monetary obligations entered into in any area after declaration by Presidential Proclamation that such area has been freed from enemy occupation and control, is temporarily suspended pending action by the Commonwealth Government." (41 O.G. 5657; Emphasis supplied)

Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or before December 8, 1941) and those contracted subsequent to December 8, 1941 and during the Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who had not filed war damage claims with the United States War Damage Commission. In other words, after the effectivity of Republic Act No. 342, the debt moratorium was limited: (1) to debts and other monetary obligations which were contracted after December 8, 1941 and during the Japanese occupation, and (2) to those pre-war (or pre-December 8, 1941) debts and other monetary obligations where the debtors filed war damage claims. That was the situation up to May 18, 1953 when this Court declared Republic Act No. 342 unconstitutional. 7 It has been held by this Court, however, that from March 10, 1945 when Executive Order No. 32 was issued, to May 18, 1953 when Republic

Act No. 342 was declared unconstitutional or a period of 8 years, 2 months and 8 days the debt moratorium was in force, and had the effect of suspending the period of prescription. 8 Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-war obligations or those incurred prior to December 8, 1941," and that "the moratorium was lifted and terminated with respect to obligations incurred after December 8, 1941." 9 This Court has held that Republic Act No. 342 does not apply to debts contracted during the war and did not lift the moratorium in relation thereto. 10 In the case of Abraham, et al. vs. Intestate Estate of Juan C. Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:
"Respondents, however, contend that Republic Act No. 342, which took effect on July 26, 1948, lifted the moratorium on debts contracted during the Japanese occupation. The court has already held that Republic Act No. 342 did not lift the moratorium on debts contracted during the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war debts, making the protection available only to debtors who had war damage claims (Sison vs. Mirasol, G.R. No. L4711, Oct. 3, 1952)"

We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to Nielson had not prescribed. What we have stated herein regarding the nonprescription of the cause of action of the claim involved in the first item in the award also holds true with respect to the second item in the award, which refers to Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto admits that this second item, like the first, is a monetary obligation. The right of action of Nielson regarding this claim accrued on January 31, 1942. As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not applicable. That is the reason why in Our decision We did not discuss the question of prescription regarding these items. The claims of Nielson involved in these items are based on the management contract, and Nielson's cause of action regarding these claims prescribes in ten years. Corollary to Our ruling that the management contract was suspended from February, 1942 until June 26, 1948, and that the contract was extended for five years from June 26, 1948, the right of action of Nielson to claim for what is due to it during that period of extension accrued during the period from June 26, 1948 till the end of the five-year extension period or until June 26, 1953. And so, even if We reckon June 26, 1948 as the starting date of the ten-year period in connection with the prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that

when the complaint was filed on February 6, 1958 the ten-year prescriptive period had not yet lapsed. In Our decision We have also ruled that the right of action of Nielson against Lepanto had not prescribed because of the arbitration clause in the Management contract. We are satisfied that there is evidence that Nielson had asked for arbitration, and an arbitration committee had been constituted. The arbitration committee, however, failed to bring about any settlement of the differences between Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely advised Nielson that they were not entertaining any claim of Nielson. The complaint in this case was filed on February 6, 1958. 4.In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the extended period of 60 months, since the damages were never demanded nor proved and, in any case, not allowable under the general law on damages." We have stated in Our decision that the original agreement in the management contract regarding the compensation of Nielson was modified, such that instead of receiving a monthly compensation of P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding month, 11 Nielson would receive a compensation of P2,500.00 a month, plus

(1)10% of the dividends declared and paid, when and as paid, during the period of the contract, and at the end of each year, (2)10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account. It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by Lepanto. 12 Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of P17,500.00. We have found that this amount was not paid to Nielson. In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement book that the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson & Co. Inc." The entry does not make any reference to dividends or participation of Nielson in the profits. On the other hand, in the photographic copy of page 89 of the 1941 cash disbursement book, also attached to the motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941 which states "Accts. Pay. Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be the participation of Nielson in the profits based on dividends declared in April 1941 as shown in Exhibit L. But in the same Exhibit L it is not stated that any dividend was declared in October 1941. On the contrary it is stated in Exhibit L that dividends were declared in December 1941. We cannot entertain

this piece of evidence for several reasons: (1) because this evidence was not presented during the trial in the court below; (2) there is no showing that this piece of evidence is newly discovered and that Lepanto was not in possession of said evidence when this case was being tried in the court below; and (3) according to Exhibit L cash dividends of P175,000.00 were declared in December, 1941, and so the sum of P17,500.00 which appears to have been paid to Nielson in October 1941 could not be payment of the equivalent of 10% of the cash dividends that were later declared in December, 1941. As regards the management fee of Nielson corresponding to January, 1942, in the sum of P2,500.00, We have also found that Nielson is entitled to be paid this amount, and that this amount was not paid by Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid the management fees of Nielson for November and December, 1941, 13 it was not able to present any evidence to show that the management fee of P2,500.00 for January, 1942 had been paid. It having been declared in Our decision, as well as in this resolution, that the management contract had been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the cause of action of Nielson to claim for its compensation during that period of extension had not prescribed, it follows that Nielson should be awarded the management fees during the whole period of extension, plus the 10% of the value of the dividends declared during the said period of

extension, the 10% of the depletion reserve that was set up, and the 10% of any amount expended out of surplus earnings for capital account. 5.In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred in ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof. In Our decision, We declared that pursuant to the modified agreement regarding the compensation of Nielson which provides, among others, that Nielson would receive 10% of any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto during the period of extension of the contract. It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00; and on August 22, 1950, it declared stock dividends worth P2,000,000.00. In other words, during the period of extension Lepanto had declared stock dividends worth 3,000,000.00. We held in Our decision that Nielson is entitled to receive 10% of the stock dividends declared, or shares of stocks, worth P300,000.00 at the par value of P0.10 per share. We ordered Lepanto to issue and deliver to Nielson those shares of stocks as well as all the fruits or dividends that accrued to said shares. In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as compensation for its services under the management contract is a violation of the Corporation Law, and that it

was not, and it could not be, the intention of Lepanto and Nielson as contracting parties that the services of Nielson should be paid in shares of stock taken out of stock dividends declared by Lepanto. We have assiduously considered the arguments adduced by Lepanto in support of its contention, as well as the answer of Nielson in this connection, and We have arrived at the conclusion that there is merit in the contention of Lepanto. Section 16 of the Corporation Law, in part, provides as follows:
"No corporation organized under this Act shall create or issue bills, notes or other evidence of debt, for circulation as money, and no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the par or issued value of the stock or bonds so issued; and in case of disagreement as to their value, the same shall be presumed to be the assessed value or the value appearing in invoices or other commercial documents, as the case may be; and the burden or proof that the real present value of the property is greater than the assessed value or value appearing in invoices or other commercial documents, as the case may be, shall be upon the corporation, or for (2) profits earned by it but not distributed among its stockholders or members; Provided,

however, That no stock or bond dividend shall be issued without the approval of stockholders representing not less than twothirds of all stock then outstanding and entitled to vote at a general meeting of the corporation or at a special meeting duly called for the purpose. xxx xxx xxx "No corporation shall make or declare any dividend except from the surplus profits arising from its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution: Provided, That banking, savings and loan, and trust corporations may receive deposits and issue certificates of deposit, checks, drafts, and bills of exchange, and the like in the transaction of the ordinary business of banking, savings and loan, and trust corporations." (As amended by Act No. 2792, and Act No. 3518; Emphasis supplied.)

From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If shares of stocks are issued

in exchange of cash or property then those shares do not fall under the category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property, because services is equivalent to property. 14 Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation. A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a

corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits. 15 So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par. 16 When a corporation issues stock dividends, it shows that the corporation's accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution. 17 Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each stockholder remains the same. 18 If a stockholder is deprived of his stock dividends and this happens if the shares of stock forming part of the stock dividends are issued to a nonstockholder then the proportion of the stockholder's interest changes radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits. 19 The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing

agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside, and declared by the directors of the corporation as a dividends, and duly ordered by the director, or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their respective interests. 20 It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends can not be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this conclusion of Ours finds support in the record. We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and Nielson regarding the application and interpretation of certain provisions of the original contract particularly with regard to the 10% participation of Nielson in the net profits, so that some adjustments had to be made. In the minutes of the meeting of the Board of Directors of Lepanto on August 21, 1940, We read the following:
"The Chairman stated that he believed that it

would be better to tie the computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the dividends declared. In addition to the dividend, we have been setting up a depletion reserve and it does not seem fair to burden the 10% participation of Nielson with the depletion reserve, as the depletion reserve should not be considered as an operating expense. After a prolonged discussion, upon motion duly made and seconded, it was "RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937, effective January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any dividends declared and paid, when and as paid during the period of the contract and at the end of each year, 10% of any depletion reserve that may be set up and 10% of any amount expended during the year out of surplus earnings for capital account." (Emphasis supplied.)

From the sentence, "The Chairman stated that he believed that it would be better to tie the computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the

dividends declared" the idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to make the value of the dividends declared whether the dividends were in cash or in stock as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the dividends so declared. It does not mean, however, that the compensation of Nielson would be taken from the amount actually declared as cash dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as stock dividends, but from the other assets or funds of the corporation which are not burdened by the dividends thus declared. In other words, if, for example, cash dividends of P300,000.00 are declared. Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should not be taken from the P300,000.00 to be distributed as cash dividends to the stockholders but from some other funds or assets of the corporation which are not included in the amount to answer for the cash dividends thus declared. This is so because if the P30,000.00 would be taken out from the P300,000.00 declared as cash dividends, then the stockholders would not be getting P300,000.00 as dividends but only P270,000.00. There would be a dilution of the dividend that corresponds to each share of stock held by the stockholders. Similarly, if there were stock dividends worth one million pesos that were declared, which means an issuance of ten million shares at the par value of ten centavos per share, it does not mean that Nielson would be given 100,000 shares. It

only means that Nielson should be given the equivalent of 10% of the aggregate cash value of those shares issued as stock dividends. That this was the understanding of Nielson itself is borne out by the fact that in its appeal brief Nielson urged that it should be paid P300,000.00 being 10% of the P3,000,000.00 stock dividends declared on November 28, 1949 and August 20, 1950 . . ." 21 We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares of stock worth P300,000.00 based on the stock dividends declared on November 28, 1949 and on August 20, 1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is entitled to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money value of the stock dividends worth P3,000,000.00 which were declared on November 28, 1949 and on August 20, 1950, with interest thereon at the rate of 6% from February 6, 1958. 6.In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not be ascertained and executed without further litigation. In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock dividends in payment of its compensation under the management contract, We do not consider it necessary to discuss this

ground of the motion for reconsideration. The awards in the present case are all reduced to specific sums of money. 7.In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in rendering judgment or attorney's fees. The matter of the award of attorney's fees is within the sound discretion of this Court. In Our decision We have stated the reason why the award of P50,000.00 for attorney's fees is considered by this Court as reasonable. Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the sense that instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten centavos (P0.10) per share based on the stock dividends declared by Lepanto on November 28, 1949 and August 20, 1950, together with their fruits, Nielson should be awarded the sum of P300,000.00 which is an amount equivalent to 10% of the cash value of the stock dividends thus declared, as part of the compensation due Nielson under the management contract. The dispositive portion of the decision should, therefore, be amended, to read as follows: IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson the different amounts as specified hereinbelow: (1)Seventeen thousand five hundred pesos (P17,500.00),

equivalent to 10% of the cash dividends of December, 1941, with legal interest thereon from the date of the filing of the complaint; (2)Two thousand five hundred pesos (P2,500.00), as management fee for January, 1942, with legal interest thereon from the date of the filing of the complaint; (3)One hundred fifty thousand pesos (P150,000.00), representing management fees for the sixty-month period of extension of the management contract, with legal interest thereon from the date of the filing of the complaint; (4)One million four hundred thousand pesos (P1,400,000.00), equivalent to 10% of the cash dividends declared during the period of extension of the management contract, with legal interest thereon from the date of the filing of the complaint; (5)Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the stock dividends declared on November 28, 1949 and August 20, 1950, with legal interest thereon from the date of the filing of the complaint; (6)Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos (P53,928.88), equivalent to 10% of the depletion reserve set up during the period of extension, with legal interest thereon from the date of the filing of the complaint; (7)Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos (P694,364.76),

equivalent to 10% of the expenses for capital account during the period of extension, with legal interest thereon from the date of the filing of the complaint; (8)Fifty thousand pesos (P50,000.00) as attorney's fees; and (9)The costs. It is so ordered.

[G.R. No. 160215. November 10, 2004.] HYDRO RESOURCES CONTRACTORS CORPORATION, petitioner, vs. NATIONAL IRRIGATION ADMINISTRATION, respondent. DECISION YNARES-SANTIAGO, J :
p

Challenged in this petition for review on certiorari under Rule 45 is the Decision of the Court of Appeals 1 dated October 29, 2002 and its Resolution dated September 24, 2003 2 in CA-G.R. SP No. 44527, 3 reversing the judgment of the Construction Industry Arbitration Commission (CIAC) dated June 10, 1997 4 in CIAC Case No. 14-98 in favor of petitioner Hydro Resources Contractors Corporation. The facts are undisputed and are matters of record. In a competitive bidding conducted by the National Irrigation Administration (NIA) sometime in August 1978, Hydro Resources Contractors Corporation (Hydro) was awarded Contract MPI-C-2 5 involving the main civil work of the Magat River Multi-Purpose Project. The contract price for the work was pegged at P1,489,146,473.72 with the peso component thereof amounting to P1,041,884,766.99 and the US$ component valued at $60,657,992.37 at the exchange rate of P7.3735 to the

dollar or P447,361,706.73. On November 6, 1978, the parties signed Amendment No. 1 6 of the contract whereby NIA agreed to increase the foreign currency allocation for equipment financing from US$28,000,000.00 for the first and second years of the contract to US$38,000,000.00, to be made available in full during the first year of the contract to enable the contractor to purchase the needed equipment and spare parts, as approved by NIA, for the construction of the project. On April 9, 1980, the parties entered into a Memorandum of Agreement 7 (MOA) whereby they agreed that Hydro may directly avail of the foreign currency component of the contract for the sole purpose of purchasing necessary spare parts and equipment for the project. This was made in order for the contractor to avoid further delays in the procurement of the said spare parts and equipment. A few months after the MOA was signed, NIA and Hydro entered into a Supplemental Memorandum of Agreement (Supplemental MOA) to include among the items to be financed out of the foreign currency portion of the Contract "construction materials, supplies and services as well as equipment and materials for incorporation in the permanent works of the Project." 8 Work on the project progressed steadily until Hydro substantially completed the project in 1982 and the final acceptance was made by NIA on February 14, 1984. 9 During the period of the execution of the contract, the foreign exchange value of the peso against the US dollar

declined and steadily deteriorated. Whenever Hydro's availment of the foreign currency component exceeded the amount of the foreign currency payable to Hydro for a particular period, NIA charged interest in dollars based on the prevailing exchange rate instead of the fixed exchange rate of P7.3735 to the dollar. Yet when Hydro received payments from NIA in Philippine Pesos, NIA made deductions from Hydro's foreign currency component at the fixed exchange rate of P7.3735 to US$1.00 instead of the prevailing exchange rate.
AEHTIC

Upon completion of the project, a final reconciliation of the total entitlement of Hydro to the foreign currency component of the contract was made. The result of this final reconciliation showed that the total entitlement of Hydro to the foreign currency component of the contract exceeded the amount of US dollars required by Hydro to repay the advances made by NIA for its account in the importation of new equipment, spare parts and tools. Hydro then requested a full and final payment due to the underpayment of the foreign exchange portion caused by price escalations and extra work orders. In 1983, NIA and Hydro prepared a joint computation denominated as the "MPI-C-2 Dollar Rate Differential on Foreign Component of Escalation." 10 Based on said joint computation, Hydro was still entitled to a foreign exchange differential of US$1,353,771.79 equivalent to P10,898,391.17. Hydro then presented its claim for said foreign exchange differential to NIA on August 12, 1983 11 but the latter refused to honor the same. Hydro made several 12

demands to recover its claim until the same was turned down with finality by then NIA Administrator Federico N. Alday, Jr. on January 6, 1987. 13 On December 7, 1994, Hydro filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC). 14 In the said request, Hydro nominated six (6) arbitrators. The case was docketed as CIAC Case No. 18-94. NIA filed its Answer with Compulsory Counterclaim 15 raising laches, estoppel and lack of jurisdiction by CIAC as its special defenses. NIA also submitted its six (6) nominees to the panel of arbitrators. After appointment of the arbitrators, both parties agreed on the Terms of Reference 16 as well as the issues submitted for arbitration. On March 13, 1995, NIA filed a Motion to Dismiss 17 questioning CIAC's jurisdiction to take cognizance of the case. The latter, however, deferred resolution of the motion and set the case for hearing for the reception of evidence. 18 NIA moved 19 for reconsideration but the same was denied by CIAC in an Order dated April 25, 1995. 20 Dissatisfied, NIA filed a petition for certiorari and prohibition with the Court of Appeals where the same was docketed as CA-G.R. SP No. 37180, 21 which dismissed the petition in a Resolution dated June 28, 1996. 22 NIA challenged the resolution of the Court of Appeals before this Court in a special civil action for certiorari,

docketed as G.R. No. 129169.

23

Meanwhile, on June 10, 1997, the CIAC promulgated a decision in favor of Hydro. 24 NIA filed a Petition for Review on Appeal before the Court of Appeals, which was docketed as CA-G.R. SP No. 44527. 25 During the pendency of CA-G.R. SP No. 44527 before the Court of Appeals, this Court dismissed special civil action for certiorari docketed as G.R. No. 129169 on the ground that CIAC had jurisdiction over the dispute and directed the Court of Appeals to proceed with reasonable dispatch in the disposition of CA-G.R. SP No. 44527. NIA did not move for reconsideration of the said decision, hence, the same became final and executory on December 15, 1999. 26 Thereafter, the Court of Appeals rendered the challenged decision in CA-G.R. SP No. 44527, reversing the judgment of the CIAC on the grounds that: (1) Hydro's claim has prescribed; (2) assuming that Hydro was entitled to its claim, the rate of exchange should be based on a fixed rate; (3) Hydro's claim is contrary to R.A. No. 529; 27 (4) NIA's Certification of Non-ForumShopping was proper even if the same was signed only by counsel and not by NIA's authorized representative; and (5) NIA did not engage in forum-shopping. Hydro's Motion for Reconsideration was denied in Resolution of September 24, 2003. Hence, this petition. Addressing first the issue of prescription, the Court of

Appeals, in ruling that Hydro's claim had prescribed, reasoned thus:


Nevertheless, We find good reason to apply the principle of prescription against HRCC. It is well to note that Section 25 of the General Conditions of the subject contract provides (CIAC Decision, p. 15, Rollo, p. 57): Any controversy or dispute arising out of or relating to this Contract which cannot be resolved by mutual agreement shall be decided by the Administrator within thirty (30) calendar days from receipt of a written notice from Contractor and who shall furnish Contractor a written copy of this decision. Such decision shall be final and conclusive unless within thirty (30) calendar days from the date of receipt thereof, Contractor shall deliver to NIA a written notice addressed to the Administrator that he desires that the dispute be submitted to arbitration. Pending decision from arbitration, Contractor shall proceed diligently with the performance of the Contract and in accordance with the decision of the Administrator. (Emphasis and Italics Ours) Both parties admit the existence of this provision in the Contract (Petition, p. 4; Comment, p. 16; Rollo, pp. 12 and 131).

Apropos, the following matters are clear: (1) any controversy or dispute between the parties arising from the subject contract shall be governed by the provisions of the contract; (2) upon the failure to arrive at a mutual agreement, the contractor shall submit the dispute to the Administrator of NIA for determination; and (3) the decision of the Administrator shall become final and conclusive, unless within thirty (30) calendar days from the date of receipt thereof, the Contractor shall deliver to NIA a written notice addressed to the Administrator that he desires that the dispute be submitted for arbitration.
cHCIDE

Prescinding from the foregoing matters, We find that the CIAC erred in granting HRCC's claim considering that the latter's right to make such demand had clearly prescribed. To begin with, on January 7, 1986, Cesar L. Tech (NIA's Administrator at the time) informed HRCC in writing that after a review of the additional points raised by the latter, NIA confirms its original recommendation not to allow the said claim (Annex "F"; Rollo, p. 81; CIAC Decision, p. 11; Rollo, p. 53). This should have propelled private respondent to notify and signify to NIA of intention to submit the dispute to arbitration pursuant to the provision of the contract. Yet, it did not. Instead it persisted to send several letters to NIA reiterating the reason for its rejected claim (CIAC Decision, p. 11; Rollo, p. 53). 28

We disagree for the following reasons: First, the appellate court clearly overlooked the fact that NIA, through then Administrator Federico N. Alday, Jr., denied "with finality" Hydro's claim only on January 6, 1987 in a letter bearing the same date 29 which reads:
This refers to your letter dated November 7, 1986 requesting reconsideration on your claim for payment of the Dollar Rate Differential of Price Escalation in Contract No. MPI-C-2. We have reviewed the relevant facts and issues as presented and the additional points raised in the abovementioned letter in the context of the Contract Documents and we find no strong and valid reason to reverse the earlier decision of NIA's previous management denying your claim. Therefore, we regret that we have to reiterate the earlier official stand of NIA under its letter dated January 7, 1986, that confirms the original recommendation which had earlier been presented in our 4th Indorsement dated February 5, 1985 to your office. In view hereof, we regret to say with finality that the claim cannot be given favorable consideration. (Emphasis and italics supplied)

Hydro received the above-mentioned letter on January 27, 1987. 30 Pursuant to Section 25 of the Contract's

General Conditions (GC-25), Hydro had thirty (30) days from receipt of said denial, or until February 26, 1987, within which to notify NIA of its desire to submit the dispute to arbitration. On February 18, 1987, Hydro sent a letter 31 to NIA, addressed to then NIA Administrator Federico N. Alday, Jr., manifesting its desire to submit the dispute to arbitration. The letter was received by NIA on February 19, 1987, which was within the thirty-day prescriptive period. Moreover, a circumspect scrutiny of the wording of GC25 with regard to the thirty-day prescriptive period shows that said proviso is intended to apply to disputes which arose during the actual construction of the project and not for controversies which occurred after the project is completed. The rationale for such a stipulation was aptly explained thus by the CIAC in its Decision in CIAC Case No. 18-94:
In construction contracts, there is invariably a provision for interim settlement of disputes. The right to settle disputes is given to the owner or his representative, either an architect or engineer, designated as "owner's representative," only for the purpose of avoiding delay in the completion of the project. In this particular contract, that right was reserved to the NIA Administrator. The types of disputes contemplated were those which may have otherwise affected the progress of the work. It is very clear that this

is the purpose of the limiting periods in this clause that the dispute shall be resolved by the Administrator within 30 days from receipt of a written notice from the Contractor and that the Contractor may submit to arbitration this dispute if it does not agree with the decision of the Administrator, and "Pending decision from arbitration, Contractor shall proceed diligently with the performance of the Contract and in accordance with the decision of the Administrator." In this case, the dispute had arisen after completion of the Project. The reason for the 30-day limitation no longer applies, and we find no legal basis for applying it. Moreover, in Exhibit "B," NIA Administrator Cesar L. Tech had, instead of rendering an adverse decision, by signing the document with HRCC's Onofre B. Banson, implicitly approved the payment of the foreign exchange differential, but this payment could not be made because of the opinion of Auditor Saldua and later of the Commission on Audit.
32

Second, as early as April 1983, Hydro and NIA, through its Administrator Cesar L. Tech, prepared the Joint Computation which shows that Hydro is entitled to the foreign currency differential. 33 As correctly found by the CIAC, this computation constitutes a written acknowledgment of the debt by the debtor under Article 1155 of the Civil Code, which states:

ART. 1155.The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor. (Emphasis and italics supplied)

aDSIHc

Instead of upholding the CIAC's findings on this point, the Court of Appeals ruled that Cesar L. Tech's act of signing the Joint Computation was an ultra vices act. This again is patent error. It must be noted that the Administrator is the highest officer of the NIA. Furthermore, Hydro has been dealing with NIA through its Administrator in all of its transactions with respect to the contract and subsequently the foreign currency differential claim. The NIA Administrator is empowered by the Contract to grant or deny foreign currency differential claims. It would be preposterous for the NIA Administrator to have the power of granting claims without the authority to verify the computation of such claims. Finally, the records of the case will show that NIA itself never disputed its Administrator's capacity to sign the Joint Computation because it knew that the Administrator, in fact, had such capacity. Even assuming for the sake of argument that the Administrator had no authority to bind NIA, the latter is already estopped after repeatedly representing to Hydro that the Administrator had such authority. A corporation may be held in estoppel from denying as against third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority.

34 Indeed

. . . The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time.". . . 35

Third, NIA has clearly waived the prescriptive period when it continued to entertain Hydro's claim regarding new matters raised by the latter in its letters to NIA and then issuing rulings thereon. In this regard, Article 1112 of the Civil Code provides that:
ART. 1112.Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future. Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired. (Emphasis and italics supplied)

Certainly, when a party has renounced a right acquired by prescription through its actions, it can no longer claim prescription as a defense. 36 Fourth, even assuming that NIA did not waive the thirtyday prescriptive period, it clearly waived the effects of such period when it actively participated in arbitration proceedings through the following acts:
a)On January 6, 1995, NIA voluntarily filed its written appearance, readily submitted its Answer and asserted its own Counterclaims; b)In the Compliance which accompanied the Answer, NIA also submitted its six nominees to the Arbitral Tribunal to be constituted, among of which one was eventually appointed to the tribunal; c)NIA also actively participated in the deliberations for and the formulation of the Terms of Reference during the preliminary conference set by CIAC; and d)For the purpose of obviating the introduction of testimonial evidence on the authenticity and due execution of its documentary evidence, NIA even had examined, upon prior request to Hydro, all of the documents which the latter intended to present as evidentiary exhibits for the said arbitration case.

We now come to the issue of whether or not the provisions of R.A. No. 529, otherwise known as an Act To

Assure Uniform Value to Philippine Coin And Currency, is applicable to Hydro's claim. The Contract between NIA and Hydro is an internationally tendered contract considering that it was funded by the International Bank for Reconstruction and Development (IBRD). As a contract funded by an international organization, particularly one recognized by the Philippines, 37 the contract is exempt from the provisions of R.A. No. 529. R.A. No. 4100 amended the provisions of R.A. 529 thus:
SECTION 1.Section one of Republic Act Numbered Five hundred and twenty-nine, entitled "An Act to Assure Uniform Value of Philippine Coin and Currency," is hereby amended to read as follows: Sec. 1.Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provisions purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a)

transactions where the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are identifiable, as having emanated from the sources enumerated above; (b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transaction entered into between banks or between banks and individuals or juridical persons; (d) import-export and other international banking, financial investment and industrial transactions. With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provisions, in which bases the terms of the parties' agreement shall apply, every other domestic obligation heretofore or hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in

any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank notes, heretofore and hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public and private.
ACETSa

SECTION 2.This Act shall take effect upon its approval. (Emphasis and italics supplied)

Even assuming ex gratia argumenti that R.A. No. 529 is applicable, it is still erroneous for the Court of Appeals to deny Hydro's claim because Section 1 of R.A. No. 529 states that only the stipulation requiring payment in foreign currency is void, but not the obligation to make payment. This can be gleaned from the provision that "every other domestic obligation heretofore or hereafter

incurred" shall be "discharged upon payment in any coin and currency which at the time is legal tender for public and private debts." In Republic Resources and Development Corporation v. Court of Appeals, 38 it was held:
. . . it is clear from Section 1 of R.A. No. 529 that what is declared null and void is the "provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby" and not the contract or agreement which contains such proscribed provision. (Emphasis supplied)

More succinctly, we held in San Buenaventura v. Court of Appeals 39 that


It is to be noted under the foregoing provision that while an agreement to pay an obligation in a currency other than Philippine currency is null and void as contrary to public policy, what the law specifically prohibits is payment in currency other than legal tender but does not defeat a creditor's claim for payment. A contrary rule would allow a person to profit or enrich himself inequitably at another's expense. (Emphasis supplied)

It is thus erroneous for the Court of Appeals to disallow petitioner's claim for foreign currency differential because NIA's obligation should be converted to Philippine Pesos which was legal tender at the time. 40 The next issue to be resolved is whether or not Hydro's claim should be computed at the fixed rate of exchange. When the MOA 41 and the Supplemental MOA 42 were in effect, there were instances when the foreign currency availed of by Hydro exceeded the foreign currency payable to it for that particular Progress Payment. In instances like these, NIA actually charged Hydro interest in foreign currency computed at the prevailing exchange rate and not at the fixed rate. NIA now insists that the exchange rate should be computed according to the fixed rate and not the escalating rate it actually charged Hydro. Suffice it to state that this flip-flopping stance of NIA of adopting and discarding positions to suit its convenience cannot be countenanced. A person who, by his deed or conduct has induced another to act in a particular manner, is barred from adopting an inconsistent position, attitude or course of conduct that thereby causes loss or injury to another. 43 Indeed, the application of the principle of estoppel is proper and timely in heading off NIA's efforts at renouncing its previous acts to the prejudice of Hydro which had dealt with it honestly and in good faith.
. . . A principle of equity and natural justice, this is expressly adopted under Article 1431

of the Civil Code, and pronounced as one of the conclusive presumptions under Rule 131, Section 3(a) of the Rules of Court, as follows: Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing to be true, and to act upon such a belief he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it.
aTcIAS

Petitioner, having performed affirmative acts upon which the respondents based their subsequent actions, cannot thereafter refute his acts or renege on the effects of the same, to the prejudice of the latter. To allow him to do so would be tantamount to conferring upon him the liberty to limit his liability at his whim and caprice, which is against the very principles of equity and natural justice. . . . 44

NIA is, therefore, estopped from invoking the contractual stipulation providing for the fixed rate to justify a lower computation than that claimed by Hydro. It cannot be allowed to hide behind the very provision which it itself continuously violated. 45 An admission or representation is rendered conclusive upon the person making it and cannot be denied nor disproved as against the person relying thereon. 46 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 47

NIA was guilty of forum-shopping. Forum-shopping refers to the act of availing oneself of several judicial remedies in different courts, either simultaneously or successively, substantially founded on the same transaction and identical material facts and circumstances, raising basically the like issues either pending in, or already resolved by, some other court.

48

It has been characterized as an act of malpractice that is prohibited and condemned as trifling with the courts and abusing their processes. It constitutes improper conduct which tends to degrade the administration of justice. It has also been described as deplorable because it adds to the congestion of the heavily burdened dockets of the courts. 49 The test in determining the presence of this pernicious practice is whether in the two or more cases pending, there is identity of: (a) parties; (b) rights or causes of action; and (c) reliefs sought. 50 Applying the foregoing yardstick to the instant case, it is clear that NIA violated the prohibition against forumshopping. Besides filing CA-G.R. SP No. 44527 wherein the Court of Appeals' decision is the subject of appeal in this proceeding, NIA previously filed CA-G.R. SP No. 37180 and G.R. No. 129169 which is a special civil action for certiorari. In all three cases, the parties are invariably Hydro and NIA. In all three petitions, NIA raised practically the same issues 51 and in all of them, NIA's prayer was the same: to nullify the proceedings commenced at the CIAC. It must be pointed out in this regard that the first two petitions namely, CA-G.R. SP No. 37180 and G.R. No.

129169 are both original actions. Since NIA failed to file a petition for review on certiorari under Rule 45 of the Rules of Court challenging the decision of the appellate court in CA-G.R. SP No. 37180 dismissing its petition, it opted to file an original action for certiorari under Rule 65 with this Court where the same was docketed as G.R. No. 129169. For its failure to appeal the judgments in CA-G.R. SP No. 37180 and G.R. No. 129169, NIA is necessarily bound by the effects of those decisions. The filing of CA-G.R. SP No. 44527, which raises the issues already passed upon in both cases is a clear case of forum-shopping which merits outright dismissal. The issue of whether or not the Certification of NonForum Shopping is valid despite that it was signed by NIA's counsel must be answered in the negative. Applicable is the ruling in Mariveles Shipyard Corp. v. Court of Appeals, et al.: 52
It is settled that the requirement in the Rules that the certification of non-forum shopping should be executed and signed by the plaintiff or the principal means that counsel cannot sign said certification unless clothed with special authority to do so. The reason for this is that the plaintiff or principal knows better than anyone else whether a petition has previously been filed involving the same case or substantially the same issues. Hence, a certification signed by counsel alone is defective and constitutes a valid cause for dismissal of the petition. In the case of natural persons, the Rule requires the parties

themselves to sign the certificate of nonforum shopping. However, in the case of the corporations, the physical act of signing may be performed, on behalf of the corporate entity, only by specifically authorized individuals for the simple reason that corporations, as artificial persons, cannot personally do the task themselves. . . . It cannot be gainsaid that obedience to the requirements of procedural rule[s] is needed if we are to expect fair results therefrom. Utter disregard of the rules cannot justly be rationalized by harking on the policy of liberal construction. (Emphasis and italics supplied)
HASDcC

In this connection, the lawyer must be "specifically authorized" in order to validly sign the certification.

53

In closing, we restate the rule that the courts will not interfere in matters which are addressed to the sound discretion of government agencies entrusted with the regulation of activities coming under the special technical knowledge and training of such agencies. 54 An action by an administrative agency may be set aside by the judicial department only if there is an error of law, abuse of power, lack of jurisdiction or grave abuse of discretion clearly conflicting with the letter and spirit of the law. 55 In the case at bar, there is no cogent reason to depart from the general rule because the action of the CIAC conforms rather than conflicts with the governing statutes and controlling case law on the matter. WHEREFORE, the petition is GRANTED. The Decision of

the Court of Appeals in CA-G.R. SP No. 44527 dated October 29, 2002 and the Resolution dated September 24, 2003 are REVERSED aid SET ASIDE. The Decision of the Construction Industry Arbitration Commission dated June 10, 1997 in CIAC Case No. 18-94 is REINSTATED. SO ORDERED.