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G.R. No.

6817

July 31, 1958

ESTEFANIA R. VDA. DE PIROVANO, plaintiff-appellant,


vs.
DE LA RAMA STEAMSHIP CO., INC., defendant-appellee.
PADILLA, J.:
Plaintiff seeks to recover from the defendant the sum of P221,975.45, the
balance of the amount of dividends at P100 per share, declared by
Resolution No. 50-127 of 29 December 1950, to which she is entitled as
the registered owner of 3,424 shares of stock in the defendant
corporation, after deducting the sum of P120,424.55 she had withdrawn
or received from the defendant for advances made to her after the death
of the late Esteban de la Rama, 20 per cent of the sum sought to be
recovered for attorney's fees and expenses of litigation by way of
damages, and costs.
Answering the complaint, the defendant avers that although the plaintiff
is entitled to the dividends claimed in the complaint, yet she is indebted
to the defendant as of 29 December 1950 in the sum of P444,202.52, and
that by reason of the unnecessary commencement of the suit, the
defendant suffered damages in the sum of P100,000. Upon the foregoing
allegations the defendant asks for the dismissal of the complaint and
prays that judgment rendered condemning the plaintiff to pay the
amount of damages it has suffered and costs.
After hearing, the Court dismissed both the complaint and the
counterclaim without pronouncement as to costs. The plaintiff has
appealed.
Appellant's theory is that the cash advances to her in the United States
during the Pacific War for her personal expenses and for the support and
education of her children were assumed by Esteban de la Rama, as set
forth in his letter dated 5 May 1947 (Exhibit B) to the appellee and the
Hijos de I. de la Rama & Co., Inc., consented to and approved by both
corporations. She claims that the advances made to her by the appellee
were debited against the account of Hijos de I. de la Rama & Co., Inc.,
another corporation practically owned by Esteban de Ia Rama; that the
only sum the appellee corporation may deduct from the amount of
dividends to which she is entitled is P120,424.55 which she received after
the death of her father Esteban de la Rama and was not assumed by him;
and that as a matter of fact in special proceedings No. 401 of the Court of
First Instance of Iloilo for the administration and settlement of the estate
of the late Esteban de la Rama, the Hijos de I. de la Rama & Co., Inc.,

filed a claim charging the estate with the aforesaid advances for
expenses of the appellant and of her children which had been assumed
by the deceased in his lifetime, a claim which, although reduced to
P26,000 as per Ballentyne schedule of monetary value, was approved by
the Court of First Instance of Iloilo on 27 September 1950, and the
executor of the estate of the late Esteban de la Rama was directed to pay
the claim thus allowed (Exhibit O).
The appellee resists appellant's claim upon the ground that the
assumption by Esteban de la Rama of the total sum of withdrawals by the
appellant for her expenses and of her children was never consented to by
the appellee and hence not binding upon it; and that the accounting
method by which the withdrawals were charged against the Hijas de I. de
la Rama & Co., Inc. was to circumvent the prohibition imposed upon the
appellee to declare dividends, agreed upon in the deed of trust executed
by the appellee and the National Development Company, a prohibition
which lasted from 26 February 1940 to 23 September 1949 (Exhibit 7).
There is no dispute that the appellant is the registered owner of 3,424
shares of stock in the appellee corporation; that on 29 December 1950
the appellee by Resolution No. 50-127 declared a dividend of P100 for
each share of stock; that the appellee further resolved that the personal
accounts of the stockholders of the De la Rama Steamship Co., Inc.,
which include that of the appellant in the sum of P444,202.52 set up in
the books of De la Rama Steamship Co., Inc. against the Hijos de I. de la
Rama & Co., Inc., be credited to the account of the last named
corporation and debited to accounts receivable from the stockholders;
and that from the amount of dividends, the personal account of each and
every stockholder be deducted (Exhibit A-1).
The determination of the controversy hinges on whether the assumption
made by the late Esteban de la Rama in his lifetime of all the advances
made by the appellee to the appellant was binding upon it. There is no
doubt that because of the prohibition agreed upon in the deed of trust to
the effect that no dividends could be declared by the appellee during the
period of time already stated, advances to the stockholders would
constitute a violation of section 12 of the deed of trust. For that reason it
was made to appear that such advances were made to the Hijos de I. de
la Rama & Co., Inc. and debited the same against the latter in the books
of the appellee, and in the books of the Hijos de I. de la Rama & Co., Inc.
the said advances were debited against the individual the stockholders,
the stockholders of both corporations being the same. The pivotal point is
whether the assumption by Esteban de la Rama of the advances made to
the appellant by the appellee, as stated in his letter of 5 May 1947, was
consented to by the appellee to constitute a novation. Express sent by
the creditor is necessary to substitute another for the debtor. 1 Such

consent does not appear to have been given by the board of directors of
the appellee. Corporate acts of a corporation must appear in its books or
records. No such consent appears in the books or records of the appellee.
The appellant does not dispute the total sum of her withdrawals which is
P444,202.52 as claimed by the appellee.
Aside from the letter of 5 May 1947 of Esteban de la Rama, the appellant
relies upon the financial statements and books of the appellee where the
withdrawals by the appellant were entered in the account of Hijos de I. de
la Rama & Co., Inc. or transferred to the account of Esteban de la Rama.
The entries on the withdrawals by the appellant entered in the account of
Hijos de I. de la Rama & Co., Inc. or transferred to the account of Esteban
de la Rama have already been explained satisfactorily. They were done so
in order to circumvent the prohibition referred to above. As a matter of
fact the withdrawals made by the appellant were made by her and not by
the Hijos de I. de la Rama & Co., Inc. Nor is there any evidence that those
advances were used by the Hijos de I. de la Rama & Co., Inc.
As to the inclusion of the withdrawals made by the appellant in the claim
of the Hijos de I. de la Rama & Co., Inc. filed against the estate of the late
Esteban de la Rama in special proceedings No. 401 of the probate court
of Iloilo and allowed by the court although in a reduced amount, suffice it
to say that such act of the Hijos de I. de la Rama & Co., Inc. cannot and
does not bind the appellee. Its appearance in the probate court was by
order of that court of 19 June 1950 (Exhibit M), and in its pleading the
appellee disclaimed any interest in the claim filed by the Hijos de I. de la
Rama & Co., Inc. against the estate of the late Esteban de la Rama
(Exhibit N).
Resolution No. 50-127 of the board of directors of the appellee of 29
December 1950, whereby a cash dividend of P2,000,000 was declared in
favor of stockholders of record as of 1 December 1950, or at the rate of
P100 per share, subject to the conditions already stated, does not suffer
from any legal infirmity. The segregation from the account of Hijos de I.
de la Rama & Co., Inc. and the setting up in the books of the De la Rama
Steamship Co., Inc. of withdrawals made by the stockholders of the
appellee as accounts receivable due from said stockholders was even
suggested by the President of Hijos de I. de la Rama & Co., Inc. in a letter
dated 9 April 1945, addressed to the De la Rama Steamship Co., Inc.
(Exhibit A-1).
There is no room for the application of the in pari delicto principle to the
instant case, because the appellee corporation and the Hijos de I. de la
Rama & Co., Inc. have committed no crime or violation of law, but a

violation of section 12 of the deed of trust by the appellee corporation


which gave rise to a cause of action by the National Development
Company, the injured party, against the appellee corporation. However,
the National Development Company chose not to avail itself of its right.
The appellant must answer for the personal advances made to her by the
appellee corporation and the latter may set off the total sum of such
advances against the amount of dividends to which she is entitled.
For the foregoing considerations, the judgment appealed from is affirmed,
without pronouncement as to costs.

G.R. No. L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their


own behalf and in that all other stockholders of the Balatoc
Mining Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING
COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W.
BEAM, defendants-appellees.
STREET, J.:
This action was originally instituted in the Court of First Instance of the
City of Manila by F. M. Harden, acting in his own behalf and that of all
other stockholders of the Balatoc Mining Co. who might join in the action
and contribute to the expense of the suit. With the plaintiff Harden two
others, J. D. Highsmith and John C. Hart, subsequently associated
themselves. The defendants are the Benguet Consolidated Mining Co.,
the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W.
Beam. The principal purpose of the original action was to annul a
certificate covering 600,000 shares of the stock of the Balatoc Mining Co.,
which have been issued to the Benguet Consolidated Mining Co., and to
secure to the Balatoc Mining Co., the restoration of a large sum of money
alleged to have been unlawfully collected by the Benguet Consolidated
Mining Co., with legal interest, after deduction therefrom of the amount
expended by the latter company under a contract between the two
companies, bearing date of March 9, 1927. The complaint was afterwards
amended so as to include a prayer for the annulment of this contract.
Shortly prior to the institution of this lawsuit, the Benguet Consolidated
Mining Co., transferred to H. E. Renz, as trustee, the certificate for

600,000 shares of the Balatoc Mining Co. which constitute the principal
subject matter of the action. This was done apparently to facilitate the
splitting up to the shares in the course of the sale or distribution. To
prevent this the plaintiffs, upon filing their original complaint, procured a
preliminary injunction restraining the defendants, their agents and
servants, from selling, assigning or transferring the 600,000 shares of the
Balatoc Mining Co., or any part thereof, and from removing said shares
from the Philippine Islands. This explains the connection of Renz with the
case. The other individual defendants are made merely as officials of the
Benguet Consolidated Mining Co. Upon hearing the cause the trial court
dismissed the complaint and dissolved the preliminary injunction, with
costs against the plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial
interests involve are immense. Briefly told these facts are as follows: The
Benguet Consolidated Mining Co. was organized in June, 1903, as
a sociedad anonima in conformity with the provisions of Spanish law;
while the Balatoc Mining Co. was organized in December 1925, as a
corporation, in conformity with the provisions of the Corporation Law (Act
No. 1459). Both entities were organized for the purpose of engaging in
the mining of gold in the Philippine Islands, and their respective
properties are located only a few miles apart in the subprovince of
Benguet. The capital stock of the Balatoc Mining Co. consists of one
million shares of the par value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired
by it were largely undeveloped; and the original stockholders were
unable to supply the means needed for profitable operation. For this
reason, the board of directors of the corporation ordered a suspension of
all work, effective July 31, 1926. In November of the same year a general
meeting of the company's stockholders appointed a committee for the
purpose of interesting outside capital in the mine. Under the authority of
this resolution the committee approached A. W. Beam, then president and
general manager of the Benguet Company, to secure the capital
necessary to the development of the Balatoc property. As a result of the
negotiations thus begun, a contract, formally authorized by the
management of both companies, was executed on March 9, 1927, the
principal features of which were that the Benguet Company was to
proceed with the development and construct a milling plant for the
Balatoc mine, of a capacity of 100 tons of ore per day, and with an
extraction of at least 85 per cent of the gold content. The Benguet
Company also agreed to erect an appropriate power plant, with the aerial
tramlines and such other surface buildings as might be needed to
operate the mine. In return for this it was agreed that the Benguet
Company should receive from the treasurer of the Balatoc Company

shares of a par value of P600,000, in payment for the first P600,000 be


thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31,
1929, the Benguet Company had spent upon the development the sum of
P1,417,952.15. In compensation for this work a certificate for six hundred
thousand shares of the stock of the Balatoc Company has been delivered
to the Benguet Company, and the excess value of the work in the amount
of P817,952.15 has been returned to the Benguet Company in cash.
Meanwhile dividends of the Balatoc Company have been enriching its
stockholders, and at the time of the filing of the complaint the value of its
shares had increased in the market from a nominal valuation to more
than eleven pesos per share. While the Benguet Company was pouring its
million and a half into the Balatoc property, the arrangements made
between the two companies appear to have been viewed by the plaintiff
Harden with complacency, he being the owner of many thousands of the
shares of the Balatoc Company. But as soon as the success of the
development had become apparent, he began this litigation in which he
has been joined by two others of the eighty shareholders of the Balatoc
Company.
Briefly, the legal point upon which the action is planted is that it is
unlawful for the Benguet Company to hold any interest in a mining
corporation and that the contract by which the interest here in question
was acquired must be annulled, with the consequent obliteration of the
certificate issued to the Benguet Company and the corresponding
enrichment of the shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United
States, in the attention of the Philippine Commission was early drawn to
the fact that there is no entity in Spanish law exactly corresponding to
the notion of the corporation in English and American law; and in the
Philippine Bill, approved July 1, 1902, the Congress of the United States
inserted certain provisions, under the head of Franchises, which were
intended to control the lawmaking power in the Philippine Islands in the
matter of granting of franchises, privileges and concessions. These
provisions are found in section 74 and 75 of the Act. The provisions of
section 74 have been superseded by section 28 of the Act of Congress of
August 29, 1916, but in section 75 there is a provision referring to mining
corporations, which still remains the law, as amended. This provisions, in
its original form, reads as follows: "... it shall be unlawful for any member
of a corporation engaged in agriculture or mining and for any corporation
organized for any purpose except irrigation to be in any wise interested in
any other corporation engaged in agriculture or in mining."

Under the guidance of this and certain other provisions thus enacted by
Congress, the Philippine Commission entered upon the enactment of a
general law authorizing the creation of corporations in the Philippine
Islands. This rather elaborate piece of legislation is embodied in what is
called our Corporation Law (Act No. 1459 of the Philippine Commission).
The evident purpose of the commission was to introduce the American
corporation into the Philippine Islands as the standard commercial entity
and to hasten the day when the sociedad anonima of the Spanish law
would be obsolete. That statute is a sort of codification of American
corporate law.
For the purposes general description only, it may be stated that
the sociedad anonima is something very much like the English joint stock
company, with features resembling those of both the partnership is
shown in the fact that sociedad, the generic component of its name in
Spanish, is the same word that is used in that language to designate
other forms of partnership, and in its organization it is constructed along
the same general lines as the ordinary partnership. It is therefore not
surprising that for purposes of loose translation the expression sociedad
anonima has not infrequently the other hand, the affinity of this entity to
the American corporation has not escaped notice, and the
expression sociedad anonima is now generally translated by the word
corporation. But when the word corporation is used in the sense
of sociedad anonima and close discrimination is necessary, it should be
associated with the Spanish expression sociedad anonima either in a
parenthesis or connected by the word "or". This latter device was
adopted in sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted
bodily, in subsection (5) of section 13 of that Act (No. 1459) the words
which we have already quoted from section 75 of the Act of Congress of
July 1, 1902 (Philippine Bill); and it is of course obvious that whatever
meaning originally attached to this provision in the Act of Congress, the
same significance should be attached to it in section 13 of our
Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of
the American Corporation into Philippine law in the place of the sociedad
anonima, it was necessary to make certain adjustments resulting from
the continued co-existence, for a time, of the two forms of commercial
entities. Accordingly, in section 75 of the Corporation Law, a provision is
found making the sociedad anonima subject to the provisions of the
Corporation Law "so far as such provisions may be applicable", and giving
to the sociedades anonimas previously created in the Islands the option
to continue business as such or to reform and organize under the
provisions of the Corporation Law. Again, in section 191 of the

Corporation Law, the Code of Commerce is repealed in so far as it relates


to sociedades anonimas. The purpose of the commission in repealing this
part of the Code of Commerce was to compel commercial entities
thereafter organized to incorporate under the Corporation Law, unless
they should prefer to adopt some form or other of the partnership. To this
provision was added another to the effect that existing sociedades
anonimas, which elected to continue their business as such, instead of
reforming and reorganizing under the Corporation Law, should continue
to be governed by the laws that were in force prior to the passage of this
Act "in relation to their organization and method of transacting business
and to the rights of members thereof as between themselves, but their
relations to the public and public officials shall be governed by the
provisions of this Act."
As already observed, the provision above quoted from section 75 of the
Act Congress of July 1, 1902 (Philippine Bill), generally prohibiting
corporations engaged in mining and members of such from being
interested in any other corporation engaged in mining, was amended by
section 7 of Act No. 3518 of the Philippine Legislature, approved by
Congress March 1, 1929. The change in the law effected by this
amendment was in the direction of liberalization. Thus, the inhibition
contained in the original provision against members of a corporation
engaged in agriculture or mining from being interested in other
corporations engaged in agriculture or in mining was so modified as
merely to prohibit any such member from holding more than fifteen per
centum of the outstanding capital stock of another such corporation.
Moreover, the explicit prohibition against the holding by any corporation
(except for irrigation) of an interest in any other corporation engaged in
agriculture or in mining was so modified as to limit the restriction to
corporations organized for the purpose of engaging in agriculture or in
mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain
any appropriate clause directly penalizing the act of a corporation, a
member of a corporation , in acquiring an interest contrary to paragraph
(5) of section 13 of the Act. The Philippine Legislature undertook to
remedy this situation in section 3 of Act No. 2792 of the Philippine
Legislature, approved on February 18, 1919, but this provision was
declared invalid by this court inGovernment of the Philippine Islands vs.
El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act.
Subsequently the Legislature reenacted substantially the same penal
provision in section 21 of Act No. 3518, under a title sufficiently broad to
comprehend the subject matter. This part of Act No. 3518 became
effective upon approval by the Governor-General, on December 3, 1928,
and it was therefore in full force when the contract now in question was
made.

This provision was inserted as a new section in the Corporation Law,


forming section 1990 (A) of said Act as it now stands. Omitting the
proviso, which seems not to be pertinent to the present controversy, said
provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions
of this Act and its amendments not otherwise penalized therein,
shall be punished by a fine of not more than five thousand pesos
and by imprisonment for not more than five years, in the
discretion of the court. If the violation is committed by a
corporation, the same shall, upon such violation being proved, be
dissolved by quo warranto proceedings instituted by the
Attorney-General or by any provincial fiscal by order of said
Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two
fundamental questions involved in this controversy. The first is whether
the plaintiffs can maintain an action based upon the violation of law
supposedly committed by the Benguet Company in this case. The second
is whether, assuming the first question to be answered in the affirmative,
the Benguet Company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by the Congress of
the United States, and later by the Philippine Legislature, prohibiting a
mining corporation from becoming interested in another mining
corporation. It is obvious that, if the first question be answered in the
negative, it will be unnecessary to consider the second question in this
lawsuit.
Upon the first point it is at once obvious that the provision referred to was
adopted by the lawmakers with a sole view to the public policy that
should control in the granting of mining rights. Furthermore, the penalties
imposed in what is now section 190 (A) of the Corporation Law for the
violation of the prohibition in question are of such nature that they can be
enforced only by a criminal prosecution or by an action of quo warranto.
But these proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs seek to
assert in this case? The defendant Benguet Company has committed no
civil wrong against the plaintiffs, and if a public wrong has been
committed, the directors of the Balatoc Company, and the plaintiff
Harden himself, were the active inducers of the commission of that
wrong. The contract, supposing it to have been unlawful in fact, has been
performed on both sides, by the building of the Balatoc plant by the
Benguet Company and the delivery to the latter of the certificate of

600,000 shares of the Balatoc Company. There is no possibility of really


undoing what has been done. Nobody would suggest the demolition of
the mill. The Balatoc Company is secure in the possession of that
improvement, and talk about putting the parties in status quo ante by
restoring the consideration with interest, while the Balatoc Company
remains in possession of what it obtained by the use of that money, does
not quite meet the case. Also, to mulct the Benguet Company in many
millions of dollars in favor of individuals who have not the slightest
equitable right to that money in a proposition to which no court can give
a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on
the assumption that only one of the contracting parties has been guilty of
a misdemeanor, namely, the Benguet Company, and that the other party,
the Balatoc Company, is wholly innocent to participation in that wrong.
The plaintiffs would then have us apply the second paragraph of article
1305 of the Civil Code which declares that an innocent party to an illegal
contract may recover anything he may have given, while he is not bound
to fulfill any promise he may have made. But, supposing that the first
hurdle can be safely vaulted, the general remedy supplied in article 1305
of the Civil Code cannot be invoked where an adequate special remedy is
supplied in a special law. It has been so held by this court in Go Chioco
vs. Martinez (45 Phil., 256, 280), where we refused to apply that article to
a case of nullity arising upon a usurious loan. The reason given for the
decision on this point was that the Usury Act, as amended, contains all
the provisions necessary for the effectuation of its purposes, with the
result that the remedy given in article 1305 of the Civil Code is
unnecessary. Much more is that idea applicable to the situation now
before us, where the special provisions give ample remedies for the
enforcement of the law by action in the name of the Government, and
where no civil wrong has been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising
upon our own statutes; and it would seem to be unnecessary to ransack
the American decisions for analogies pertinent to the case. We may
observe, however, that the situation involved is not unlike that which has
frequently arisen in the United States under provisions of the National
Bank Act prohibiting banks organized under that law from holding real
property. It has been uniformly held that a trust deed or mortgaged
conveying property of this kind to a bank, by way of security, is valid until
the transaction is assailed in a direct proceeding instituted by the
Government against the bank, and the illegality of such tenure supplies
no basis for an action by the former private owner, or his creditor, to
annul the conveyance. (National Bank vs. Matthews, 98 U. S., 621;
Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in
the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc.

Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes &
Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77
Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de
Carolina vs. Registrar (19 Porto Rico, 143), for the reason that this case
arose under a provision of the Foraker Act, a law analogous to our
Philippine Bill. It appears that the registrar had refused to register two
deeds in favor of the Compaia Azucarera on the ground that the land
thereby conveyed was in excess of the area permitted by law to the
company. The Porto Rican court reversed the ruling of the registrar and
ordered the registration of the deeds, saying:
Thus it may be seen that a corporation limited by the law or by its
charter has until the State acts every power and capacity that
any other individual capable of acquiring lands, possesses. The
corporation may exercise every act of ownership over such lands;
it may sue in ejectment or unlawful detainer and it may demand
specific performance. It has an absolute title against all the world
except the State after a proper proceeding is begun in a court of
law. ... The Attorney General is the exclusive officer in whom is
confided the right to initiate proceedings for escheat or attack the
right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action
against the Benguet Company for the infraction of law supposed to have
been committed, we forego cny discussion of the further question
whether a sociedad anonima created under Spanish law, such as the
Benguet Company, is a corporation within the meaning of the prohibitory
provision already so many times mentioned. That important question
should, in our opinion, be left until it is raised in an action brought by the
Government.
The judgment which is the subject of his appeal will therefore be
affirmed, and it is so ordered, with costs against the appellants.

G.R. No. L-68555 March 19, 1993


PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO
TE, respondents.

CAMPOS, JR., J.:


Before Us is a Petition for Review on Certiorari filed by petitioner Prime
White Cement Corporation seeking the reversal of the decision * of the
then Intermediate Appellate Court, the dispositive portion of which reads
as follows:
WHEREFORE, in view of the foregoing, the judgment
appealed from is hereby affirmed in toto. 1
The facts, as found by the trial court and as adopted by the respondent
Court are hereby quoted, to wit:
On or about the 16th day of July, 1969, plaintiff and
defendant corporation thru its President, Mr. Zosimo
Falcon and Justo C. Trazo, as Chairman of the Board,
entered into a dealership agreement (Exhibit A) whereby
said plaintiff was obligated to act as the exclusive dealer
and/or distributor of the said defendant corporation of its
cement products in the entire Mindanao area for a term
of five (5) years and proving (sic) among others that:
a. The corporation shall, commencing
September, 1970, sell to and supply the
plaintiff, as dealer with 20,000 bags (94
lbs/bag) of white cement per month;
b. The plaintiff shall pay the defendant
corporation P9.70, Philippine Currency,
per bag of white cement, FOB Davao and
Cagayan de Oro ports;
c. The plaintiff shall, every time the
defendant corporation is ready to deliver
the good, open with any bank or banking
institution a confirmed, unconditional,
and irrevocable letter of credit in favor of
the corporation and that upon
certification by the boat captain on the
bill of lading that the goods have been
loaded on board the vessel bound for
Davao the said bank or banking
institution shall release the corresponding

amount as payment of the goods so


shipped.
Right after the plaintiff entered into the aforesaid
dealership agreement, he placed an advertisement in a
national, circulating newspaper the fact of his being the
exclusive dealer of the defendant corporation's white
cement products in Mindanao area, more particularly, in
the Manila Chronicle dated August 16, 1969 (Exhibits R
and R-1) and was even congratulated by his business
associates, so much so, he was asked by some of his
businessmen friends and close associates if they can be
his
sub-dealer in the Mindanao area.
Relying heavily on the dealership agreement, plaintiff
sometime in the months of September, October, and
December, 1969, entered into a written agreement with
several hardware stores dealing in buying and selling
white cement in the Cities of Davao and Cagayan de Oro
which would thus enable him to sell his allocation of
20,000 bags regular supply of the said commodity, by
September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1
and Q-2). After the plaintiff was assured by his supposed
buyer that his allocation of 20,000 bags of white cement
can be disposed of, he informed the defendant
corporation in his letter dated August 18, 1970 that he is
making the necessary preparation for the opening of the
requisite letter of credit to cover the price of the due
initial delivery for the month of September, 1970 (Exhibit
B), looking forward to the defendant corporation's duty to
comply with the dealership agreement. In reply to the
aforesaid letter of the plaintiff, the defendant corporation
thru its corporate secretary, replied that the board of
directors of the said defendant decided to impose the
following conditions:
a. Delivery of white cement shall
commence at the end of November,
1970;
b. Only 8,000 bags of white cement per
month for only a period of three (3)
months will be delivered;

c. The price of white cement was priced


at P13.30 per bag;
d. The price of white cement is subject to
readjustment unilaterally on the part of
the defendant;
e. The place of delivery of white cement
shall be Austurias (sic);
f. The letter of credit may be opened only
with the Prudential Bank, Makati Branch;
g. Payment of white cement shall be
made in advance and which payment
shall be used by the defendant as
guaranty in the opening of a foreign letter
of credit to cover costs and expenses in
the procurement of materials in the
manufacture of white cement. (Exhibit C).
xxx xxx xxx
Several demands to comply with the dealership
agreement (Exhibits D, E, G, I, R, L, and N) were made by
the plaintiff to the defendant, however, defendant
refused to comply with the same, and plaintiff by force of
circumstances was constrained to cancel his agreement
for the supply of white cement with third parties, which
were concluded in anticipation of, and pursuant to the
said dealership agreement.
Notwithstanding that the dealership agreement between
the plaintiff and defendant was in force and subsisting,
the defendant corporation, in violation of, and with
evident intention not to be bound by the terms and
conditions thereof, entered into an exclusive dealership
agreement with a certain Napoleon Co for the marketing
of white cement in Mindanao (Exhibit T) hence, this suit.
(Plaintiff's Record on Appeal, pp. 86-90). 2
After trial, the trial court adjudged the corporation liable to Alejandro Te in
the amount of P3,302,400.00 as actual damages, P100,000.00 as moral
damages, and P10,000.00 as and for attorney's fees and costs. The

appellate court affirmed the said decision mainly on the following basis,
and We quote:
There is no dispute that when Zosimo R. Falcon and Justo
B. Trazo signed the dealership agreement Exhibit "A",
they were the President and Chairman of the Board,
respectively, of defendant-appellant corporation. Neither
is the genuineness of the said agreement contested. As a
matter of fact, it appears on the face of the contract itself
that both officers were duly authorized to enter into the
said agreement and signed the same for and in behalf of
the corporation. When they, therefore, entered into the
said transaction they created the impression that they
were duly clothed with the authority to do so. It cannot
now be said that the disputed agreement which
possesses all the essential requisites of a valid contract
was never intended to bind the corporation as this
avoidance is barred by the principle of estoppel. 3
In this petition for review, petitioner Prime White Cement Corporation
made the following assignment of errors. 4
I
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT ARE UNPRECEDENTED DEPARTURES
FROM THE CODIFIED PRINCIPLE THAT CORPORATE
OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF
THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE
BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED
JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY
DUTY OF DIRECTORS AND OFFICERS OF THE
CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE, PRINCIPLE AND RULE ON

UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE


1317 OF THE NEW CIVIL CODE.
IV
THE DECISION AND RESOLUTION OF THE INTERMEDIATE
APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND
MORAL DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS
STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE
DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE
APPELLATE COURT HAS CLEARLY DEPARTED FROM THE
ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.
There is only one legal issue to be resolved by this Court: whether or not
the "dealership agreement" referred by the President and Chairman of
the Board of petitioner corporation is a valid and enforceable contract.
We do not agree with the conclusion of the respondent Court that it is.
Under the Corporation Law, which was then in force at the time this case
arose, 5 as well as under the present Corporation Code, all corporate
powers shall be exercised by the Board of Directors, except as otherwise
provided by law. 6 Although it cannot completely abdicate its power and
responsibility to act for the juridical entity, the Board may expressly
delegate specific powers to its President or any of its officers. In the
absence of such express delegation, a contract entered into by its
President, on behalf of the corporation, may still bind the corporation if
the board should ratify the same expressly or impliedly. Implied
ratification may take various forms like silence or acquiescence; by
acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom. 7 Furthermore, even in the
absence of express or implied authority by ratification, the President as
such may, as a general rule, bind the corporation by a contract in the
ordinary course of business, provided the same is reasonable under the
circumstances. 8 These rules are basic, but are all general and thus quite
flexible. They apply where the President or other officer, purportedly
acting for the corporation, is dealing with a third person, i. e., a
person outside the corporation.

The situation is quite different where a director or officer is dealing with


his own corporation. In the instant case respondent Te was not an
ordinary stockholder; he was a member of the Board of Directors and
Auditor of the corporation as well. He was what is often referred to as a
"self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes
a duty of loyalty to his corporation. 9 In case his interests conflict with
those of the corporation, he cannot sacrifice the latter to his own
advantage and benefit. As corporate managers, directors are committed
to seek the maximum amount of profits for the corporation. This trust
relationship "is not a matter of statutory or technical law. It springs from
the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the
stockholders." 10 In the case of Gokongwei v. Securities and Exchange
Commission, this Court quoted with favor from Pepper v. Litton, 11 thus:
. . . He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters. .
. . He cannot utilize his inside information and his
strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the
corporation what he could not do directly. He cannot use
his power for his personal advantage and to the
detriment of the stockholders and creditors no matter
how absolute in terms that power may be and no matter
how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable
limitation that it may not be exercised for the
aggrandizement, preference, or advantage of the
fiduciary to the exclusion or detriment of the cestuis. . . . .
On the other hand, a director's contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under the
circumstances, it may be ratified by the stockholders provided a full
disclosure of his adverse interest is made. Section 32 of the Corporation
Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the
corporation. A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following
conditions are present:

1. That the presence of such director or trustee in the


board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in the case of an officer, the contract with the
officer has been previously authorized by the Board of
Directors.
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified
by the vote of the stockholders representing at least twothirds (2/3) of the outstanding capital stock or of twothirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at
such meeting: Provided, however, That the contract is fair
and reasonable under the circumstances.
Although the old Corporation Law which governs the instant case did not
contain a similar provision, yet the cited provision substantially
incorporates well-settled principles in corporate law. 12
Granting arguendo that the "dealership agreement" involved here would
be valid and enforceable if entered into with a person other than a
director or officer of the corporation, the fact that the other party to the
contract was a Director and Auditor of the petitioner corporation changes
the whole situation. First of all, We believe that the contract was neither
fair nor reasonable. The "dealership agreement" entered into in July,
1969, was to sell and supply to respondent Te 20,000 bags of white
cement per month, for five years starting September, 1970, at thefixed
price of P9.70 per bag. Respondent Te is a businessman himself and must
have known, or at least must be presumed to know, that at that time,
prices of commodities in general, and white cement in particular, were
not stable and were expected to rise. At the time of the contract,
petitioner corporation had not even commenced the manufacture of
white cement, the reason why delivery was not to begin until 14 months
later. He must have known that within that period of six years, there
would be a considerable rise in the price of white cement. In fact,

respondent Te's own Memorandum shows that in September, 1970, the


price per bag was P14.50, and by the middle of 1975, it was already
P37.50 per bag. Despite this, no provision was made in the "dealership
agreement" to allow for an increase in price mutually acceptable to the
parties. Instead, the price was pegged at P9.70 per bag for the whole five
years of the contract. Fairness on his part as a director of the corporation
from whom he was to buy the cement, would require such a provision. In
fact, this unfairness in the contract is also a basis which renders a
contract entered into by the President, without authority from the Board
of Directors, void or voidable, although it may have been in the ordinary
course of business. We believe that the fixed price of P9.70 per bag for a
period of five years was not fair and reasonable. Respondent Te, himself,
when he subsequently entered into contracts to resell the cement to his
"new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as
follows:
The price of white cement shall be mutually determined
by us but in no case shall the same be less than P14.00
per bag (94 lbs).
The contract with Henry Wee was on September 15, 1969, and that with
Gaudencio Galang, on October 13, 1967. A similar contract with
Prudencio Lim was made on December 29, 1969. 15 All of these contracts
were entered into soon after his "dealership agreement" with petitioner
corporation, and in each one of them he protected himself from any
increase in the market price of white cement. Yet, except for the contract
with Henry Wee, the contracts were for only two years from October,
1970. Why did he not protect the corporation in the same manner when
he entered into the "dealership agreement"? For that matter, why did the
President and the Chairman of the Board not do so either? As director,
specially since he was the other party in interest, respondent Te's
bounden duty was to act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this case, it is to Us quite
clear that he was guilty of disloyalty to the corporation; he was
attempting in effect, to enrich himself at the expense of the corporation.
There is no showing that the stockholders ratified the "dealership
agreement" or that they were fully aware of its provisions. The contract
was therefore not valid and this Court cannot allow him to reap the fruits
of his disloyalty.
As a result of this action which has been proven to be without legal basis,
petitioner corporation's reputation and goodwill have been prejudiced.
However, there can be no award for moral damages under Article 2217
and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil
Code in favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate


Appellate Court dated March 30, 1984 and August 6, 1984, respectively,
are hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered
to pay petitioner corporation the sum of P20,000.00 for attorney's fees,
plus the cost of suit and expenses of litigation.
SO ORDERED.

G.R. No. L-18287

March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellee,


vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
----------------------------G.R. No. L-18155

March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellant,


vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellee.
REYES, J.B.L., J.:
Appeal by the Government Service Insurance System from the decision of
the Court of First Instance of Rizal (Hon. Angel H. Mojica, presiding), in its
Civil Case No. 2088-P, entitled "Trinidad J. Francisco, plaintiff, vs.
Government Service Insurance System, defendant", the dispositive part
of which reads as follows:
WHEREFORE, judgment is hereby rendered: (a) Declaring null and
void the consolidation in the name of the defendant, Government
Service Insurance System, of the title of the VIC-MARI Compound;
said title shall be restored to the plaintiff; and all payments made
by the plaintiff, after her offer had been accepted by the
defendant, must be credited as amortizations on her loan; and (b)
Ordering the defendant to abide by the terms of the contract
created by plaintiff's offer and it's unconditional acceptance, with
costs against the defendant.

The plaintiff, Trinidad J. Francisco, likewise appealed separately (L-18155),


because the trial court did not award the P535,000.00 damages and
attorney's fees she claimed. Both appeals are, therefore, jointly treated in
this decision.
The following facts are admitted by the parties: On 10 October 1956, the
plaintiff, Trinidad J. Francisco, in consideration of a loan in the amount of
P400,000.00, out of which the sum of P336,100.00 was released to her,
mortgaged in favor of the defendant, Government Service Insurance
System (hereinafter referred to as the System) a parcel of land containing
an area of 18,232 square meters, with twenty-one (21) bungalows, known
as Vic-Mari Compound, located at Baesa, Quezon City, payable within ten
(10) years in monthly installments of P3,902.41, and with interest of 7%
per annum compounded monthly.
On 6 January 1959, the System extrajudicially foreclosed the mortgage
on the ground that up to that date the plaintiff-mortgagor was in arrears
on her monthly installments in the amount of P52,000.00. Payments
made by the plaintiff at the time of foreclosure amounted to P130,000.00.
The System itself was the buyer of the property in the foreclosure sale.

amounting to about P5,000, is more than enough to cover the


monthly amortization on Miss Francisco's loan. Indeed, had she
not encountered difficulties, due to unforeseen circumstances, in
collecting the said installments, she could have paid the
amortizations as they fell due and there would have been really
no need for the GSIS to resort to foreclosure.
The proposed administration by the GSIS of the mortgaged
property will continue even after Miss Francisco's account shall
have been kept up to date. However, once the arrears shall have
been paid, whatever amount of the monthly installments
collected in excess of the amortization due on the loan will be
turned over to Miss Francisco.
I make the foregoing proposal to show Francisco's sincere desire
to work out any fair arrangement for the settlement of her
obligation. I trust that the GSIS, under the broadminded policies
of your administration, would give it serious consideration.
Sincerely,.

On 20 February 1959, the plaintiff's father, Atty. Vicente J. Francisco, sent


a letter to the general manager of the defendant corporation, Mr. Rodolfo
P. Andal, the material portion of which recited as follows:
Yesterday, I was finally able to collect what the Government owed
me and I now propose to pay said amount of P30,000 to the GSIS
if it would agree that after such payment the foreclosure of my
daughter's mortgage would be set aside. I am aware that the
amount of P30,000 which I offer to pay will not cover the total
arrearage of P52,000 but as regards the balance, I propose this
arrangement: for the GSIS to take over the administration of the
mortgaged property and to collect the monthly installments,
amounting to about P5,000, due on the unpaid purchase price of
more than 31 lots and houses therein and the monthly
installments collected shall be applied to the payment of Miss
Francisco's arrearage until the same is fully covered. It is
requested, however, that from the amount of the monthly
installments collected, the sum of P350.00 be deducted for
necessary expenses, such as to pay the security guard, the
street-caretaker, the Meralco Bill for the street lights and sundry
items.
It will be noted that the collectible income each month from the
mortgaged property, which as I said consists of installments

s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO
On the same date, 20 February 1959, Atty. Francisco received the
following telegram:.
VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION
OF FORECLOSED PROPERTY OF YOUR DAUGHTER
ANDAL"
On 28 February 1959, Atty. Francisco remitted to the System, through
Andal, a check for P30,000.00, with an accompanying letter, which reads:
I am sending you herewith BPI Check No. B-299484 for Thirty
Thousand Pesos (P30,000.00) in accordance with my letter of
February 20th and your reply thereto of the same date, which
reads:

GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF


FORECLOSED PROPERTY OF YOUR DAUGHTER
xxx

xxx

... subject to the condition that Mr. Vicente J. Francisco shall pay
all expenses incurred by the GSIS in the foreclosure of the
mortgage.

xxx

The defendant received the amount of P30,000.00, and issued therefor


its official receipt No. 1209874, dated 4 March 1959. It did not, however,
take over the administration of the compound. In the meantime, the
plaintiff received the monthly payments of some of the occupants
thereat; then on 4 March 1960, she remitted, through her father, the
amount of P44,121.29, representing the total monthly installments that
she received from the occupants for the period from March to December
1959 and January to February 1960, minus expenses and real estate
taxes. The defendant also received this amount, and issued the
corresponding official receipt.
Remittances, all accompanied by letters, corresponding to the months of
March, April, May, and June, 1960 and totalling P24,604.81 were also sent
by the plaintiff to the defendant from time to time, all of which were
received and duly receipted for.
Then the System sent three (3) letters, one dated 29 January 1960, which
was signed by its assistant general manager, and the other two letters,
dated 19 and 26 February 1960, respectively, which were signed by
Andal, asking the plaintiff for a proposal for the payment of her
indebtedness, since according to the System the one-year period for
redemption had expired.
In reply, Atty. Francisco sent a letter, dated 11 March 1960, protesting
against the System's request for proposal of payment and inviting its
attention to the concluded contract generated by his offer of 20 February
1959, and its acceptance by telegram of the same date, the compliance
of the terms of the offer already commenced by the plaintiff, and the
misapplication by the System of the remittances she had made, and
requesting the proper corrections.
By letter, dated 31 May 1960, the defendant countered the preceding
protest that, by all means, the plaintiff should pay attorney's fees of
P35,644.14, publication expenses, filing fee of P301.00, and surcharge of
P23.64 for the foreclosure work done; that the telegram should be
disregarded in view of its failure to express the contents of the board
resolution due to the error of its minor employees in couching the correct
wording of the telegram. A copy of the excerpts of the resolution of the
Board of Directors (No. 380, February 20, 1959) was attached to the
letter, showing the approval of Francisco's offer

Inasmuch as, according to the defendant, the remittances previously


made by Atty. Francisco were allegedly not sufficient to pay off her
daughter's arrears, including attorney's fees incurred by the defendant in
foreclosing the mortgage, and the one-year period for redemption has
expired, said defendant, on 5 July 1960, consolidated the title to the
compound in its name, and gave notice thereof to the plaintiff on 26 July
1960 and to each occupant of the compound.
Hence, the plaintiff instituted the present suit, for specific performance
and damages. The defendant answered, pleading that the binding
acceptance of Francisco's offer was the resolution of the Board, and that
Andal's telegram, being erroneous, should be disregarded. After trial, the
court below found that the offer of Atty. Francisco, dated 20 February
1959, made on behalf of his daughter, had been unqualifiedly accepted,
and was binding, and rendered judgment as noted at the start of this
opinion.
The defendant-appellant corporation assigns six (6) errors allegedly
committed by the lower court, all of which, however, are resolvable on
the single issue as to whether or not the telegram generated a contract
that is valid and binding upon the parties.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts. 1wph1.t
We find no reason for altering the conclusion reached by the court below
that the offer of compromise made by plaintiff in the letter, Exhibit "A",
had been validly accepted, and was binding on the defendant. The terms
of the offer were clear, and over the signature of defendant's general
manager, Rodolfo Andal, plaintiff was informed telegraphically that her
proposal had been accepted. There was nothing in the telegram that
hinted at any anomaly, or gave ground to suspect its veracity, and the
plaintiff, therefore, can not be blamed for relying upon it. There is no
denying that the telegram was within Andal's apparent authority, but the
defense is that he did not sign it, but that it was sent by the Board
Secretary in his name and without his knowledge. Assuming this to be
true, how was appellee to know it? Corporate transactions would speedily
come to a standstill were every person dealing with a corporation held
duty-bound to disbelieve every act of its responsible officers, no matter

how regular they should appear on their face. This Court has observed
in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of this kind
it is always well to keep in mind the situation as it presents itself
to the third party with whom the contract is made. Naturally he
can have little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external
manifestations of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in accordance
with law; and we would be sorry to announce a doctrine which
would permit the property of a man in the city of Paris to be
whisked out of his hands and carried into a remote quarter of the
earth without recourse against the corporation whose name and
authority had been used in the manner disclosed in this case. As
already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to do
acts within the scope of an apparent authority, and thus holds
him out to the public as possessing power to do those acts, the
corporation will, as against any one who has in good faith dealt
with the corporation through such agent, be estopped from
denying his authority; and where it is said "if the corporation
permits" this means the same as "if the thing is permitted by the
directing power of the corporation."
It has also been decided that
A very large part of the business of the country is carried on by
corporations. It certainly is not the practice of persons dealing
with officers or agents who assume to act for such entities to
insist on being shown the resolution of the board of directors
authorizing the particular officer or agent to transact the
particular business which he assumes to conduct. A person who
knows that the officer or agent of the corporation habitually
transacts certain kinds of business for such corporation under
circumstances which necessarily show knowledge on the part of
those charged with the conduct of the corporate business
assumes, as he has the right to assume, that such agent or
officer is acting within the scope of his authority. (Curtis Land &
Loan Co. vs. Interior Land Co., 137 Wis. 341, 118 N.W. 853, 129
Am. St. Rep. 1068; as cited in 2 Fletcher's Encyclopedia, Priv.
Corp. 263, perm. Ed.)
Indeed, it is well-settled that

If a private corporation intentionally or negligently clothes its


officers or agents with apparent power to perform acts for it, the
corporation will be estopped to deny that such apparent authority
is real, as to innocent third persons dealing in good faith with
such officers or agents. (2 Fletcher's Encyclopedia, Priv. Corp.
255, Perm. Ed.)
Hence, even if it were the board secretary who sent the telegram, the
corporation could not evade the binding effect produced by the
telegram..
The defendant-appellant does not disown the telegram, and even asserts
that it came from its offices, as may be gleaned from the letter, dated 31
May 1960, to Atty. Francisco, and signed "R. P. Andal, general manager by
Leovigildo Monasterial, legal counsel", wherein these phrases occur: "the
telegram sent ... by this office" and "the telegram we sent your"
(emphasis supplied), but it alleges mistake in couching the correct
wording. This alleged mistake cannot be taken seriously, because while
the telegram is dated 20 February 1959, the defendant informed Atty.
Francisco of the alleged mistake only on 31 May 1960, and all the while it
accepted the various other remittances, starting on 28 February 1959,
sent by the plaintiff to it in compliance with her performance of her part
of the new contract.
The inequity of permitting the System to deny its acceptance become
more patent when account is taken of the fact that in remitting the
payment of P30,000 advanced by her father, plaintiff's letter to Mr. Andal
quoted verbatim the telegram of acceptance. This was in itself notice to
the corporation of the terms of the allegedly unauthorized telegram, for
as Ballentine says:
Knowledge of facts acquired or possessed by an officer or agent
of a corporation in the course of his employment, and in relation
to matters within the scope of his authority, is notice to the
corporation, whether he communicates such knowledge or not.
(Ballentine, Law on Corporations, section 112.)
since a corporation cannot see, or know, anything except through its
officers.
Yet, notwithstanding this notice, the defendant System pocketed the
amount, and kept silent about the telegram not being in accordance with
the true facts, as it now alleges. This silence, taken together with the
unconditional acceptance of three other subsequent remittances from

plaintiff, constitutes in itself a binding ratification of the original


agreement (Civil Code, Art. 1393).
ART. 1393. Ratification may be effected expressly or tacitly. It is
understood that there is a tacit ratification if, with knowledge of
the reason which renders the contract voidable and such reason
having ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to waive his
right.
Nowhere else do the circumstances call more insistently for the
application of the equitable maxim that between two innocent parties,
the one who made it possible for the wrong to be done should be the one
to bear the resulting loss..
The defendant's assertion that the telegram came from it but that it was
incorrectly worded renders unnecessary to resolve the other point on
controversy as to whether the said telegram constitutes an actionable
document..
Since the terms offered by the plaintiff in the letter of 20 February 1959
(Exhibit "A") provided for the setting aside of the foreclosure effected by
the defendant System, the acceptance of the offer left the account of
plaintiff in the same condition as if no foreclosure had taken place. It
follows, as the lower court has correctly held, that the right of the System
to collect attorneys' fees equivalent to 10% of the due (P35,694.14) and
the expenses and charges of P3,300.00 may no longer be enforced, since
by the express terms of the mortgage contract, these sums were
collectible only "in the event of foreclosure."
The court a quo also called attention to the unconscionability of
defendant's charging the attorney's fees, totalling over P35,000.00; and
this point appears well-taken, considering that the foreclosure was merely
extra-judicial, and the attorneys' work was limited to requiring the sheriff
to effectuate the foreclosure. However, in view of the parties' agreement
to set the same aside, with the consequential elimination of such
incidental charges, the matter of unreasonableness of the counsel fees
need not be labored further.
Turning now to the plaintiff's separate appeal (Case G.R. No. L-18155):
Her prayer for an award of actual or compensatory damages for
P83,333.33 is predicated on her alleged unrealized profits due to her
inability to sell the compound for the price of P750,000.00 offered by one
Vicente Alunan, which sale was allegedly blocked because the System
consolidated the title to the property in its name. Plaintiff reckons the

amount of P83,333.33 by placing the actual value of the property at


P666,666.67, a figure arrived at by assuming that the System's loan of
P400,000.00 constitutes 60% of the actual value of the security. The
court a quo correctly refused to award such actual or compensatory
damages because it could not determine with reasonable certainty the
difference between the offered price and the actual value of the property,
for lack of competent evidence. Without proof we cannot assume, or take
judicial notice, as suggested by the plaintiff, that the practice of lending
institutions in the country is to give out as loan 60% of the actual value of
the collateral. Nor should we lose sight of the fact that the price offered
by Alunan was payable in installments covering five years, so that it may
not actually represent true market values.
Nor was there error in the appealed decision in denying moral damages,
not only on account of the plaintiff's failure to take the witness stand and
testify to her social humiliation, wounded feelings, anxiety, etc., as the
decision holds, but primarily because a breach of contract like that of
defendant, not being malicious or fraudulent, does not warrant the award
of moral damages under Article 2220 of the Civil Code (Ventanilla vs.
Centeno, L-14333, 28 Jan. 1961; Fores vs. Miranda, L-12163, 4 March
1959).
There is no basis for awarding exemplary damages either, because this
species of damages is only allowed in addition to moral, temperate,
liquidated, or compensatory damages, none of which have been allowed
in this case, for reasons herein before discussed (Art. 2234, Civil Code;
Velayo vs. Shell Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs.
Aragon and Lorza, L-5164, Jan. 27, 1953, 49 O.G. No. 2, 515).
As to attorneys' fees, we agree with the trial court's stand that in view of
the absence of gross and evident bad faith in defendant's refusal to
satisfy the plaintiff's claim, and there being none of the other grounds
enumerated in Article 2208 of the Civil Code, such absence precludes a
recovery. The award of attorneys' fees is essentially discretionary in the
trial court, and no abuse of discretion has been shown.
FOR THE FOREGOING REASONS, the appealed decision is hereby
affirmed, with costs against the defendant Government Service Insurance
System, in G.R. No.L-18287.

G.R. No. L-53820 June 15, 1992

YAO KA SIN TRADING, owned and operated by YAO KA


SIN, petitioner,
vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT
CORPORATION, represented by its President-Chairman,
CONSTANCIO B. MALAGNA, respondents.
DAVIDE, JR., J.:
Assailed in this petition for review is the decision of the respondent Court
of Appeals in C.A.-G.R. No. 61072-R, 1 promulgated on 21 December
1979, reversing the decision 2 of the then Court of First Instance (now
Regional Trial Court) of Leyte dated 20 November 1975 in Civil Case No.
5064 entitled "Yao Ka Sin Trading versus Prime White Cement
Corporation."
The root of this controversy is the undated letter-offer of Constancio B.
Maglana, President and Chairman of the Board of private respondent
Prime White Cement Corporation, hereinafter referred to as PWCC, to Yao
Ka Sin Trading, hereinafter referred to as YKS, which describes itself as "a
business concern of single proprietorship," 3 and is represented by its
manager, Mr. Henry Yao; the letter reads as follows: (LETTER)
This letter-offer, hereinafter referred to as Exhibit "A", was prepared,
typed and signed on 7 June 1973 in the office of Mr. Teodoro Catindig,
Senior Vice-President of the Consolidated Bank and Trust Corporation
(Solid Bank). 5
The principal issue raised in this case is whether or not the aforesaid
letter-offer, as accepted by YKS, is a contract that binds the PWCC. The
trial court rule in favor of the petitioner, but the respondent Court held
otherwise.
The records disclose the following material operative facts:
In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days
after the signing of Exhibit "A", the Board of Directors of PWCC
disapproved the same; the rejection is evidenced by the following
Minutes (Exhibit "10"):
the 10,000 bags of white cement sold to Yao Ka Sin
Trading is sold not because of the alledged letter-contract
adhered to by them, but must be understood as a new
and separate contract, and has in no way to do with the

letter-offer which they (sic) as consummated is by this


resolution totally disapproved and is unacceptable to the
corporation.
On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of
the disapproval of Exhibit "A". Pursuant, however, to its decision with
respect to the 10,000 bags of cement, it is issued the corresponding
Delivery Order (Exhibit "4") and Official Receipt No. 0394 (Exhibit "5") for
the payment of the same in the amount of P243,000.00 This is the same
amount received and acknowledged by Maglana in Exhibit "A".
YKS accepted without protest both the Delivery and Official Receipts.
While YKS denied having received a copy of Exhibit "1", it was
established that the original thereof was shown to Mr. Henry Yao; since no
one would sign a receipt for it, the original was left at the latter's office
and this fact was duly noted in Exhibit "1" (Exhibit "l-A").
On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to
the latter's 4 August 1973 letter stating that it is "withdrawing or taking
delivery of not less than 10,000 bags of white cement on August 6-7,
1973 at Asturias, Cebu, thru M/V Taurus." In said reply, PWCC reminded
YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and told the latter that
PWCC "only committed to you and which you correspondingly paid
10,000 bags of white cement of which 4,150 bags were already delivered
to you as of August 11, 1973. 6 Unfortunately, no copy of the said 4
August 1973 letter of YKS was presented in evidence.
On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in
reply to the latter's letter of 15 August 1973. Enclosed in the reply was a
copy of Exhibit "2". While the records reveal that YKS received this reply
also on 21 August 1973 (Exhibit "3" "A"), 8 it still denied having received
it. Likewise, no copy of the so-called 15 August 1973 letter was presented
in evidence.
On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC
as a follow-up to the letter of 15 August 1973; YKS insisted on the
delivery of 45,030 bags of white cement. 10
On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC
calling the latter's attention to the statement of delivery dated 24 August
1973, particularly the price change from P23.30 to P24.30 per 94 lbs. bag
net FOB Asturias, Cebu. 11

On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC


insisting on the full compliance with the terms of Exhibit "A" and
informing the latter that it is exercising the option therein stipulated.

In its Counterclaim, PWCC asks for moral damages in the amount of not
less than P10,000.00, exemplary damages in the sum of P500,000.00 and
attorney's fees in the sum of P10,000.00.

On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a followup to the 2 November 1973 telegram, but this was returned to sender
as unclaimed. 13

On 24 July 1974, YKS filed its Answer to the Counterclaim.

As of 7 December 1973, PWCC had delivered only 9,775 bags of white


cement.
On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for
the last time, compliance by the latter with its obligation under
Exhibit "A". 14
On 27 February 1974, PWCC sent an answer (Exhibit "7") to the
aforementioned letter of 9 February 1974; PWCC reiterated the
unenforceability of Exhibit "A". 15
On 4 March 1974, YKS filed with the then Court of First Instance of Leyte
a complaint for Specific Performance with Damages against PWCC. The
complaint 16 was based on Exhibit "A" and was docketed as Civil Case No.
5064.
In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied
under oath the material averments in the complaint and alleged that: (a)
YKS "has no legal personality to sue having no legal personality even by
fiction to represent itself;" (b) Mr. Maglana, its President and Chairman,
was lured into signing Exhibit "A"; (c) such signing was subject to the
condition that Exhibit "A" be approved by the Board of Directors of PWCC,
as corporate commitments are made through it; (d) the latter
disapproved it, hence Exhibit "A" was never consummated and is not
enforceable against PWCC; (e) it agreed to sell 10,000 bags of white
cement, not under Exhibit "A", but under a separate contract prepared by
the Board; (f) the rejection by the Board of Exhibit "A" was made known
to YKS through various letters sent to it, copies of which were attached to
the Answer as Annexes 1, 2 and 3; 18 (g) YKS knew, per Delivery
Order 19 and Official Receipt 20 issued by PWCC, that only 10;000 bags
were sold to it without any terms or conditions, at P24.30 per bag FOB
Asturias, Cebu; (h) YKS is solely to blame for the failure to take complete
delivery of 10,000 bags for it did not send its boat or truck to PWCC's
plant; and (i) YKS has, therefore, no cause of action.

21

Issues having been joined, the trial court conducted a pre-trial. 22 On that
occasion, the parties admitted that according to the By-Laws of PWCC,
the Chairman of the Board, who is also the President of the corporation,
"has the power to execute and sign, for and in behalf of the corporation,
all contracts or agreements which the corporation enters into," subject to
the qualification that "all the president's actuations, prior to and after he
had signed and executed said contracts, shall be given to the board of
directors of defendant Corporation." Furthermore, it was likewise stated
for the record "that the corporation is a semi-subsidiary of the
government because of the NIDC participation in the same, and that all
contracts of the corporation should meet the approval of the NIDC and/or
the PNB Board because of an exposure and financial involvement of
around P10 million therein. 23
During the trial, PWCC presented evidence to prove that Exhibit "A" is not
binding upon it because Mr. Maglana was not authorized to make the
offer and sign the contract in behalf of the corporation. Per its By-Laws
(Exhibit "8"), only the Board of Directors has the power . . . (7) To enter
into (sic) agreement or contract of any kind with any person in the name
and for and in behalf of the corporation through its President, subject only
to the declared objects and purpose of the corporation and the existing
provisions of law. 24 Among the powers of the President is "to operate and
conduct the business of the corporation according to his own judgment
and discretion, whenever the same is not expressly limited by such
orders, directives or resolutions." 25 Per standard practice of the
corporation, contracts should first pass through the marketing and
intelligence unit before they are finalized. Because of its interest in the
PWCC, the NIDC, through its comptroller, goes over contracts involving
funds of and white cement produced by the PWCC. Finally, among the
duties of its legal counsel is to review proposed contracts before they are
submitted to the Board. While the president. may be tasked with the
preparation of a contract, it must first pass through the legal counsel and
the comptroller of the corporation. 26
On 20 November 1975, after trial on the merits, the court handed down
its decision in favor of herein petitioner, the dispositive portion of which
reads:

WHEREFORE, in view of the foregoing, judgment is


hereby rendered:
(1) Ordering defendant: to complete the
delivery of 45,000 bags of prime white
cement at 94 lbs. net per bag at the price
agreed, with a breakage allowance of
empty bags at 4% over the quantity
agreed;
(2) Ordering defendant to pay
P50,000.00, as moral damages;
P5,000.00 as exemplary damages;
P3,000.00 as attorney's fees; and the
costs of these proceedings.
SO ORDERED.

27

In disregarding PWCC's theory, the trial court interpreted the provision of


the By-Laws granting its Board of Directors the power to enter into an
agreement or contract of any kind with any person through the President,
to mean that the latter may enter into such contract or agreement at
any time and that the same is not subject to the ratification of the board
of directors but "subject only to the declared objects and purpose of the
corporation and existing laws." It then concluded:
It is obvious therefore, that it is not the whole
membership of the board of directors who actually enters
into any contract with any person in the name and for
and in behalf of the corporation, but only its president. It
is likewise crystal clear that this automatic representation
of the board by the president is limited only by the
"declared objects and purpose of the corporation and
existing provisions of law." 28
It likewise interpreted the provision on the power of the president to
"operate and conduct the business of the corporation according to the
orders, directives or resolutions of the board of directors and according to
his own judgment and discretion whenever the same is not expressly
limited by such orders, directives and resolutions," to mean that the
president can operate and conduct the business of the corporation
according to his own judgment and discretion as long as it is not
expressly limited by the orders, directives or resolutions of the board of
directors. 29 The trial court found no evidence that the board had set a
prior limitation upon the exercise of such judgment and discretion; it

further ruled that the By-Laws, does not require that Exhibit "A" be
approved by the Board of Directors. Finally, in the light of the Chairman's
power to "execute and sign for and in behalf of the corporation all
contracts or agreements which the corporation may enter into" (Exhibit
"I-1"), it concluded that Mr. Maglana merely followed the By-Laws
"presumably both as president and chairman of the board
thereof." 30 Hence, Exhibit "A" was validly entered into by Maglana and
thus binds the corporation.
The trial court, however, ruled that the option to sell is not valid because
it is not supported by any consideration distinct from the price; it was
exercised before compliance with the original contract by PWCC; and the
repudiation of the original contract by PWCC was deemed a withdrawal of
the option before acceptance by the petitioner.
Both parties appealed from the said decision to the respondent Court of
Appeals before which petitioner presented the following Assignment of
Errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION
TO RENEW THE CONTRACT OF SALE IS NOT
ENFORCEABLE BECAUSE THE OPTION WAS MADE EVEN
BEFORE THE COMPLIANCE OF (sic) THE ORIGINAL
CONTRACT BY DEFENDANT AND THAT DEFENDANT'S
PROMISE TO SELL IS NOT SUPPORTED BY ANY
CONSIDERATION DISTINCT FROM THE PRICE.
II
THE TRIAL COURT ERRED IN NOT AWARDING TO THE
PLAINTIFF ACTUAL DAMAGES, SUFFICIENT EXEMPLARY
DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE
COMPLAINT AND PROVEN DURING THE TRIAL." 31
while the private respondent cited the following errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A"
IS A VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE
PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY
ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED

PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED


TO BE ENTERED INTO OR LATER ON RATIFIED BY THE
DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A"
WAS TOTALLY REJECTED AND DISAPPROVED IN TOTO BY
THE DEFENDANT'S BOARD OF DIRECTORS IN CLEAR,
PLAIN LANGUAGE AND DULY INFORMED AND
TRANSMITTED TO PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF
CAN LEGALLY UTILIZE THE COURTS AS THE FORUM TO
GIVE LIFE AND VALIDITY TO A TOTALLY UNENFORCEABLE
OR NON-EXISTING CONTRACT.
III
THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO
IMPUGN AND CONTRADICT HIS VERY OWN ACTUATIONS
AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF
BENEFITS FROM THE COUNTER-OFFER OF DEFENDANT
FOR 10,000 BAGS OF CEMENT ONLY, UNDER THE PRICE,
TERMS AND CONDITIONS TOTALLY FOREIGN TO AND
WHOLLY DIFFERENT FROM THOSE WHICH APPEAR IN
EXHIBIT "A".
IV
THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S
COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY
CLEAR AND INDUBITABLE EVIDENCE. 32
In its decision 33 promulgated on 21 December 1979, the respondent
Court reversed the decision of the trial court, thus:
WHEREFORE, the judgment appealed from is REVERSED
and set aside, Plaintiff's complaint is dismissed with
costs. Plaintiff is ordered to pay defendant corporation
P25,000.00 exemplary damages, and P10,000.00
attorney's fees.
SO ORDERED.

Such conclusion is based on its findings, to wit:


Before resolving the issue, it is helpful to bring out some
preliminary facts. First, the defendant corporation is
supervised and principally financed by the National
Investment and Development Corporation (NIDC), a
subsidiary investment of the Philippine National Bank
(PNB), with cash financial exposure of some
P10,000,000.00. PNB is a government financial institution
whose Board is chairmaned (sic) by the Minister of
National Defense. This fact is very material to the issue of
whether defendant corporations president can bind the
corporation with his own act.
Second, for failure to deny under oath the following
actionable documents in support of defendant's
counterclaim:
1. The resolution contained in defendant's
letter to plaintiff dated July 5, 1973, on
the 10,000 bags of white cement
delivered to plaintiff was not by reason of
the letter contract, Exhibit "A", which was
totally disapproved by defendant
corporation's board of directors, clearly
stating that "If within ten (10) days from
date hereof, we will not hear from you but
you will withdraw cement at P24.30 per
bag from our plant, then we will deposit
your check of P243,000.00 dated June 7,
1973 issued by the Producers Bank of the
Philippines, per instruction of the Board."
(Annex "I" to defendant's Answer).
2. Letter of defendant to plaintiff dated
August 4, 1973 that defendant "only
committed to you and which you
accordingly paid 10,000 bags of white
cement of which 4,150 bags were already
delivered to you as of August 1, 1973"
(Annex "2" of defendant's Answer).
3. Letter dated August 21, 1973 to
plaintiff reiterating defendant's letter of

August 4, 1973 (Annex "3" to defendant's


Answer).
4. Letter to stores dated August 21, 1973,
5. Receipt from plaintiff (sic) P243,000.00
in payment of 10,000 bags of white
cement at P24.30 per bag (Annex "5", to
defendant's Answer).
plaintiff is deemed to have admitted, not only the due
execution and genuiness (sic) of said documents, (Rule 8
Sec. 8, Rules of Court) but also the allegations therein
(Rule 9, Sec. 1, Rules of Court). All of the foregoing
documents tend to prove that the letter-offer, Exhibit "A",
was rejected by defendant corporation's Board of
Directors and plaintiff was duly notified thereof and that
the P243,000.00 check was considered by both parties as
payment of the 10,000 bags of cement under a separate
transaction. As proof of which plaintiff did not complain
nor protest until February 9, 1974, when he threatened
legal action.
Third, Maglana's signing the letter-offer prepared for him
in the Solidbank was made clearly upon the condition
that it was subject to the approval of the board of
directors of defendant corporation. We find consistency
herein because according to the Corporation Law, and the
By-Laws of defendant corporation, all corporate
commitments and business are conducted by, and
contracts entered into through, the express authority of
the Board of Directors (Sec. 28. Corp. Law, Exh "I" or "8").
Fourth, What Henry Yao and Maglana agreed upon as
embodied in Exhibit "A", insofar as defendant corporation
is concerned, was an unauthorized contract (Arts. 1317
and 1403 (1), Civil Code). And because Maglana was not
authorized by the Board of Directors of defendant
corporation nor was his, actuation ratified by the Board,
the agreement is unenforceable (Art. 1403 (1), Civil Code;
Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs.
Archbishop of Manila, 43 O-G. 3224).
While it may be true that Maglana is President of
defendant corporation nowhere in the Articles of

Incorporation nor in the By-Laws of said corporation was


he empowered to enter into any contract all by himself
and bind the corporation without first securing the
authority and consent of the Board of Directors. Whatever
authority Maglana may have must be derived from the
Board of Directors of defendant corporation. A corporate
officers power as an agent must be sought from the law,
the articles of incorporation and the By-Laws or from a
resolution of the Board (Vicente vs. Geraldez, 52 SCRA
227, Board of Liquidators vs. Kalaw, 20 SCRA 987).
It clearly results from the foregoing that the judgment
appealed from is untenable. Having no cause of action
against defendant corporation, plaintiff is not entitled to
any relief. We see no justification, therefore, for the
court a quo's awards in its favor. . . . 34
Its motion for reconsideration having been denied by the respondent
Court in its resolution 35 dated 15 April 1980, petitioner filed the instant
petition based on the following grounds:
1. That the contract (Exh. "A") entered into by the
President and Chairman of the Board of Directors
Constancio B. Maglana in behalf of the respondent
corporation binds the said corporation.
2. That the contract (Exh. "A") was never novated nor
superceded (sic) by a subsequent contract.
3. That the option to renew the contract as contained in
Exhibit "A" is enforceable.
4. That Sec. 8, Rule 8 of the Rules of Court only applies
when the adverse party appear (sic) to be a party to the
instrument but not to one who is not a party to the
instrument and Sec. 1, Rule 9 of the said Rules with
regards (sic) to denying under oath refers only to
allegations of
usury. 36
We gave due course 37 to the petition after private respondent filed its
Comment 38 and required the parties to submit simultaneously their
Memoranda, which the parties subsequently complied with. 39

Before going any further, this Court must first resolve an issue which,
although raised in the Answer of private respondent, was neither pursued
in its appeal before the respondent Court nor in its Comment and
Memorandum in this case. It also eluded the attention of the trial court
and the respondent Court. The issue, which is of paramount importance,
concerns the lack of capacity of plaintiff/petitioner to sue. In the caption
of both the complaint and the instant petition, the plaintiff and the
petitioner, respectively, is:
YAO KA SIN TRADING,
owned and operated by
YAO KA SIN. 40
and is described in the body thereof as "a business concern of single
proprietorship owned and operated by Yao Ka Sin." 41 In the body of the
petition, it is described as "a single proprietorship business concern." 42 It
also appears that, as gathered from the decision of the trial court, no Yao
Ka Sin testified. Instead, one Henry Yao took the witness stand and
testified that he is the "manager of Yao Ka Sin Trading" and "it was in
representation of the plaintiff" that he signed Exhibit "A"43 Under Section
1, Rule 3 of the Rules of Court, only natural or juridical persons or entities
authorized by law may be parties in a civil action. In Juasing Hardware vs.
Mendoza, 44 this Court held that a single proprietorship is neither a
natural person nor a juridical person under Article 44 of the Civil Code; it
is not an entity authorized by law to bring suit in court:
The law merely recognizes the existence of a sole
proprietorship as a form of business organization
conducted for profit by a single individual, and requires
the proprietor or owner thereof to secure licenses and
permits, register the business name, and pair taxes to the
national government. It does not vest juridical or legal
personality upon the sole proprietorship nor empower it
to file or defend an action in court. 45
Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN.

46

The complaint then should have been amended to implead Yao Ka Sin as
plaintiff in substitution of Yao Ka Sin Trading. However, it is now too late
in the history of this case to dismiss this petition and, in effect, nullify all
proceedings had before the trial court and the respondent Court on the
sole ground of petitioner's lack of capacity to sue. Considering that
private respondent did not pursue this issue before the respondent Court
and this Court; that, as We held in Juasing, the defect is merely formal
and not substantial, and an amendment to cure such defect is expressly

authorized by Section 4, Rule 10 of the Rules of Court which provides that


"[a] defect in the designation of the parties may be summarily corrected
at any stage of the action provided no prejudice is caused thereby to the
adverse party;" and that "[a] sole proprietorship does not, of coarse,
possess any juridical personality separate and apart from the personality
of the owner of the enterprise and the personality of the persons acting
in the name of such proprietorship," 47 We hold and declare that Yao Ka
Sin should be deemed as the plaintiff in Civil Case No. 5064 and the
petitioner in the instant case. As this Court stated nearly eighty (80)
years ago in Alonso vs. Villamor: 48
No one has been misled by the error in the name of the
party plaintiff. If we should by reason of this error send
this case back for amendment and new trial, there would
be on the retrial the same complaint, the same answer,
the same defense, the same interests, the same
witnesses, and the same evidence. The name of the
plaintiff would constitute the only difference between the
old trial and the new. In our judgment there is not enough
in a name to justify such action.
And now to the merits of the petition.
The respondent Court correctly ruled that Exhibit "A" is not binding upon
the private respondent. Mr. Maglana, its President and Chairman, was not
empowered to execute it. Petitioner, on the other hand, maintains that it
is a valid contract because the Maglana has the power to enter into
contracts for the corporation as implied from the following provisions of
the By-Laws of private respondent:
a) The power of the Board of Directors to . . . enter into
(sic) agreement or contract of any kind with any person in
the name and for and in behalf of the corporation through
its President, subject only to the declared objects and
purpose of the corporation and the existing provisions of
law. (Exhibit "8-A"); and
b) The power of the Chairman of the Board of Directors to
"execute and sign, for and in behalf of the corporation, all
contracts or agreements which the corporation may enter
into" (Exhibit "I-1").
And even admitting, for the sake of argument, that Mr. Maglana was not
so authorized under the By-Laws, the private respondent, pursuant to the
doctrine laid down by this Court in Francisco vs. Government Service

Insurance
System 49 and Board of Liquidators vs. Kalaw,
for clothing him with apparent authority.

50

is still bound by his act

We are not persuaded.


Since a corporation, such as the private respondent, can act only through
its officers and agents, "all acts within the powers of said corporation
may be performed by agents of its selection; and, except so far as
limitations or restrictions may be imposed by special charter, by-law, or
statutory provisions, the same general principles of law which govern the
relation of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power to act for
the corporation; and agents when once appointed, or members acting in
their stead, are subject to the same rules, liabilities and incapacities as
are agents of individuals and private persons." 51 Moreover, " . . . a
corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that authority to do so has
been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred. 52
While there can be no question that Mr. Maglana was an officer the
President and Chairman of private respondent corporation at the time
he signed Exhibit "A", the above provisions of said private respondent's
By-Laws do not in any way confer upon the President the authority to
enter into contracts for the corporation independently, of the Board of
Directors. That power is exclusively lodged in the latter. Nevertheless, to
expedite or facilitate the execution of the contract, only the President
and not all the members of the Board, or so much thereof as are required
for the act shall sign it for the corporation. This is the import of the
words through the president in Exhibit "8-A" and the clear intent of the
power of the chairman "to execute and sign for and in behalf of the
corporation all contracts and agreements which the corporation may
enter into" in Exhibit "I-1". Both powers presuppose a prior act of the
corporation exercised through the Board of Directors. No greater power
can be implied from such express, but limited, delegated authority.
Neither can it be logically claimed that any power greater than that
expressly conferred is inherent in Mr. Maglana's position as president and
chairman of the corporation.

Although there is authority "that if the president is given general control


and supervision over the affairs of the corporation, it will be presumed
that he has authority to make contract and do acts within the course of
its ordinary business," 53 We find such inapplicable in this case. We note
that the private corporation has a general manager who, under its ByLaws has, inter alia, the following powers: "(a) to have the active and
direct management of the business and operation of the corporation,
conducting the same accordingly to the order, directives or resolutions of
the Board of Directors or of the president." It goes without saying then
that Mr. Maglana did not have a direct and active and in the management
of the business and operations of the corporation. Besides, no evidence
was adduced to show that Mr. Maglana had, in the past, entered into
contracts similar to that of Exhibit "A" either with the petitioner or with
other parties.
Petitioner's last refuge then is his alternative proposition, namely, that
private respondent had clothed Mr. Maglana with the apparent power to
act for it and had caused persons dealing with it to believe that he was
conferred with such power. 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." 54 Also, "if a private corporation intentionally or
negligently clothes its officers or agents with apparent power to perform
acts for it, the corporation will be estopped to deny that such apparent
authority in real, as to innocent third persons dealing in good faith with
such officers or agents." 55 This "apparent authority may result from (1)
the general manner, by which the corporation holds out an officer or
agent as having power to act or, in other words, the apparent authority
with which it clothes him to act in general or (2) acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof,
whether within or without the scope of his ordinary powers. 56
It was incumbent upon the petitioner to prove that indeed the private
respondent had clothed Mr. Maglana with the apparent power to execute
Exhibit "A" or any similar contract. This could have been easily done by
evidence of similar acts executed either in its favor or in favor of other
parties. Petitioner miserably failed to do that. Upon the other hand,
private respondent's evidence overwhelmingly shows that no contract
can be signed by the president without first being approved by the Board
of Directors; such approval may only be given after the contract passes

through, at least, the comptroller, who is the NIDC representative, and


the legal counsel.

practically laid aside the by-laws requirement of prior


approval.

The cases then of Francisco vs. GSIS and Board of Liquidators vs.
Kalaw are hopelessly unavailing to the petitioner. In said cases, this Court
found sufficient evidence, based on the conduct and actuations of the
corporations concerned, of apparent authority conferred upon the officer
involved which bound the corporations on the basis of ratification. In the
first case, it was established that the offer of compromise made by
plaintiff in the letter, Exhibit "A", was validly accepted by the GSIS. The
terms of the trial offer were clear, and over the signature of defendant's
general manager Rodolfo Andal, plaintiff was informed telegraphically
that her proposal had been accepted. It was sent by the GSIS Board
Secretary and defendant did not disown the same. Moreover, in a letter
remitting the payment of P30,000 advanced by her father, plaintiff
quoted verbatim the telegram of acceptance. This was in itself notice to
the corporation of the terms of the allegedly unauthorized telegram.
Notwithstanding this notice, GSIS pocketed the amount and kept silent
about the telegram. This Court then ruled that:

Under the given circumstances, the Kalaw contracts are


valid corporate acts.

This silence, taken together with the unconditional


acceptance of three other subsequent remittances from
plaintiff, constitutes in itself a binding ratification of the
original agreement (Civil Code, Art. 1393).
Art. 1393. Ratification may be effected
expressly or tactly it is understood that
there is a tacit ratification if, with
knowledge of the reason which renders
the contract voidable and such reason
having ceased, the person who has a
right to invoke it should execute an act
which necessarily implies an intention to
waive his right
In the second case, this Court found:
In the case at bar, the practice of the corporation has
been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in
NACOCO's behalf without prior board approval. If the bylaws were to be literally followed, the board should give
its stamp of prior approval on all corporate contracts. But
that board itself, by its acts and through acquiescence,

The inevitable conclusion then is that Exhibit "A" is an unenforceable


contract under Article 1317 of the Civil Code which provides as follows:
Art. 1317. No one may contract in the name of another
without being authorized by the latter, or unless he has
by law a right to represent him.
A contract entered into in the name of another by one
who has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless
it is ratified, expressly or impliedly, by the person on
whose behalf it, has been execrated, before it is revoked
by the other contracting party.
The second ground is based on a wrong premise. It assumes, contrary to
Our conclusion above, that Exhibit "A" is a valid contract binding upon
the private respondent. It was effectively disapproved and rejected by
the Board of Directors which, at the same time, considered the amount of
P243,000.00 received Mr. Maglana as payment for 10,000 bags of white
cement, treated as an entirely different contract, and forthwith notified
petitioner of its decision that "If within ten (10) days from date hereof we
will not hear from you but you will withdraw cement at P24.30 per bag
from our plant, then we will deposit your check of P243,000.00 dated
June 7, 1973 issued by the Producers Bank of the Philippines, per
instruction of the Board." 57Petitioner received the copy of this notification
and thereafter accepted without any protest the Delivery Receipt
covering the 10,000 bags and the Official Receipt for the P243,000.00.
The respondent Court thus correctly ruled that petitioner had in fact
agreed to a new transaction involving only 10,000 bags of white cement.
The third ground must likewise fail. Exhibit "A" being unenforceable, the
option to renew it would have no leg to stand on. The river cannot rise
higher than its source. In any event, the option granted in. this case is
without any consideration Article 1324 of the Civil Code expressly
provides that:
When the offerer has allowed the offeree a certain period
to accept, the offer may be withdrawn at any time before

acceptance by communicating such withdrawal, except


when the option is founded upon a consideration, as
something paid or promised.

Cost against the petitioner.

while Article 1749 of the same Code provides:


A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price.
Accordingly, even if it were accepted, it can not validly bind the private
respondent. 58
The fourth ground is, however, meritorious.
Section 8, Rule 8 of the Rules of Court provides:
Sec. 8. How to contest genuineness of such documents
When an action or defense is founded upon a written
instrument, copied in or attached in the corresponding
pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to
be the facts; but this provision does not apply when the
adverse party does not appear, to be a party to the
instrument or when compliance with an order for an
inspection of the original instrument is refused.
It is clear that the petitioner is not a party to any of the documents
attached to the private respondent's Answer. Thus, the above quoted rule
is not applicable. 59 While the respondent Court, erred in holding
otherwise, the challenged decision must, nevertheless, stand in view of
the above disquisitions on the first to the third grounds of the petition.
WHEREFORE, judgment is hereby rendered AFFIRMING the decision of
respondent Court of Appeals in C.A. G.R. No. 61072-R promulgated on 21
December 1979.

G.R. No. L-17504 & L-17506

February 28, 1969

RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA


SALAS, PAZ SALAS and PATRIA SALAS, heirs of Magdalena Salas,
as stockholders on their own behalf and for the benefit of the
Ma-ao Sugar Central Co., Inc., and other stockholders thereof
who may wish to join in this action, plaintiffs-appellants,
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS.
RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A.
YULO, defendants-appellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on
October 20, 1953, in the Court of First Instance of Manila by four minority
stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado
Araneta and three other directors of the corporation.
The complaint comprising the period November, 1946 to October,
1952, stated five causes of action, to wit: (1) for alleged illegal and ultravires acts consisting of self-dealing irregular loans, and unauthorized
investments; (2) for alleged gross mismanagement; (3) for alleged
forfeiture of corporate rights warranting dissolution; (4) for alleged
damages and attorney's fees; and (5) for receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado
Araneta and his individual co-defendants be ordered to render an
accounting of all transactions made and carried out by them for
defendant corporation, and "to collect, produce and/or pay to the

defendant corporation the outstanding balance of the amounts so


diverted and still unpaid to defendant corporation";
Under the SECOND CAUSE OF ACTION, that the individual
defendants be held liable and be ordered to pay to the defendant
corporation "whatever amounts may be recovered by the plaintiffs in Civil
Case No. 20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central
Co.'"; to return to the defendant corporation all amounts withdrawn by
way of discretionary funds or backpay, and to account for the difference
between the corporation's crop loan accounts payable and its crop loan
accounts receivable;

BY WAY OF COUNTERCLAIM, the defendants in substance further


alleged, among others, that the complaint was premature, improper and
malicious, and that the language used was "unnecessarily vituperative
abusive and insulting, particularly against defendant J. Amado Araneta
who appears to be the main target of their hatred." Wherefore, the
defendant sought to recover "compensation for damages, actual, moral,
exemplary and corrective, including reasonable attorney's fees."
After trial, the Lower Court rendered its Decision (later
supplemented by an Order resolving defendants' Motion for
Reconsideration), the dispositive portion of which reads:

Under the THIRD CAUSE OF ACTION, that the corporation be


dissolved and its net assets be distributed to the stockholders; and

IN VIEW WHEREOF, the Court dismisses the petition for


dissolution but condemns J. Amado Araneta to pay unto Ma-ao
Sugar Central Co., Inc. the amount of P46,270.00 with 8% interest
from the date of the filing of this complaint, plus the costs; the
Court reiterates the preliminary injunction restraining the Ma-ao
Sugar Central Co., Inc. management to give any loans or
advances to its officers and orders that this injunction be as it is
hereby made, permanent; and orders it to refrain from making
investments in Acoje Mining, Mabuhay Printing, and any other
company whose purpose is not connected with the Sugar Central
business; costs of plaintiffs to be borne by the Corporation and J.
Amado Araneta.

Under the FOURTH CAUSE OF ACTION, that the defendants be


ordered "to pay the sum of P300,000.00 by way of compensatory, moral
and exemplary damages and for expenses of litigation, including
attorney's fees and costs of the suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional
remedy of receivership.
In their answer originally filed on December 1, 1953, and amended
on February 1, 1955, defendants denied "the allegations regarding the
supposed gross mismanagement, fraudulent use and diversion of
corporate funds, disregard of corporate requirements, abuse of trust and
violation of fiduciary relationship, etc., supposed to have been discovered
by plaintiffs, all of which are nothing but gratuitous, unwarranted,
exaggerated and distorted conclusions not supported by plain and
specific facts and transactions alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among
other things: (1) that the complaint "is premature, improper and
unjustified"; (2) that plaintiffs did not make an "earnest, not simulated
effort" to exhaust first their remedies within the corporation before filing
their complaint; (3) that no actual loss had been suffered by the
defendant corporation on account of the transactions questioned by
plaintiffs; (4) that the payments by the debtors of all amounts due to the
defendant corporation constituted a full, sufficient and adequate remedy
for the grievances alleged in the complaint and (5) that the dissolution
and/or receivership of the defendant corporation would violate and impair
the obligation of existing contracts of said corporation.

From this judgment both parties appealed directly to the Supreme


Court.
Before taking up the errors respectively, assigned by the parties,
we should state that the following findings of the Lower Court on the
commission of corporate irregularities by the defendants have not been
questioned by the defendants:
1. Failure to hold stockholders' meetings regularly. No
stockholders' meetings were held in 1947, 1950 and 1951;
2. Irregularities in the keeping of the books. Untrue entries were
made in the books which could not simply be considered as
innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the
Acoje Mining, P7,000.00. The investments were made not in
pursuance of the corporate purpose and without the requisite
authority of two-thirds of the stockholders;

4. Unauthorized loans to J. Amado Araneta totalling P132,082.00


(which, according to the defendants, had been fully paid), in
violation of the by-laws of the corporation which prohibits any
director from borrowing money from the corporation;

THE LOWER COURT ERRED IN HOLDING THAT THE


DISCRIMINATORY ACTS COMMITTED AGAINST PLANTERS DID NOT
CONSTITUTE MISMANAGEMENT.
IV.

5. Diversion of corporate funds of the Ma-ao Sugar Central Co.,


Inc. to:
J. Amado Araneta & Co.

P243,415.62

Luzon Industrial Corp.

585,918.17

Associated Sugar

463,860.36

General Securities

86,743.65

Bacolod Murcia

501,030.61

Central Azucarera del Danao


Talisay-Silay

97,884.42
4,365.90

The Court found that sums were taken out of the funds of the Maao Sugar Central Co., Inc. and delivered to these affiliated companies,
and vice versa, without the approval of the Ma-ao Board of Directors, in
violation of Sec. III, Art. 6-A of the by-laws.
The errors assigned in the appeal of the plaintiffs, as appellants,
are as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT THE
INVESTMENT OF CORPORATE FUNDS OF THE MA-AO SUGAR
CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING CO.,
INC. WAS NOT A VIOLATION OF SEC. 17- OF THE CORPORATION
LAW.
II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MAAO SUGAR CENTRAL CO., INC. WAS INSOLVENT.
III.

THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE


ACTS WERE INSUFFICIENT FOR THE DISSOLUTION OF THE
CORPORATION.
The portions of the Decision of the Lower Court assailed by the
plaintiffs as appellants are as follows:
(1) ".... Finally, as to the Philippine Fiber, the Court takes it that
defendants admit having invested P655,000.00 in shares of stock
of this company but that this was ratified by the Board of
Directors in Resolutions 60 and 80, Exhibits "R" and "R-2"; more
than that, defendants contend that since said company was
engaged in the manufacture of sugar bags it was perfectly
legitimate for Ma-ao Sugar either to manufacture sugar bags or
invest in another corporation engaged in said manufacture, and
they quote authorities for the purpose, pp. 28-31, memorandum;
the Court is persuaded to believe that the defendants on this
point are correct, because while Sec. 17-1/2 of the Corporation
Law provides that:
No corporation organized under this act shall invest
its funds in any other corporation or business or for any
purpose other than the main purpose for which it was
organized unless its board of directors has been so
authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling
them to exercise at least two-thirds of the voting power
on such proposal at the stockholders' meeting called for
the purpose.
the Court is convinced that that law should be understood
to mean as the authorities state, that it is prohibited to the
Corporation to invest in shares of another corporation unless such
an investment is authorized by two-thirds of the voting power of
the stockholders, if the purpose of the corporation in which
investment is made is foreign to the purpose of the investing
corporation because surely there is more logic in the stand that if
the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its

purpose, to require authority of the stockholders would be to


unduly curtail the Power of the Board of Directors; the only
trouble here is that the investment was made without any
previous authority of the Board of Directors but was only ratified
afterwards; this of course would have the effect of legalizing the
unauthorized act but it is an indication of the manner in which
corporate business is transacted by the Ma-ao Sugar
administration, the fact that off and on, there would be passed by
the Board of Directors, resolutions ratifying all acts previously
done by the management, e.g. resolutions passed on February
25, 1947, and February 25, 1952, by the Board of Directors as set
forth in the affidavit of Isidro T. Dunca p. 127, etc. Vol. 1.
(Decision, pp. 239-241 of Record on Appeal.)
xxx

xxx

xxx

(2) "On the other hand, the Court has noted against plaintiffs that
their contention that Ma-ao Sugar is on the verge of bankruptcy
has not been clearly shown; against this are Exh. C to Exh. C-3
perhaps the best proof that insolvency is still far is that this
action was filed in 1953 and almost seven years have passed
since then without the company apparently getting worse than it
was before; ..." (Decision, pp. 243-244,supra.)
xxx

xxx

xxx

(3) "As to the crop loan anomalies in that instead of giving unto
the planters the entire amount alloted for that, the Central
withheld a certain portion for their own use, as can be seen in
Appendix A of Exh. C-1, while the theory of plaintiffs is that since
between the amount of P3,791,551.78 the crop loan account
payable, and the amount of P1,708,488.22, the crop loan
receivable, there is a difference of P2,083,063.56, this would
indicate that this latter sum had been used by the Central itself
for its own purposes; on the other hand, defendants contend that
the first amount did not represent the totality of the crop loans
obtained from the Bank for the purpose of relending to the
planters, but that it included the Central's own credit line on its
40% share in the standing crop; and that this irregularity
amounts to a grievance by plaintiffs as planters and not as
stockholders, the Court must find that as to this count, there is
really reason to find that said anomaly is not a clear basis for the
derivative suit, first, because plaintiffs' evidence is not very
sufficient to prove clearly the alleged diversion in the face of
defendants' defense; there should have been a showing that the

Central had no authority to make the diversion; and secondly, if


the anomaly existed, there is ground to hold with defendants that
it was an anomaly pernicious not to the Central but to the
planters; it was not even pernicious to the stockholders.
Going to the discriminatory acts of J. Amado Araneta,
namely, manipulation of cane allotments, withholding of
molasses and alcohol shares, withholding of trucking allowance,
formation of rival planters associations, refusal to deal with
legitimate planters group, Exh. S; the Court notices that as to the
failure to provide hauling transportation, this in a way is
corroborated by Exh. 7, that part containing the decision of the
Court of First Instance of Manila, civil 20122, Francisco Rodriguez
v. Ma-ao Sugar; for the reason, however, that even if these were
true, those grievances were grievances of plaintiffs as planters
and not as stockholders just as the grievance as to the crop
loans already adverted to, this Court will find insufficient merit
on this count. (Decision, pp. 230-231, supra.)
xxx

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xxx

(4) "...; for the Court must admit its limitations and confess that it
cannot pretend to know better than the Board in matters where
the Board has not transgressed any positive statute or by-law
especially where as here, there is the circumstance that
presumably, an impartial representative in the Board of Directors,
the one from the Philippine National Bank, against whom
apparently plaintiffs have no quarrel, does not appear to have
made any protest against the same; the net result will be to hold
that the culpable acts proved are not enough to secure a
dissolution; the Court will only order the correction of abuses,
proved as already mentioned; nor will the Court grant any more
damages one way or the other. (Decision, p. 244,supra.)
On the other hand, the errors assigned in the appeal of the
defendants as appellants are as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO
ARANETA TO PAY TO MA-AO SUGAR CENTRAL CO., INC., THE
AMOUNT OF P46,270.00, WITH 8% INTEREST FROM THE DATE OF
FILING OF THE COMPLAINT.

II.
THE LOWER COURT ERRED IN NOT ORDERING THE
PLAINTIFFS TO PAY THE DEFENDANTS, PARTICULARLY J. AMADO
ARANETA, THE DAMAGES PRAYED FOR IN THE COUNTERCLAIM OF
SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the
defendants as appellants are as follows:
(1) "As to the alleged juggling of books in that the personal
account of J. Amado Araneta of P46,270.00 was closed on
October 31, 1947 by charges transferred to loans receivable nor
was interest paid on this amount, the Court finds that this is
related to charge No. 1, namely, the granting of personal loans to
J. Amado Araneta; it is really true that according to the books,
and as admitted by defendants, J. Amado Araneta secured
personal loans; in 1947, the cash advance to him was
P132,082.00 (Exh. A); the Court has no doubt that this was
against the By-Laws which provided that:
The Directors shall not in any case borrow money
from the Company. (Sec. III, Art. 7);
the Court therefore finds this count to be duly proved;
worse, the Court also finds that as plaintiffs contend, while the
books of the Corporation would show that the last balance of
P46,270.00 was written off as paid, as testified to by Auditor Mr.
Sanchez, the payment appeared to be nothing more than a
transfer of his loan receivable account, stated otherwise, the item
was only transferred from the personal account to the loan
receivable account, so that again the Court considers established
the juggling of the books; and then again, it is also true that the
loans were secured without any interest and while it is true that
in the Directors' meeting of 21 October, 1953, it was resolved to
collect 8%, the Court does not see how such a unilateral action of
the Board could bind the borrowers. Be it stated that defendants
have presented in evidence Exh. 5 photostatic copy of the page
in loan receivable and it is sought to be proved that J. Amado
Araneta's debt was totally paid on 31 October, 1953; to the
Court, in the absence of definite primary proof of actual payment
having found out that there had already been a juggling of books,
it cannot just believe that the amount had been paid as noted in
the books. (Decision, pp. 233-235 of Record on Appeal.)

(2) "With respect to the second point in the motion for


reconsideration to the effect that the Court did not make any
findings of fact on the counterclaim of defendants, although the
Court did not say that in so many words, the Court takes it that
its findings of fact on pages 17 to 21 of its decision were enough
to justify a dismissal of the counterclaim, because the
counterclaims were based on the fact that the complaint was
premature, improper, malicious and that the language is
unnecessarily vituperative abusive and insulting; but the Court
has not found that the complaint is premature; nor has the Court
found that the complaint was malicious; these findings can be
gleaned from the decision with respect to the allegation that the
complaint was abusive and insulting, the Court does not concur;
for it has not seen anything in the evidence that would justify a
finding that plaintiffs and been actuated by bad faith, nor is there
anything in the complaint essentially libelous; especially as the
rule is that allegations in pleading where relevant, are privileged
even though they may not clearly proved afterwards; so that the
Court has not seen any merit in the counterclaims; and the Court
had believed that the decision already carried with it the
implication of the dismissal of the counterclaims, but if that is not
enough, the Court makes its position clear on this matter in this
order, and clarifies that it has dismissed the counterclaims of
defendant; ..." (Order of September 3, 1960, pp. 248-249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the
brief of the plaintiffs as appellants, it appears to us that the Lower Court
was correct in its appreciation (1) that the evidence presented did not
show that the defendant Ma-ao Sugar Company was insolvent (2) that
the alleged discriminatory acts committed by the defendant Central
against the planters were not a proper subject of derivative suit, but, at
most, constituted a cause of action of the individual planters; and (3) that
the acts of mismanagement complained of and proved do not justify a
dissolution of the corporation.
Whether insolvency exists is usually a question of fact, to
be determined from an inventory of the assets and their value, as
well as a consideration of the liabilities.... But the mere
impairment of capital stock alone does not establish insolvency
there being other evidence as to the corporation being a going
concern with sufficient assets. Also, the excess of liabilities over
assets does not establish insolvency, when other assets are
available. (Fletcher Cyc. of the Law of Private Corporations, Vol.
15A, 1938 Ed pp. 34-37; Emphasis supplied).

But relief by dissolution will be awarded in such cases only


where no other adequate remedy is available, and is not available
where the rights of the stockholders can be, or are, protected in
some other way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp.
812-813, citing "Thwing v. McDonald", 134 Minn. 148, 156 N.W.
780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell
v. Bank of St. Paul, 7 Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as
appellants, contending that the investment of corporate funds by the Maao Sugar Co., Inc., in another corporation (the Philippine Fiber Processing
Co., Inc.) constitutes a violation of Sec. 17- of the Corporation Law,
deserves consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central
Co., Inc., through its President, J. Amado Araneta,, subscribed for
P300,000.00 worth of capital stock of the Philippine Fiber Processing Co.
Inc., that payments on the subscription were made on September 20,
1950, for P150,000.00, on April 30, 1951, for P50,000.00, and on March 6,
1952, for P100,000.00; that at the time the first two payments were
made there was no board resolution authorizing the investment; and that
it was only on November 26, 1951, that the President of Ma-ao Sugar
Central Co., Inc., was so authorized by the Board of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber
Processing Co., Inc., owned by Luzon Industrial, corporation were
transferred on May 31, 1952, to the defendant Ma-ao Sugar Central Co.,
Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per
share. Again the "investment" was made without prior board resolution,
the authorizing resolution having been subsequentIy approved only on
June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo,
that the said Board Resolutions are valid, the transaction, is still wanting
in legality, no resolution having been approved by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise
at least two-thirds of the voting power, as required in Sec. 17- of the
Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 17 of the Corporation Law, provides:
No corporation organized under this act shall invest its
funds in any other corporation or business, or for any purpose
other than the main purpose for which it was organized, unless its

board of directors has been so authorized in a resolution by the


affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power
on such proposal at a stockholders' meeting called for the
purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13,
par. 10 of the Corporation Law, which provides:
SEC. 13. Every corporation has the power:
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xxx

(9) To enter into any obligation or contract essential to the proper


administration of its corporate affairs or necessary for the proper
transaction of the business or accomplishment of the purpose for
which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to
accomplish its purpose as stated in the articles of incorporation,
to acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities and other evidences of indebtedness of any domestic
or foreign corporation.
A reading of the two afore-quoted provisions shows that there is
need for interpretation of the apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th
edition, Professor Sulpicio S. Guevara of the University of the Philippines,
College of Law, a well-known authority in commercial law, reconciled
these two apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities. A
private corporation, in order to accomplish its purpose as stated
in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and
other evidences of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of the stockholders; but
when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is
necessary. In any case, the purchase of such shares or securities

must be subject to the limitations established by the Corporation


Law; namely, (a) that no agricultural or mining corporation shall
in anywise be interested in any other agricultural or mining
corporation; or (b) that a non-agricultural or non-mining
corporation shall be restricted to own not more than 15% of the
voting stock of any agricultural or mining corporation; and (c)
that such holdings shall be solely for investment and not for the
purpose of bringing about a monopoly in any line of commerce or
combination in restraint of trade. (The Philippine Corporation Law
by Sulpicio S. Guevara, 1967 Ed., p. 89.) (Emphasis
ours.)lawphi1.nt
40. Power to invest corporate funds. A private
corporation has the power to invest its corporate funds in any
other corporation or business, or for any purpose other than the
main purpose for which it was organized, provided that 'its board
of directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power
on such a proposal at a stockholders' meeting called for that
purpose,' and provided further, that no agricultural or mining
corporation shall in anywise be interested in any other
agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in it
articles of incorporation, the approval of the stockholders is not
necessary. (Id., p. 108.) (Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the
investment in question does not fall under the purview of Sec. 17- of
the Corporation Law.
With respect to the defendants' assignment of errors, the second
(referring to the counterclaim) is clearly without merit. As the Lower
Court aptly ruled in its Order of September 3, 1960 (resolving the
defendants' Motion for Reconsideration) the findings of fact were enough
to justify a dismissal of the counterclaim, "because the counterclaims
were based on the fact that the complaint was premature, improper,
malicious and that the language is unnecessarily vituperative abusive
and insulting; but the Court has not found that the complaint is
premature; nor has the Court found that the complaint was malicious;
these findings can be gleaned from the decision; with respect to the
allegation that the complaint was abusive and insulting, the Court does
not concur; for it has not seen anything in the evidence that would justify

a finding that plaintiffs had been actuated by bad faith, nor is there
anything in the complaint essentially libelous especially as the rule is that
allegations in pleadings where relevant, are privileged even though they
may not be clearly proved afterwards; ..."
As regards defendants' first assignment of error, referring to the
status of the account of J. Amado Araneta in the amount of P46,270.00,
this Court likewise agrees with the finding of the Lower Court that Exhibit
5, photostatic copy of the page on loans receivable does not constitute
definite primary proof of actual payment, particularly in this case where
there is evidence that the account in question was transferred from one
account to another. There is no better substitute for an official receipt and
a cancelled check as evidence of payment.
In the judgment, the lower court ordered the management of the
Ma-ao Sugar Central Co., Inc. "to refrain from making investments in
Acoje Mining, Mabuhay Printing and any other company whose purpose is
not connected with the sugar central business." This portion of the
decision should be reversed because, Sec. 17- of the Corporation Law
allows a corporation to "invest its fund in any other corporation or
business, or for any purpose other than the main purpose for which it was
organized," provided that its board of directors has been so authorized by
the affirmative vote of stockholders holding shares entitling them to
exercise at least two-thirds of the voting power.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which
orders the Ma-ao Sugar Central Co., Inc. "to refrain from making
investments in Acoje Mining, Mabuhay Printing, and any other: company
whose purpose is not connected with the sugar central business," is
reversed. The other parts of the judgment are, affirmed. No special
pronouncement as to costs.

G.R. No. L-21601

December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,


vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
ZALDIVAR, J.:
On February 6, 1958, plaintiff brought this action against defendant
before the Court of First Instance of Manila to recover certain sums of

money representing damages allegedly suffered by the former in view of


the refusal of the latter to comply with the terms of a management
contract entered into between them on January 30, 1937, including
attorney's fees and costs.
Defendant in its answer denied the material allegations of the complaint
and set up certain special defenses, among them, prescription and
laches, as bars against the institution of the present action.
After trial, during which the parties presented testimonial and numerous
documentary evidence, the court a quorendered a decision dismissing
the complaint with costs. The court stated that it did not find sufficient
evidence to establish defendant's counterclaim and so it likewise
dismissed the same.
The present appeal was taken to this Court directly by the plaintiff in view
of the amount involved in the case.
The facts of this case, as stated in the decision appealed from, are
hereunder quoted for purposes of this decision:
It appears that the suit involves an operating agreement
executed before World War II between the plaintiff and the
defendant whereby the former operated and managed the mining
properties owned by the latter for a management fee of
P2,500.00 a month and a 10% participation in the net profits
resulting from the operation of the mining properties. For brevity
and convenience, hereafter the plaintiff shall be referred to as
NIELSON and the defendant, LEPANTO.
The antecedents of the case are: The contract in question (Exhibit
`C') was made by the parties on January 30, 1937 for a period of
five (5) years. In the latter part of 1941, the parties agreed to
renew the contract for another period of five (5) years, but in the
meantime, the Pacific War broke out in December, 1941.
In January, 1942 operation of the mining properties was disrupted
on account of the war. In February of 1942, the mill, power plant,
supplies on hand, equipment, concentrates on hand and mines,
were destroyed upon orders of the United States Army, to
prevent their utilization by the invading Japanese Army. The
Japanese forces thereafter occupied the mining properties,
operated the mines during the continuance of the war, and who
were ousted from the mining properties only in August of 1945.

After the mining properties were liberated from the Japanese


forces, LEPANTO took possession thereof and embarked in
rebuilding and reconstructing the mines and mill; setting up new
organization; clearing the mill site; repairing the mines; erecting
staff quarters and bodegas and repairing existing structures;
installing new machinery and equipment; repairing roads and
maintaining the same; salvaging equipment and storing the same
within the bodegas; doing police work necessary to take care of
the materials and equipment recovered; repairing and renewing
the water system; and remembering (Exhibits "D" and "E"). The
rehabilitation and reconstruction of the mine and mill was not
completed until 1948 (Exhibit "F"). On June 26, 1948 the mines
resumed operation under the exclusive management of LEPANTO
(Exhibit "F-l").
Shortly after the mines were liberated from the Japanese invaders
in 1945, a disagreement arose between NIELSON and LEPANTO
over the status of the operating contract in question which as
renewed expired in 1947. Under the terms thereof, the
management contract shall remain in suspense in case fortuitous
event or force majeure, such as war or civil commotion, adversely
affects the work of mining and milling.
"In the event of inundations, floodings of mine, typhoon,
earthquake or any other force majeure, war, insurrection,
civil commotion, organized strike, riot, 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."
(Clause II of Exhibit "C").
NIELSON held the view that, on account of the war, the contract
was suspended during the war; hence the life of the contract
should be considered extended for such time of the period of
suspension. On the other hand, LEPANTO contended that the
contract should expire in 1947 as originally agreed upon because
the period of suspension accorded by virtue of the war did not
operate to extend further the life of the contract.
No understanding appeared from the record to have been bad by
the parties to resolve the disagreement. In the meantime,

LEPANTO rebuilt and reconstructed the mines and was able to


bring the property into operation only in June of 1948, . . . .
Appellant in its brief makes an alternative assignment of errors
depending on whether or not the management contract basis of the
action has been extended for a period equivalent to the period of
suspension. If the agreement is suspended our attention should be
focused on the first set of errors claimed to have been committed by the
court a quo; but if the contrary is true, the discussion will then be
switched to the alternative set that is claimed to have been committed.
We will first take up the question whether the management agreement
has been extended as a result of the supervening war, and after this
question shall have been determined in the sense sustained by appellant,
then the discussion of the defense of laches and prescription will follow
as a consequence.
The pertinent portion of the management contract (Exh. C) which refers
to suspension should any event constituting force majeure happen
appears in Clause II thereof which we quote hereunder:
In the event of inundations, floodings of the mine, typhoon,
earthquake or any other force majeure, war, insurrection, civil
commotion, organized strike, riot, 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.
A careful scrutiny of the clause above-quoted will at once reveal that in
order that the management contract may be deemed suspended two
events must take place which must be brought in a satisfactory manner
to the attention of defendant within a reasonable time, to wit: (1) the
event constituting the force majeure must be reasonably beyond the
control of Nielson, and (2) it must adversely affect the work of mining and
milling the company is called upon to undertake. As long as these two
condition exist the agreement is deem suspended.
Does the evidence on record show that these two conditions had existed
which may justify the conclusion that the management agreement had
been suspended in the sense entertained by appellant? Let us go to the
evidence.
It is a matter that this Court can take judicial notice of that war
supervened in our country and that the mines in the Philippines were

either destroyed or taken over by the occupation forces with a view to


their operation. The Lepanto mines were no exception for not was the
mine itself destroyed but the mill, power plant, supplies on hand,
equipment and the like that were being used there were destroyed as
well. Thus, the following is what appears in the Lepanto Company Mining
Report dated March 13, 1946 submitted by its President C. A. DeWitt to
the defendant:1 "In February of 1942, our mill, power plant, supplies on
hand, equipment, concentrates on hand, and mine, were destroyed upon
orders of the U.S. Army to prevent their utilization by the enemy." The
report also mentions the report submitted by Mr. Blessing, an official of
Nielson, that "the original mill was destroyed in 1942" and "the original
power plant and all the installed equipment were destroyed in 1942." It is
then undeniable that beginning February, 1942 the operation of the
Lepanto mines stopped or became suspended as a result of the
destruction of the mill, power plant and other important equipment
necessary for such operation in view of a cause which was clearly beyond
the control of Nielson and that as a consequence such destruction
adversely affected the work of mining and milling which the latter was
called upon to undertake under the management contract. Consequently,
by virtue of the very terms of said contract the same may be deemed
suspended from February, 1942 and as of that month the contract still
had 60 months to go.
On the other hand, the record shows that the defendant admitted that
the occupation forces operated its mining properties subject of the
management contract,2 and from the very report submitted by President
DeWitt it appears that the date of the liberation of the mine was August
1, 1945 although at the time there were still many booby
traps.3 Similarly, in a report submitted by the defendant to its
stockholders dated August 25, 1948, the following appears: "Your
Directors take pleasure in reporting that June 26, 1948 marked the official
return to operations of this Company of its properties in Mankayan,
Mountain Province, Philippines."4
It is, therefore, clear from the foregoing that the Lepanto mines were
liberated on August 1, 1945, but because of the period of rehabilitation
and reconstruction that had to be made as a result of the destruction of
the mill, power plant and other necessary equipment for its operation it
cannot be said that the suspension of the contract ended on that date.
Hence, the contract must still be deemed suspended during the
succeeding years of reconstruction and rehabilitation, and this period can
only be said to have ended on June 26, 1948 when, as reported by the
defendant, the company officially resumed the mining operations of the
Lepanto. It should here be stated that this period of suspension from
February, 1942 to June 26, 1948 is the one urged by plaintiff. 5

It having been shown that the operation of the Lepanto mines on the part
of Nielson had been suspended during the period set out above within
the purview of the management contract, the next question that needs to
be determined is the effect of such suspension. Stated in another way,
the question now to be determined is whether such suspension had the
effect of extending the period of the management contract for the period
of said suspension. To elucidate this matter, we again need to resort to
the evidence.
For appellant Nielson two witnesses testified, declaring that the
suspension had the effect of extending the period of the contract,
namely, George T. Scholey and Mark Nestle. Scholey was a mining
engineer since 1929, an incorporator, general manager and director of
Nielson and Company; and for some time he was also the vice-president
and director of the Lepanto Company during the pre-war days and, as
such, he was an officer of both appellant and appellee companies. As
vice-president of Lepanto and general manager of Nielson, Scholey
participated in the negotiation of the management contract to the extent
that he initialed the same both as witness and as an officer of both
corporations. This witness testified in this case to the effect that the
standard force majeure clause embodied in the management contract
was taken from similar mining contracts regarding mining operations and
the understanding regarding the nature and effect of said clause was that
when there is suspension of the operation that suspension meant the
extension of the contract. Thus, to the question, "Before the war, what
was the understanding of the people in the particular trend of business
with respect to the force majeure clause?", Scholey answered: "That was
our understanding that the suspension meant the extension of time
lost."6

issued on March 10, 1945 which was then chairmaned by Atty. C. A.


DeWitt. We read the following from said report:
The Chairman also stated that the contract with Nielson and
Company would soon expire if the obligations were not
suspended, in which case we should have to pay them the
retaining fee of P2,500.00 a month. He believes however, that
there is a provision in the contract suspending the effects thereof
in cases like the present, and that even if it were not there, the
law itself would suspend the operations of the contract on
account of the war. Anyhow, he stated, we shall have no difficulty
in solving satisfactorily any problem we may have with Nielson
and Company.8
Thus, we can see from the above that even in the opinion of Mr. DeWitt
himself, who at the time was the chairman of the Board of Directors of
the Lepanto Company, the management contract would then expire
unless the period therein rated is suspended but that, however, he
expressed the belief that the period was extended because of the
provision contained therein suspending the effects thereof should any of
the case of force majeure happen like in the present case, and that even
if such provision did not exist the law would have the effect of
suspending it on account of the war. In substance, Atty. DeWitt expressed
the opinion that as a result of the suspension of the mining operation
because of the effects of the war the period of the contract had been
extended.

Mark Nestle, the other witness, testified along similar line. He had been
connected with Nielson since 1937 until the time he took the witness
stand and had been a director, manager, and president of the same
company. When he was propounded the question: "Do you know what
was the custom or usage at that time in connection with force
majeure clause?", Nestle answered, "In the mining world the force
majeure clause is generally considered. When a calamity comes up and
stops the work like in war, flood, inundation or fire, etc., the work is
suspended for the duration of the calamity, and the period of the contract
is extended after the calamity is over to enable the person to do the big
work or recover his money which he has invested, or accomplish what his
obligation is to a third person ."7

Contrary to what appellant's evidence reflects insofar as the


interpretation of the force majeure clause is concerned, however,
appellee gives Us an opposite interpretation invoking in support thereof
not only a letter Atty. DeWitt sent to Nielson on October 20,
1945,9 wherein he expressed for the first time an opinion contrary to
what he reported to the Board of Directors of Lepanto Company as stated
in the portion of the minutes of its Board of Directors as quoted above,
but also the ruling laid down by our Supreme Court in some cases
decided sometime ago, to the effect that the war does not have the
effect of extending the term of a contract that the parties may enter into
regarding a particular transaction, citing in this connection the cases
of Victorias Planters Association v. Victorias Milling Company, 51 O.G.
4010; Rosario S. Vda. de Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150;
andLo Ching y So Young Chong Co. v. Court of Appeals, et al., 81 Phil.
601.

And the above testimonial evidence finds support in the very minutes of
the special meeting of the Board of Directors of the Lepanto Company

To bolster up its theory, appellee also contends that the evidence


regarding the alleged custom or usage in mining contract that appellant's

witnesses tried to introduce was incompetent because (a) said custom


was not specifically pleaded; (b) Lepanto made timely and repeated
objections to the introduction of said evidence; (c) Nielson failed to show
the essential elements of usage which must be shown to exist before any
proof thereof can be given to affect the contract; and (d) the testimony of
its witnesses cannot prevail over the very terms of the management
contract which, as a rule, is supposed to contain all the terms and
conditions by which the parties intended to be bound.
It is here necessary to analyze the contradictory evidence which the
parties have presented regarding the interpretation of the force
majeure clause in the management contract.
At the outset, it should be stated that, as a rule, in the construction and
interpretation of a document the intention of the parties must be sought
(Rule 130, Section 10, Rules of Court). This is the basic rule in the
interpretation of contracts because all other rules are but ancilliary to the
ascertainment of the meaning intended by the parties. And once this
intention has been ascertained it becomes an integral part of the
contract as though it had been originally expressed therein in
unequivocal terms (Shoreline Oil Corp. v. Guy, App. 189, So., 348, cited in
17A C.J.S., p. 47). How is this intention determined?
One pattern is to ascertain the contemporaneous and subsequent acts of
the contracting parties in relation to the transaction under consideration
(Article 1371, Civil Code). In this particular case, it is worthy of note what
Atty. C. A. DeWitt has stated in the special meeting of the Board of
Directors of Lepanto in the portion of the minutes already quoted above
wherein, as already stated, he expressed the opinion that the life of the
contract, if not extended, would last only until January, 1947 and yet he
said that there is a provision in the contract that the war had the effect of
suspending the agreement and that the effect of that suspension was
that the agreement would have to continue with the result that Lepanto
would have to pay the monthly retaining fee of P2,500.00. And this belief
that the war suspended the agreement and that the suspension meant its
extension was so firm that he went to the extent that even if there was
no provision for suspension in the agreement the law itself would
suspend it.
It is true that Mr. DeWitt later sent a letter to Nielson dated October 20,
1945 wherein apparently he changed his mind because there he stated
that the contract was merely suspended, but not extended, by reason of
the war, contrary to the opinion he expressed in the meeting of the Board
of Directors already adverted to, but between the two opinions of Atty.
DeWitt We are inclined to give more weight and validity to the former not

only because such was given by him against his own interest but also
because it was given before the Board of Directors of Lepanto and in the
presence, of some Nielson officials 10 who, on that occasion were
naturally led to believe that that was the true meaning of the suspension
clause, while the second opinion was merely self-serving and was given
as a mere afterthought.
Appellee also claims that the issue of true intent of the parties was not
brought out in the complaint, but anent this matter suffice it to state that
in paragraph No. 19 of the complaint appellant pleaded that the contract
was extended. 11 This is a sufficient allegation considering that the rules
on pleadings must as a rule be liberally construed.
It is likewise noteworthy that in this issue of the intention of the parties
regarding the meaning and usage concerning the force majeure clause,
the testimony adduced by appellant is uncontradicted. If such were not
true, appellee should have at least attempted to offer contradictory
evidence. This it did not do. Not even Lepanto's President, Mr. V. E.
Lednicky who took the witness stand, contradicted said evidence.
In holding that the suspension of the agreement meant the extension of
the same for a period equivalent to the suspension, We do not have the
least intention of overruling the cases cited by appellee. We simply want
to say that the ruling laid down in said cases does not apply here
because the material facts involved therein are not the same as those
obtaining in the present. The rule of stare decisis cannot be invoked
where there is no analogy between the material facts of the decision
relied upon and those of the instant case.
Thus, in Victorias Planters Association vs. Victorias Milling Company, 51
O.G. 4010, there was no evidence at all regarding the intention of the
parties to extend the contract equivalent to the period of suspension
caused by the war. Neither was there evidence that the parties
understood the suspension to mean extension; nor was there evidence of
usage and custom in the industry that the suspension meant the
extension of the agreement. All these matters, however, obtain in the
instant case.
Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87
Phil. 150, the issue referred to the interpretation of a pre-war contract of
lease of sugar cane lands and the liability of the lessee to pay rent during
and immediately following the Japanese occupation and where the
defendant claimed the right of an extension of the lease to make up for
the time when no cane was planted. This Court, in holding that the years
which the lessee could not use the land because of the war could not be

discounted from the period agreed upon, held that "Nowhere is there any
insinuation that the defendant-lessee was to have possession of lands for
seven years excluding years on which he could not harvest sugar."
Clearly, this ratio decidendi is not applicable to the case at bar wherein
there is evidence that the parties understood the "suspension clause by
force majeure" to mean the extension of the period of agreement.
Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals,
et al., 81 Phil. 601, appellant leased a building from appellee beginning
September 13, 1940 for three years, renewable for two years. The
lessee's possession was interrupted in February, 1942 when he was
ousted by the Japanese who turned the same over to German Otto
Schulze, the latter occupying the same until January, 1945 upon the
arrival of the liberation forces. Appellant contended that the period
during which he did not enjoy the leased premises because of his
dispossession by the Japanese had to be deducted from the period of the
lease, but this was overruled by this Court, reasoning that such
dispossession was merely a simple "perturbacion de merohecho y de la
cual no responde el arrendador" under Article 1560 of the old Civil Code
Art. 1664). This ruling is also not applicable in the instant case because in
that case there was no evidence of the intention of the parties that any
suspension of the lease by force majeure would be understood to extend
the period of the agreement.
In resume, there is sufficient justification for Us to conclude that the
cases cited by appellee are inapplicable because the facts therein
involved do not run parallel to those obtaining in the present case.
We shall now consider appellee's defense of laches. Appellee is correct in
its contention that the defense of laches applies independently of
prescription. Laches is different from the statute of limitations.
Prescription is concerned with the fact of delay, whereas laches is
concerned with the effect of delay. Prescription is a matter of time; laches
is principally a question of inequity of permitting a claim to be enforced,
this inequity being founded on some change in the condition of the
property or the relation of the parties. Prescription is statutory; laches is
not. Laches applies in equity, whereas prescription applies at law.
Prescription is based on fixed time, laches is not. (30 C.J.S., p. 522; See
also Pomeroy's Equity Jurisprudence, Vol. 2, 5th ed., p. 177).
The question to determine is whether appellant Nielson is guilty of laches
within the meaning contemplated by the authorities on the matter. In the
leading case of Go Chi Gun, et al. vs. Go Cho, et al., 96 Phil. 622, this
Court enumerated the essential elements of laches as follows:

(1) conduct on the part of the defendant, or of one under whom


he claims, giving rise to the situation of which complaint is made
and for which the complaint seeks a remedy; (2) delay in
asserting the complainant's rights, the complainant having had
knowledge or notice of the defendant's conduct and having been
afforded an opportunity to institute a suit; (3) lack of knowledge
or notice on the part of the defendant that the complainant would
assert the right on which he bases his suit; and (4) injury or
prejudice to the defendant in the event relief is accorded to the
complainant, or the suit is not held barred.
Are these requisites present in the case at bar?
The first element is conceded by appellant Nielson when it claimed that
defendant refused to pay its management fees, its percentage of profits
and refused to allow it to resume the management operation.
Anent the second element, while it is true that appellant Nielson knew
since 1945 that appellee Lepanto has refused to permit it to resume
management and that since 1948 appellee has resumed operation of the
mines and it filed its complaint only on February 6, 1958, there being
apparent delay in filing the present action, We find the delay justified and
as such cannot constitute laches. It appears that appellant had not
abandoned its right to operate the mines for even before the termination
of the suspension of the agreement as early as January 20, 1946 12 and
even before March 10, 1945, it already claimed its right to the extension
of the contract,13 and it pressed its claim for the balance of its share in
the profits from the 1941 operation14 by reason of which negotiations had
taken place for the settlement of the claim 15 and it was only on June 25,
1957 that appellee finally denied the claim. There is, therefore, only a
period of less than one year that had elapsed from the date of the final
denial of the claim to the date of the filing of the complaint, which
certainly cannot be considered as unreasonable delay.
The third element of laches is absent in this case. It cannot be said that
appellee Lepanto did not know that appellant would assert its rights on
which it based suit. The evidence shows that Nielson had been claiming
for some time its rights under the contract, as already shown above.
Neither is the fourth element present, for if there has been some delay in
bringing the case to court it was mainly due to the attempts at arbitration
and negotiation made by both parties. If Lepanto's documents were lost,
it was not caused by the delay of the filing of the suit but because of the
war.

Another reason why appellant Nielson cannot be held guilty of laches is


that the delay in the filing of the complaint in the present case was the
inevitable of the protracted negotiations between the parties concerning
the settlement of their differences. It appears that Nielson asked for
arbitration16 which was granted. A committee consisting of Messrs.
DeWitt, Farnell and Blessing was appointed to act on said differences but
Mr. DeWitt always tried to evade the issue17 until he was taken ill and
died. Mr. Farnell offered to Nielson the sum of P13,000.58 by way of
compromise of all its claim arising from the management contract 18 but
apparently the offer was refused. Negotiations continued with the
exchange of letters between the parties but with no satisfactory
result.19 It can be said that the delay due to protracted negotiations was
caused by both parties. Lepanto, therefore, cannot be permitted to take
advantage of such delay or to question the propriety of the action taken
by Nielson. The defense of laches is an equitable one and equity should
be applied with an even hand. A person will not be permitted to take
advantage of, or to question the validity, or propriety of, any act or
omission of another which was committed or omitted upon his own
request or was caused by his conduct (R. H. Stearns Co. vs. United States,
291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry
Prentiss & Co., 288 U.S. 73, 77 L. Ed., 626, 53 S. Ct., 283).
Had the action of Nielson prescribed? The court a quo held that the action
of Nielson is already barred by the statute of limitations, and that ruling is
now assailed by the appellant in this appeal. In urging that the court a
quoerred in reaching that conclusion the appellant has discussed the
issue with reference to particular claims.
The first claim is with regard to the 10% share in profits of 1941
operations. Inasmuch as appellee Lepanto alleges that the correct basis
of the computation of the sharing in the net profits shall be as provided
for in Clause V of the Management Contract, while appellant Nielson
maintains that the basis should be what is contained in the minutes of
the special meeting of the Board of Directors of Lepanto on August 21,
1940, this question must first be elucidated before the main issue is
discussed.
The facts relative to the matter of profit sharing follow: In the
management contract entered into between the parties on January 30,
1937, which was renewed for another five years, it was stipulated that
Nielson would receive a compensation of P2,500.00 a month plus 10% of
the net profits from the operation of the properties for the preceding
month. In 1940, a dispute arose regarding the computation of the 10%
share of Nielson in the profits. The Board of Directors of Lepanto, realizing
that the mechanics of the contract was unfair to Nielson, authorized its
President to enter into an agreement with Nielson modifying the pertinent

provision of the contract effective January 1, 1940 in such a way that


Nielson shall receive (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. 20 Counsel for the appellee admitted during the trial that
the extract of the minutes as found in Exhibit B is a faithful copy from the
original. 21 Mr. George Scholey testified that the foregoing modification
was agreed upon. 22
Lepanto claims that this new basis of computation should be rejected (1)
because the contract was clear on the point of the 10% share and it was
so alleged by Nielson in its complaint, and (2) the minutes of the special
meeting held on August 21, 1940 was not signed.
It appearing that the issue concerning the sharing of the profits had been
raised in appellant's complaint and evidence on the matter was
introduced 23 the same can be taken into account even if no amendment
of the pleading to make it conform to the evidence has been made, for
the same is authorized by Section 4, Rule 17, of the old Rules of Court
(now Section 5, Rule 10, of the new Rules of Court).
Coming now to the question of prescription raised by defendant Lepanto,
it is contended by the latter that the period to be considered for the
prescription of the claim regarding participation in the profits is only four
years, because the modification of the sharing embodied in the
management contract is merely verbal, no written document to that
effect having been presented. This contention is untenable. The
modification appears in the minutes of the special meeting of the Board
of Directors of Lepanto held on August 21, 1940, it having been made
upon the authority of its President, and in said minutes the terms of the
modification had been specified. This is sufficient to have the agreement
considered, for the purpose of applying the statute of limitations, as a
written contract even if the minutes were not signed by the parties (3
A.L.R., 2d, p. 831). It has been held that a writing containing the terms of
a contract if adopted by two persons may constitute a contract in writing
even if the same is not signed by either of the parties (3 A.L.R., 2d, pp.
812-813). Another authority says that an unsigned agreement the terms
of which are embodied in a document unconditionally accepted by both
parties is a written contract (Corbin on Contracts, Vol. 1, p. 85)
The modification, therefore, made in the management contract relative to
the participation in the profits by appellant, as contained in the minutes
of the special meeting of the Board of Directors of Lepanto held on
August 21, 1940, should be considered as a written contract insofar as

the application of the statutes of limitations is concerned. Hence, the


action thereon prescribes within ten (10) years pursuant to Section 43 of
Act 190.
Coming now to the facts, We find that the right of Nielson to its 10%
participation in the 1941 operations accrued on December 21, 1941 and
the right to commence an action thereon began on January 1, 1942 so
that the action must be brought within ten (10) years from the latter
date. It is true that the complaint was filed only on February 6, 1958, that
is sixteen (16) years, one (1) month and five (5) days after the right of
action accrued, but the action has not yet prescribed for various reasons
which We will hereafter discuss.
The first reason is the operation of the Moratorium Law, for appellant's
claim is undeniably a claim for money. Said claim accrued on December
31, 1941, and Lepanto is a war sufferer. Hence the claim was covered by
Executive Order No. 32 of March 10, 1945. It is well settled that the
operation of the Moratorium Law suspends the running of the statue of
limitations (Pacific Commercial Co. vs. Aquino, G.R. No. L-10274, February
27, 1957).
This Court has held that the Moratorium Law had been enforced for eight
(8) years, two (2) months and eight (8) days (Tioseco vs. Day, et al., L9944, April 30, 1957; Levy Hermanos, Inc. vs. Perez, L-14487, April 29,
1960), and deducting this period from the time that had elapsed since
the accrual of the right of action to the date of the filing of the complaint,
the extent of which is sixteen (16) years, one (1) month and five (5) days,
we would have less than eight (8) years to be counted for purposes of
prescription. Hence appellant's action on its claim of 10% on the 1941
profits had not yet prescribed.
Another reason that may be taken into account in support of the no-bar
theory of appellant is the arbitration clause embodied in the
management contract which requires that any disagreement as to any
amount of profits before an action may be taken to court shall be subject
to arbitration. 24 This agreement to arbitrate is valid and binding. 25 It
cannot be ignored by Lepanto. Hence Nielson could not bring an action
on its participation in the 1941 operations-profits until the condition
relative to arbitration had been first complied with. 26 The evidence shows
that an arbitration committee was constituted but it failed to accomplish
its purpose on June 25, 1957. 27From this date to the filing of the
complaint the required period for prescription has not yet elapsed.
Nielson claims the following: (1) 10% share in the dividends declared in
1941, exclusive of interest, amounting to P17,500.00; (2) 10% in the

depletion reserves for 1941; and (3) 10% in the profits for years prior to
1948 amounting to P19,764.70.
With regard to the first claim, the Lepanto's report for the calendar year
of 1954 28 shows that it declared a 10% cash dividend in December,
1941, the amount of which is P175,000.00. The evidence in this
connection (Exhibits L and O) was admitted without objection by counsel
for Lepanto. 29 Nielson claims 10% share in said amount with interest
thereon at 6% per annum. The document (Exhibit L) was even recognized
by Lepanto's President V. L. Lednicky, 30 and this claim is predicated on
the provision of paragraph V of the management contract as modified
pursuant to the proposal of Lepanto at the special meeting of the Board
of Directors on August 21, 1940 (Exh. B), whereby it was provided that
Nielson would be entitled to 10% of any dividends to be declared and
paid during the period of the contract.
With regard to the second claim, Nielson admits that there is no evidence
regarding the amount set aside by Lepanto for depletion reserve for
1941 31 and so the 10% participation claimed thereon cannot be
assessed.
Anent the third claim relative to the 10% participation of Nielson on the
sum of P197,647.08, which appears in Lepanto's annual report for
1948 32 and entered as profit for prior years in the statement of income
and surplus, which amount consisted "almost in its entirety of proceeds
of copper concentrates shipped to the United States during 1947," this
claim should to denied because the amount is not "dividend declared and
paid" within the purview of the management contract.
The fifth assignment of error of appellant refers to the failure of the lower
court to order Lepanto to pay its management fees for January, 1942, and
for the full period of extension amounting to P150,000.00, or P2,500.00 a
month for sixty (60) months, a total of P152,500.00 with interest
thereon from the date of judicial demand.
It is true that the claim of management fee for January, 1942 was not
among the causes of action in the complaint, but inasmuch as the
contract was suspended in February, 1942 and the management fees
asked for included that of January, 1942, the fact that such claim was not
included in a specific manner in the complaint is of no moment because
an appellate court may treat the pleading as amended to conform to the
evidence where the facts show that the plaintiff is entitled to relief other
than what is asked for in the complaint (Alonzo vs. Villamor, 16 Phil. 315).
The evidence shows that the last payment made by Lepanto for
management fee was for November and December, 1941. 33 If, as We

have declared, the management contract was suspended beginning


February 1942, it follows that Nielson is entitled to the management fee
for January, 1942.
Let us now come to the management fees claimed by Nielson for
the period of extension. In this respect, it has been shown that the
management contract was extended from June 27, 1948 to June 26,
1953, or for a period of sixty (60) months. During this period Nielson had
a right to continue in the management of the mining properties of
Lepanto and Lepanto was under obligation to let Nielson do it and to pay
the corresponding management fees. Appellant Nielson insisted in
performing its part of the contract but Lepanto prevented it from doing
so. Hence, by virtue of Article 1186 of the Civil Code, there was a
constructive fulfillment an the part of Nielson of its obligation to manage
said mining properties in accordance with the contract and Lepanto had
the reciprocal obligation to pay the corresponding management fees and
other benefits that would have accrued to Nielson if Lepanto allowed it
(Nielson) to continue in the management of the mines during the
extended period of five (5) years.
We find that the preponderance of evidence is to the effect that Nielson
had insisted in managing the mining properties soon after liberation. In
the report 34 of Lepanto, submitted to its stockholders for the period from
1941 to March 13, 1946, are stated the activities of Nielson's officials in
relation to Nielson's insistence in continuing the management. This report
was admitted in evidence without objection. We find the following in the
report:
Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San
Fernando (La Union) to await the liberation of the mines. (Mr. Blessing
was the Treasurer and Metallurgist of Nielson). Blessing with Clark and
Stanford went to the property on July 16 and found that while the mill site
had been cleared of the enemy the latter was still holding the area
around the staff houses and putting up a strong defense. As a result, they
returned to San Fernando and later went back to the mines on July 26. Mr.
Blessing made the report, dated August 6, recommending a program of
operation. Mr. Nielson himself spent a day in the mine early in December,
1945 and reiterated the program which Mr. Blessing had outlined. Two or
three weeks before the date of the report, Mr. Coldren of the Nielson
organization also visited the mine and told President C. A. DeWitt of
Lepanto that he thought that the mine could be put in condition for the
delivery of the ore within ten (10) days. And according to Mark Nestle, a
witness of appellant, Nielson had several men including engineers to do
the job in the mines and to resume the work. These engineers were in
fact sent to the mine site and submitted reports of what they had done. 35

On the other hand, appellee claims that Nielson was not ready and able
to resume the work in the mines, relying mainly on the testimony of Dr.
Juan Nabong, former secretary of both Nielson and Lepanto, given in the
separate case of Nancy Irving Romero vs. Lepanto Consolidated Mining
Company (Civil Case No. 652, CFI, Baguio), to the effect that as far as he
knew "Nielson and Company had not attempted to operate the Lepanto
Consolidated Mining Company because Mr. Nielson was not here in the
Philippines after the last war. He came back later," and that Nielson and
Company had no money nor stocks with which to start the operation. He
was asked by counsel for the appellee if he had testified that way in Civil
Case No. 652 of the Court of First Instance of Baguio, and he answered
that he did not confirm it fully. When this witness was asked by the same
counsel whether he confirmed that testimony, he said that when he
testified in that case he was not fully aware of what happened and that
after he learned more about the officials of the corporation it was only
then that he became aware that Nielson had really sent his men to the
mines along with Mr. Blessing and that he was aware of this fact
personally. He further said that Mr. Nielson was here in 1945 and "he was
going out and contacting his people." 36
Lepanto admits, in its own brief, that Nielson had really insisted in taking
over the management and operation of the mines but that it (Lepanto)
unequivocally refuse to allow it. The following is what appears in the brief
of the appellee:
It was while defendant was in the midst of the rehabilitation work
which was fully described earlier, still reeling under the terrible
devastation and destruction wrought by war on its mine that
Nielson insisted in taking over the management and operation of
the mine. Nielson thus put Lepanto in a position where
defendant, under the circumstances, had to refuse, as in fact it
did, Nielson's insistence in taking over the management and
operation because, as was obvious, 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. The stand of
Lepanto in disallowing Nielson to assume again the management
of the mine in 1945 was unequivocal and cannot be
misinterpreted, infra.37
Based on the foregoing facts and circumstances, and Our conclusion that
the management contract was extended, We believe that Nielson is
entitled to the management fees for the period of extension. Nielson
should be awarded on this claim sixty times its monthly pay of P2,500.00,
or a total of P150,000.00.

In its sixth assignment of error Nielson contends that the lower court
erred in not ordering Lepanto to pay it (Nielson) the 10% share in the
profits of operation realized during the period of five (5) years from the
resumption of its post-war operations of the Mankayan mines, in the total
sum of P2,403,053.20 with interest thereon at the rate of 6% per annum
from February 6, 1958 until full payment. 38
The above claim of Nielson refers to four categories, namely: (1) cash
dividends; (2) stock dividends; (3) depletion reserves; and (4) amount
expended on capital investment.
Anent the first category, Lepanto's report for the calendar year
1954 39 contains a record of the cash dividends it paid up to the date of
said report, and the post-war dividends paid by it corresponding to the
years included in the period of extension of the management contract are
as follows:
POST-WAR
8

10%

November

1949

P 200,000.00

10%

July

1950

300,000.00

10

10%

October

1950

500,000.00

11

20%

December

1950

1,000,000.00

12

20%

March

1951

1,000,000.00

13

20%

June

1951

1,000,000.00

14

20%

September

1951

1,000,000.00

15

40%

December

1951

2,000,000.00

16

20%

March

1952

1,000,000.00

17

20%

May

1952

1,000,000.00

18

20%

July

1952

1,000,000.00

19

20%

September

1952

1,000,000.00

20

20%

December

1952

1,000,000.00

21

20%

March

1953

1,000,000.00

22

20%

June

1953

1,000,000.00

TOTAL

P14,000,000.00

According to the terms of the management contract as modified,


appellant is entitled to 10% of the P14,000,000.00 cash dividends that
had been distributed, as stated in the above-mentioned report, or the
sum of P1,400,000.00.
With regard to the second category, the stock dividends declared by
Lepanto during the period of extension of the contract are: On November
28, 1949, the stock dividend declared was 50% of the outstanding
authorized capital of P2,000,000.00 of the company, or stock dividends
worth P1,000,000.00; and on August 22, 1950, the stock dividends
declared was 66-2/3% of the standing authorized capital of
P3,000,000.00 of the company, or stock dividends worth
P2,000,000.00. 40
Appellant's claim that it should be given 10% of the cash value of said
stock dividends with interest thereon at 6% from February 6, 1958 cannot
be granted for that would not be in accordance with the management
contract which entitles Nielson to 10% of any dividends declared
paid, when and as paid. Nielson, therefore, is entitled to 10% of the stock
dividends and to the fruits that may have accrued to said stock dividends
pursuant to Article 1164 of the Civil Code. Hence to Nielson is due shares
of stock worth P100,000.00, as per stock dividends declared on
November 28, 1949 and all the fruits accruing to said shares after said
date; and also shares of stock worth P200,000.00 as per stock dividends
declared on August 20, 1950 and all fruits accruing thereto after said
date.
Anent the third category, the depletion reserve appearing in the
statement of income and surplus submitted by Lepanto corresponding to
the years covered by the period of extension of the contract, may be
itemized as follows:
In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion
reserve set up was P11,602.80.
In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion
reserve set up was P33,556.07.

In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the


depletion reserve set up was P84,963.30.
In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the
depletion reserve set up was P129,089.88.
In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the
depletion reserve was P147,141.54.
In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion
reserve set up as P277,493.25.
Regarding the depletion reserve set up in 1948 it should be noted that
the amount given was for the whole year. Inasmuch as the contract was
extended only for the last half of the year 1948, said amount of
P11,602.80 should be divided by two, and so Nielson is only entitled to
10% of the half amounting to P5,801.40.
Likewise, the amount of depletion reserve for the year 1953 was for the
whole year and since the contract was extended only until the first half of
the year, said amount of P277,493.25 should be divided by two, and so
Nielson is only entitled to 10% of the half amounting to P138,746.62.
Summing up the entire depletion reserves, from the middle of 1948 to
the middle of 1953, we would have a total of P539,298.81, of which
Nielson is entitled to 10%, or to the sum of P53,928.88.
Finally, with regard to the fourth category, there is no figure in the record
representing the value of the fixed assets as of the beginning of the
period of extension on June 27, 1948. It is possible, however, to arrive at
the amount needed by adding to the value of the fixed assets as of
December 31, 1947 one-half of the amount spent for capital account in
the year 1948. As of December 31, 1947, the value of the fixed assets
was P1,061,878.88 41and as of December 31, 1948, the value of the fixed
assets was P3,270,408.07. 42 Hence, the increase in the value of the fixed
assets for the year 1948 was P2,208,529.19, one-half of which is
P1,104,264.59, which amount represents the expenses for capital
account for the first half of the year 1948. If to this amount we add the
fixed assets as of December 31, 1947 amounting to P1,061,878.88, we
would have a total of P2,166,143.47 which represents the fixed assets at
the beginning of the second half of the year 1948.
There is also no figure representing the value of the fixed assets when
the contract, as extended, ended on June 26, 1953; but this may be
computed by getting one-half of the expenses for capital account made

in 1953 and adding the same to the value of the fixed assets as of
December 31, 1953 is P9,755,840.41 43 which the value of the fixed
assets as of December 31, 1952 is P8,463,741.82, the difference being
P1,292,098.69. One-half of this amount is P646,049.34 which would
represent the expenses for capital account up to June, 1953. This amount
added to the value of the fixed assets as of December 31, 1952 would
give a total of P9,109,791.16 which would be the value of fixed assets at
the end of June, 1953.
The increase, therefore, of the value of the fixed assets of Lepanto from
June, 1948 to June, 1953 is P6,943,647.69, which amount represents the
difference between the value of the fixed assets of Lepanto in the year
1948 and in the year 1953, as stated above. On this amount Nielson is
entitled to a share of 10% or to the amount of P694,364.76.
Considering that most of the claims of appellant have been entertained,
as pointed out in this decision, We believe that appellant is entitled to be
awarded attorney's fees, especially when, according to the undisputed
testimony of Mr. Mark Nestle, Nielson obliged himself to pay attorney's
fees in connection with the institution of the present case. In this respect,
We believe, considering the intricate nature of the case, an award of fifty
thousand (P50,000.00) pesos for attorney's fees would be reasonable.
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 appellant Nielson the different amounts as
specified hereinbelow:
(1) 10% share of cash dividends of December, 1941 in the amount of
P17,500.00, with legal interest thereon from the date of the filing of the
complaint;
(2) management fee for January, 1942 in the amount of P2,500.00, with
legal interest thereon from the date of the filing of the complaint;
(3) management fees for the sixty-month period of extension of the
management contract, amounting to P150,000.00, with legal interest
from the date of the filing of the complaint;
(4) 10% share in the cash dividends during the period of extension of the
management contract, amounting to P1,400,000.00, with legal interest
thereon from the date of the filing of the complaint;

(5) 10% of the depletion reserve set up during the period of extension,
amounting to P53,928.88, with legal interest thereon from the date of the
filing of the complaint;
(6) 10% of the expenses for capital account during the period of
extension, amounting to P694,364.76, with legal interest thereon from
the date of the filing of the complaint;
(7) to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto
Consolidated Mining Co. at par value equivalent to the total of Nielson's
l0% share in the stock dividends declared on November 28, 1949 and
August 22, 1950, together with all cash and stock dividends, if any, as
may have been declared and issued subsequent to November 28, 1949
and August 22, 1950, as fruits that accrued to said shares;
If sufficient shares of stock of Lepanto's are not available to satisfy this
judgment, defendant-appellee shall pay plaintiff-appellant an amount in
cash equivalent to the market value of said shares at the time of default
(12 C.J.S., p. 130), that is, all shares of the stock that should have been
delivered to Nielson before the filing of the complaint must be paid at
their market value as of the date of the filing of the complaint; and all
shares, if any, that should have been delivered after the filing of the
complaint at the market value of the shares at the time Lepanto disposed
of all its available shares, for it is only then that Lepanto placed itself in
condition of not being able to perform its obligation (Article 1160, Civil
Code);
(8) the sum of P50,000.00 as attorney's fees; and
(9) the costs. It is so ordered.

G.R. No. L-40620 May 5, 1979

RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA,


EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA
RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of
First Instance of Negros Occidental, Branch II, BENJAMIN LOPUE,
SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U.
DACLESrespondents.
CONCEPCION JR., J,:
Petition for certiorari to review the order of the respondent judge, dated
January 2, 1975, denying the petitioners' motion to dismiss the complaint
filed in Civil Case No. 10257 of the Court of First Instance of Negros
Occidental, entitled, "Benjamin Lopue Sr., et al., plaintiffs, versus Ricardo
Gamboa, et al., defendants," as well as the order dated April 4, 1975,
denying the motion for the reconsideration of Said order.
In the aforementioned Civil Case No. 10257 of the Court of First Instance
of Negros Occidental, the herein petitioners, Ricardo L. Gamboa, Lydia R.
Gamboa, Honorio de la Rama, Eduardo de la Rama, and the late
Mercedes de la Rama-Borromeo, now represented by her heirs, as well as
Ramon de la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi, were
sued by the herein private respondents, Benjamin Lopue, Sr., Benjamin
Lopue, Jr., Leonito Lopue, and Luisa U. Dacles to nullify the issuance of
823 shares of stock of the Inocentes de la Rama, Inc. in favor of the said
defendants. The gist of the complaint, filed on April 4, 1972, is that the
plaintiffs, with the exception of Anastacio Dacles who was joined as a
formal party, are the owners of 1,328 shares of stock of the Inocentes de
la Rama, Inc., a domestic corporation, with an authorized capital stock of
3,000 shares, with a par value of P100.00 per share, 2,177 of which were
subscribed and issued, thus leaving 823 shares unissued; that upon the
plaintiffs' acquisition of the shares of stock held by Rafael Ledesma and
Jose Sicangco, Jr., then President and Vice-President of the corporation,
respectively, the defendants Mercedes R. Borromeo, Honorio de la Rama,
and Ricardo Gamboa, remaining members of the board of directors of the
corporation, in order to forestall the takeover by the plaintiffs of the
afore-named corporation, surreptitiously met and elected Ricardo L.
Gamboa and Honorio de la Rama as president and vice-president of the
corporation, respectively, and thereafter passed a resolution authorizing
the sale of the 823 unissued shares of the corporation to the defendants,
Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Ramon de la
Rama, Paz R. Battistuzzi Eduardo de la Rama, and Mercedes R. Borromeo,
at par value, after which the defendants Honorio de la Rama, Lydia de la
Rama-Gamboa, and Enzo Battistuzzi were elected to the board of
directors of the corporation; that the sale of the unissued 823 shares of

stock of the corporation was in violation of the plaintiffs' and pre-emptive


rights and made without the approval of the board of directors
representing 2/3 of the outstanding capital stock, and is in disregard of
the strictest relation of trust existing between the defendants, as
stockholders thereof; and that the defendants Lydia de la Rama-Gamboa,
Honorio de la Rama, and Enzo Battistuzzi were not legally elected to the
board of directors of the said corporation and has unlawfully usurped or
intruded into said office to the prejudice of the plaintiffs. Wherefore, they
prayed that a writ of preliminary injunction be issued restraining the
defendants from committing, or continuing the performance of an act
tending to prejudice, diminish or otherwise injure the plaintiffs' rights in
the corporate properties and funds of the corporation, and from
disposing, transferring, selling, or otherwise impairing the value of the
823 shares of stock illegally issued by the defendants; that a receiver be
appointed to preserve and administer the property and funds of the
corporation; that defendants Lydia de la Rama-Gamboa, Honorio de la
Rama, and Enzo Battistuzzi be declared as usurpers or intruders into the
office of director in the corporation and, consequently, ousting them
therefrom and declare Luisa U. Dacles as a legally elected director of the
corporation; that the sale of 823 shares of stock of the corporation be
declared null and void; and that the defendants be ordered to pay
damages and attorney's fees, as well as the costs of suit . 1
Acting upon the complaint, the respondent judge, after proper hearing,
directed the clerk of court "to issue the corresponding writ of preliminary
injunction restraining the defendants and/or their representatives,
agents, or persons acting in their behalf from the commission or
continuance of any act tending in any way to prejudice, diminish or
otherwise injure plaintiffs' rights in the corporate properties and funds of
the corporation Inocentes de la Rama, Inc.' and from disposing,
transferring, selling or otherwise impairing the value of the certificates of
stock allegedly issued illegally in their names on February 11, 1972, or at
any date thereafter, and ordering them to deposit with the Clerk of Court
the corresponding certificates of stock for the 823 shares issued to said
defendants on February 11, 1972, upon plaintiffs' posting a bond in the
sum of P50,000.00, to answer for any damages and costs that may be
sustained by the defendants by reason of the issuance of the writ, copy
of the bond to be furnished to the defendants. " 2 Pursuant thereto, the
defendants deposited with the clerk of court the corporation's certificates
of stock Nos. 80 to 86, inclusive, representing the disputed 823 shares of
stock of the corporation. 3
On October 31, 1972, the plaintiffs therein, now private respondents,
entered into a compromise agreement with the defendants Ramon de la
Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi , 4 whereby the
contracting parties withdrew their respective claims against each other

and the aforenamed defendants waived and transferred their rights and
interests over the questioned 823 shares of stock in favor of the plaintiffs,
as follows:
3. That the defendants Ramon L. de la Rama, Paz de la
Rama Battistuzzi and Enzo Battistuzzi will waive, cede,
transfer or other wise convey, as they hereby waive,
cede, transfer and convey, free from all liens and
encumbrances unto the plaintiffs, in such proportion as
the plaintiffs may among themselves determine, all of the
rights, interests, participations or title that the
defendants Ramon L. de la Rama, Paz de la Rama
Battistuzzi Enzo Battistuzzi now have or may have in the
eight hundred twenty-three (823) shares in the capital
stock of the corporation INOCENTES DELA RAMA, INC.'
which were issued in the names of the defendants in the
above-entitled case on or about February 11, 1972, or at
any date thereafter and which shares are the subjectmatter of the present suit.
The compromise agreement was approved by the trial court on
December 4, 1972, 5 As a result, the defendants filed a motion to dismiss
the complaint, on November 19, 1974, upon the grounds: (1) that the
plaintiffs' cause of action had been waived or abandoned; and (2) that
they were estopped from further prosecuting the case since they have, in
effect, acknowledged the validity of the issuance of the disputed 823
shares of stock. The motion was denied on January 2, 1975. 6
The defendants also filed a motion to declare the defendants Ramon L.
de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi in contempt
of court, for having violated the writ of preliminary injunction when they
entered into the aforesaid compromise agreement with the plaintiffs, but
the respondent judge denied the said motion for lack of merit. 7
On February 10, 1975, the defendants filed a motion for the
reconsideration of the order denying their motion to dismiss the
complaint' and subsequently, an Addendum thereto, claiming that the
respondent court has no jurisdiction to interfere with the management of
the corporation by the board of directors, and the enactment of a
resolution by the defendants, as members of the board of directors of the
corporation, allowing the sale of the 823 shares of stock to the
defendants was purely a management concern which the courts could
not interfere with. When the trial court denied said motion and its
addendum, the defendants filed the instant petition for certiorari for the
review of said orders.

The petition is without merit. The questioned order denying the


petitioners' motion to dismiss the complaint is merely interlocutory and
cannot be the subject of a petition for certiorari. The proper procedure to
be followed in such a case is to continue with the trial of the case on the
merits and, if the decision is adverse, to reiterate the issue on appeal. It
would be a breach of orderly procedure to allow a party to come before
this Court every time an order is issued with which he does not agree.
Besides, the order denying the petitioners' motion to dismiss the
complaint was not capriciously, arbitrarily, or whimsically issued, or that
the respondent court lacked jurisdiction over the cause as to warrant the
issuance of the writ prayed for. As found by the respondent judge, the
petitioners have not waived their cause of action against the petitioners
by entering into a compromise agreement with the other defendants in
view of the express provision of the compromise agreement that the
same "shall not in any way constitute or be considered a waiver or
abandonment of any claim or cause of action against the other
defendants." There is also no estoppel because there is nothing in the
agreement which could be construed as an affirmative admission by the
plaintiff of the validity of the resolution of the defendants which is now
sought to be judicially declared null and void. The foregoing
circumstances and the fact that no consideration was mentioned in the
agreement for the transfer of rights to the said shares of stock to the
plaintiffs are sufficient to show that the agreement was merely an
admission by the defendants Ramon de la Rama, Paz de la Rama
Battistuzzi and Enzo Battistuzzi of the validity of the claim of the
plaintiffs.
The claim of the petitioners, in their Addendum to the motion for
reconsideration of the order denying the motion to dismiss the complaint,
questioning the trial court's jurisdiction on matters affecting the
management of the corporation, is without merit. The well-known rule is
that courts cannot undertake to control the discretion of the board of
directors about administrative matters as to which they have legitimate
power of, 10 action and contractsintra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere
unless such contracts are so unconscionable and oppressive as to
amount to a wanton destruction of the rights of the minority. 11 In the
instant case, the plaintiffs aver that the defendants have concluded a
transaction among themselves as will result to serious injury to the
interests of the plaintiffs, so that the trial court has jurisdiction over the
case.
The petitioners further contend that the proper remedy of the plaintiffs
would be to institute a derivative suit against the petitioners in the name

of the corporation in order to secure a binding relief after exhausting all


the possible remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. 12 In the
case at bar, however, the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation. At any
rate, it is yet too early in the proceedings since the issues have not been
joined. Besides, misjoinder of parties is not a ground to dismiss an
action. 13
WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of
merit. With costs against the petitioners.
SO ORDERED.

G.R. No. L-18805

August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF


THE REPUBLIC OF THE PHILIPPINES,plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE
DECEASED CASIMIRO GARCIA,3 and LEONOR MOLL, defendantsappellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered as
a non-profit governmental organization on May 7, 1940 by
Commonwealth Act 518 avowedly for the protection, preservation and
development of the coconut industry in the Philippines. On August 1,
1946, NACOCO's charter was amended [Republic Act 5] to grant that
corporation the express power "to buy, sell, barter, export, and in any
other manner deal in, coconut, copra, and dessicated coconut, as well as
their by-products, and to act as agent, broker or commission merchant of
the producers, dealers or merchants" thereof. The charter amendment
was enacted to stabilize copra prices, to serve coconut producers by

securing advantageous prices for them, to cut down to a minimum, if not


altogether eliminate, the margin of middlemen, mostly aliens. 4

January, 1948. This contract was assigned to Pacific Vegetable


Co.

General manager and board chairman was Maximo M. Kalaw; defendants


Juan Bocar and Casimiro Garcia were members of the Board; defendant
Leonor Moll became director only on December 22, 1947.

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: January, 1948. This
contract was assigned to Pacific Vegetable Co.

NACOCO, after the passage of Republic Act 5, embarked on copra trading


activities. Amongst the scores of contracts executed by general manager
Kalaw are the disputed contracts, for the delivery of copra, viz:

An unhappy chain of events conspired to deter NACOCO from fulfilling


these contracts. Nature supervened. Four devastating typhoons visited
the Philippines: the first in October, the second and third in November,
and the fourth in December, 1947. Coconut trees throughout the country
suffered extensive damage. Copra production decreased. Prices spiralled.
Warehouses were destroyed. Cash requirements doubled. Deprivation of
export facilities increased the time necessary to accumulate shiploads of
copra. Quick turnovers became impossible, financing a problem.

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons,
$167.00: per ton, f. o. b., delivery: August and September, 1947.
This contract was later assigned to Louis Dreyfus & Co.
(Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long
tons $145.00 per long ton, f.o.b., Philippine ports, to be shipped:
September-October, 1947. This contract was also assigned to
Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons,
$137.50 per ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long
tons, $160.00 per ton, c.i.f., Los Angeles, California, delivery:
November, 1947.
(e) September 9, 1947: Franklin Baker Division of General Foods
Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York,
to be shipped in November, 1947.

When it became clear that the contracts would be unprofitable, Kalaw


submitted them to the board for approval. It was not until December 22,
1947 when the membership was completed. Defendant Moll took her
oath on that date. A meeting was then held. Kalaw made a full disclosure
of the situation, apprised the board of the impending heavy losses. No
action was taken on the contracts. Neither did the board vote thereon at
the meeting of January 7, 1948 following. Then, on January 11, 1948,
President Roxas made a statement that the NACOCO head did his best to
avert the losses, emphasized that government concerns faced the same
risks that confronted private companies, that NACOCO was recouping its
losses, and that Kalaw was to remain in his post. Not long thereafter, that
is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia
and Moll in attendance. They unanimously approved the contracts
hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the contracts, as
follows:

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for
3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports,
delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00
per ton, delivery: November and December, 1947. This contract
was assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: December, 1947 and

Buyers
Pacific Vegetable Oil

Tons
Delivered

Undeliver
ed

2,386.45

4,613.55

Spencer Kellog

None

1,000

Franklin Baker

1,000

500

800

2,200

1,150

850

Louis Dreyfus
Louis Dreyfus (Adamson contract of July

30, 1947)
Louis Dreyfus (Adamson Contract of
August 14, 1947)
TOTALS

1,755

245

7,091.45

9,408.55

The buyers threatened damage suits. Some of the claims were


settled, viz: Pacific Vegetable Oil Co., in copra delivered by NACOCO,
P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog &
Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before
the Court of First Instance of Manila, upon claims as follows: For the
undelivered copra under the July 30 contract (Civil Case 4459);
P287,028.00; for the balance on the August 14 contract (Civil Case 4398),
P75,098.63; for that per the September 12 contract reduced to judgment
(Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These
cases culminated in an out-of-court amicable settlement when the Kalaw
management was already out. The corporation thereunder paid Dreyfus
P567,024.52 representing 70% of the total claims. With particular
reference to the Dreyfus claims, NACOCO put up the defenses that: (1)
the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did
not have license to do business here; and (2) failure to deliver was due
to force majeure, the typhoons. To project the utter unreasonableness of
this compromise, we reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant
[Louis Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for
non-delivery of copra also involving a claim of P345,654.68
wherein defendant set upsame defenses as above, plaintiff
accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.)
Following the same proportion, the claim of Dreyfus against
NACOCO should have been compromised for only P10,000.00, if
at all. Now, why should defendants be held liable for the large
sum paid as compromise by the Board of Liquidators? This is just
a sample to show how unjust it would be to hold defendants
liable for the readiness with which the Board of Liquidators
disposed of the NACOCO funds, although there was much
possibility of successfully resisting the claims, or at least
settlement for nominal sums like what happened in the Syjuco
case.5
All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the


above sum of P1,343,274.52 from general manager and board chairman
Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor
Moll. It charges Kalaw with negligence under Article 1902 of the old Civil
Code (now Article 2176, new Civil Code); and defendant board members,
including Kalaw, with bad faith and/or breach of trust for having approved
the contracts. The fifth amended complaint, on which this case was tried,
was filed on July 2, 1959. Defendants resisted the action upon defenses
hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint
without costs as well as defendants' counterclaims, except that plaintiff
was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for
unpaid salaries and cash deposit due the deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for
the sum of P2,601.94.
Right at the outset, two preliminary questions raised before, but
adversely decided by, the court below, arrest our attention. On appeal,
defendants renew their bid. And this, upon established jurisprudence that
an appellate court may base its decision of affirmance of the judgment
below on a point or points ignored by the trial court or in which said court
was in error.6
1. First of the threshold questions is that advanced by defendants that
plaintiff Board of Liquidators has lost its legal personality to continue with
this suit.
Accepted in this jurisdiction are three methods by which a corporation
may wind up its affairs: (1) under Section 3, Rule 104, of the Rules of
Court [which superseded Section 66 of the Corporation Law]7 whereby,
upon voluntary dissolution of a corporation, the court may direct "such
disposition of its assets as justice requires, and may appoint a receiver to
collect such assets and pay the debts of the corporation;" (2) under
Section 77 of the Corporation Law, whereby a corporation whose
corporate existence is terminated, "shall nevertheless be continued as a
body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or
against it and of enabling it gradually to settle and close its affairs, to
dispose of and convey its property and to divide its capital stock, but not
for the purpose of continuing the business for which it was established;"
and (3) under Section 78 of the Corporation Law, by virtue of which the

corporation, within the three year period just mentioned, "is authorized
and empowered to convey all of its property to trustees for the benefit of
members, stockholders, creditors, and others interested." 8
It is defendants' pose that their case comes within the coverage of the
second method. They reason out that suit was commenced in February,
1949; that by Executive Order 372, dated November 24, 1950, NACOCO,
together with other government-owned corporations, was abolished, and
the Board of Liquidators was entrusted with the function of settling and
closing its affairs; and that, since the three year period has elapsed, the
Board of Liquidators may not now continue with, and prosecute, the
present case to its conclusion, because Executive Order 372 provides in
Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the
National Coconut Corporation, the National Tobacco Corporation,
the National Food Producer Corporation and the former enemyowned or controlled corporations or associations, . . . are hereby
abolished. The said corporations shall be liquidated in accordance
with law, the provisions of this Order, and/or in such manner as
the President of the Philippines may direct; Provided, however,
That each of the said corporations shall nevertheless be
continued as a body corporate for a period of three (3) years from
the effective date of this Executive Order for the purpose of
prosecuting and defending suits by or against it and of enabling
the Board of Liquidators gradually to settle and close its affairs,
to dispose of and, convey its property in the manner hereinafter
provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even where it
may be found impossible within the 3 year period to reduce disputed
claims to judgment, nonetheless, "suits by or against a corporation abate
when it ceases to be an entity capable of suing or being sued" (Fisher,
The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris
Secundum likewise is authority for the statement that "[t]he dissolution
of a corporation ends its existence so that there must be statutory
authority for prolongation of its life even for purposes of pending
litigation"9 and that suit "cannot be continued or revived; nor can a valid
judgment be rendered therein, and a judgment, if rendered, is not only
erroneous, but void and subject to collateral attack." 10 So it is, that
abatement of pending actions follows as a matter of course upon the
expiration of the legal period for liquidation, 11 unless the statute merely
requires a commencement of suit within the added time. 12 For, the court
cannot extend the time alloted by statute. 13

We, however, express the view that the executive order abolishing
NACOCO and creating the Board of Liquidators should be examined in
context. The proviso in Section 1 of Executive Order 372, whereby the
corporate existence of NACOCO was continued for a period of three years
from the effectivity of the order for "the purpose of prosecuting and
defending suits by or against it and of enabling the Board of Liquidators
gradually to settle and close its affairs, to dispose of and convey its
property in the manner hereinafter provided", is to be read not as an
isolated provision but in conjunction with the whole. So reading, it will be
readily observed that no time limit has been tacked to the existence of
the Board of Liquidators and its function of closing the affairs of the
various government owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the
various corporations were abolished, their powers and functions and
duties under existing laws were to be assumed and exercised by the
Board of Liquidators. The President thought it best to do away with the
boards of directors of the defunct corporations; at the same time,
however, the President had chosen to see to it that the Board of
Liquidators step into the vacuum. And nowhere in the executive order
was there any mention of the lifespan of the Board of Liquidators. A
glance at the other provisions of the executive order buttresses our
conclusion. Thus, liquidation by the Board of Liquidators may, under
section 1, proceed in accordance with law, the provisions of the executive
order, "and/or in such manner as the President of the Philippines may
direct." By Section 4, when any property, fund, or project is transferred to
any governmental instrumentality "for administration or continuance of
any project," the necessary funds therefor shall be taken from the
corresponding special fund created in Section 5. Section 5, in turn, talks
of special funds established from the "net proceeds of the liquidation" of
the various corporations abolished. And by Section, 7, fifty per centum of
the fees collected from the copra standardization and inspection service
shall accrue "to the special fund created in section 5 hereof for the
rehabilitation and development of the coconut industry." Implicit in all
these, is that the term of life of the Board of Liquidators is without time
limit. Contemporary history gives us the fact that the Board of Liquidators
still exists as an office with officials and numerous employees continuing
the job of liquidation and prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to
the final determination of the present case is without jurisprudential
support. The first judicial test before this Court is National Abaca and
Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case,
the corporation, already dissolved, commenced suit within the three-year
extended period for liquidation. That suit was for recovery of money
advanced to defendant for the purchase of hemp in behalf of the

corporation. She failed to account for that money. Defendant moved to


dismiss, questioned the corporation's capacity to sue. The lower court
ordered plaintiff to include as co-party plaintiff, The Board of Liquidators,
to which the corporation's liquidation was entrusted by Executive
Order 372. Plaintiff failed to effect inclusion. The lower court dismissed
the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in
that its counsel prepared the amended complaint, as directed, and
instructed the board's incoming and outgoing correspondence clerk, Mrs.
Receda Vda. de Ocampo, to mail the original thereof to the court and a
copy of the same to defendant's counsel. She mailed the copy to the
latter but failed to send the original to the court. This motion was rejected
below. Plaintiff came to this Court on appeal. We there said that "the rule
appears to be well settled that, in the absence of statutory provision to
the contrary, pending actions by or against a corporation are abated
upon expiration of the period allowed by law for the liquidation of its
affairs." We there said that "[o]ur Corporation Law contains no provision
authorizing a corporation, after three (3) years from the expiration of its
lifetime, to continue in its corporate name actions instituted by it within
said period of three (3) years." 14 However, these precepts
notwithstanding, we, in effect, held in that case that the Board of
Liquidators escapes from the operation thereof for the reason that
"[o]bviously, the complete loss of plaintiff's corporate existence after the
expiration of the period of three (3) years for the settlement of its affairs
is what impelled the President to create a Board of Liquidators, to
continue the management of such matters as may then be
pending."15 We accordingly directed the record of said case to be returned
to the lower court, with instructions to admit plaintiff's amended
complaint to include, as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder, abolished
NACOCO, and placed its assets in the hands of the Board of Liquidators.
The Board of Liquidators thus became the trustee on behalf of the
government. It was an express trust. The legal interest became vested in
the trustee the Board of Liquidators. The beneficial
interest remained with the sole stockholder the government. At no
time had the government withdrawn the property, or the authority to
continue the present suit, from the Board of Liquidators. If for this reason
alone, we cannot stay the hand of the Board of Liquidators from
prosecuting this case to its final conclusion. 16 The provisions of Section
78 of the Corporation Law the third method of winding up corporate
affairs find application.
We, accordingly, rule that the Board of Liquidators has personality to
proceed as: party-plaintiff in this case.

2. Defendants' second poser is that the action is unenforceable against


the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was
overruled, and in their nineteenth special defense, that plaintiff's action is
personal to the deceased Maximo M. Kalaw, and may not be deemed to
have survived after his death.18 They say that the controlling statute is
Section 5, Rule 87, of the 1940 Rules of Court.19 which provides that "[a]ll
claims for money against the decedent, arising from contract, express or
implied", must be filed in the estate proceedings of the deceased. We
disagree.
The suit here revolves around the alleged negligent acts of Kalaw for
having entered into the questioned contracts without prior approval of
the board of directors, to the damage and prejudice of plaintiff; and is
against Kalaw and the other directors for having subsequently approved
the said contracts in bad faith and/or breach of trust." Clearly then, the
present case is not a mere action for the recovery of money nor a claim
for money arising from contract. The suit involves alleged tortious acts.
And the action is embraced in suits filed "to recover damages for an
injury to person or property, real or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L18107, August 30, 1962. There, plaintiffs sought to recover damages
from defendant Llemos. The complaint averred that Llemos had served
plaintiff by registered mail with a copy of a petition for a writ of
possession in Civil Case 4824 of the Court of First Instance at Catbalogan,
Samar, with notice that the same would be submitted to the Samar court
on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice
served, plaintiffs proceeded to the said court of Samar from their
residence in Manila accompanied by their lawyers, only to discover that
no such petition had been filed; and that defendant Llemos maliciously
failed to appear in court, so that plaintiffs' expenditure and trouble turned
out to be in vain, causing them mental anguish and undue
embarrassment. Defendant died before he could answer the complaint.
Upon leave of court, plaintiffs amended their complaint to include the
heirs of the deceased. The heirs moved to dismiss. The court dismissed
the complaint on the ground that the legal representative, and not the
heirs, should have been made the party defendant; and that, anyway, the
action being for recovery of money, testate or intestate proceedings
should be initiated and the claim filed therein. This Court, thru Mr. Justice
Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that contrasting the
correlated provisions of the Rules of Court, those concerning

claims that are barred if not filed in the estate settlement


proceedings (Rule 87, sec. 5) and those defining actions that
survive and may be prosecuted against the executor or
administrator (Rule 88, sec. 1), it is apparent that actions for
damages caused by tortious conduct of a defendant (as in the
case at bar) survive the death of the latter. Under Rule 87,
section 5, the actions that are abated by death are: (1) claims for
funeral expenses and those for the last sickness of the decedent;
(2) judgments for money; and (3) "all claims for money against
the decedent, arising from contract express or implied." None of
these includes that of the plaintiffs-appellants; for it is not
enough that the claim against the deceased party be for money,
but it must arise from "contract express or implied", and these
words (also used by the Rules in connection with attachments
and derived from the common law) were construed in Leung Ben
vs. O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal obligations other than
those which have their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that
survive against a decedent's executors or administrators, and
they are: (1) actions to recover real and personal property from
the estate; (2) actions to enforce a lien thereon; and (3) actions
to recover damages for an injury to person or property. The
present suit is one for damages under the last class, it having
been held that "injury to property" is not limited to injuries to
specific property, but extends to other wrongs by which personal
estate is injured or diminished (Baker vs. Crandall, 47 Am. Rep.
126; also 171 A.L.R., 1395). To maliciously cause a party to incur
unnecessary expenses, as charged in this case, is certainly injury
to that party's property (Javier vs. Araneta, L-4369, Aug. 31,
1953).
The ruling in the preceding case was hammered out of facts comparable
to those of the present. No cogent reason exists why we should break
away from the views just expressed. And, the conclusion remains: Action
against the Kalaw heirs and, for the matter, against the Estate of
Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the
controversy.
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw
justifiedly entered into the controverted contracts without the prior

approval of the corporation's directorate. Plaintiff leans heavily on


NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as
amongst the duties of the general manager, the obligation: "(b) To
perform or execute on behalf of the Corporation upon prior approval of
the Board, all contracts necessary and essential to the proper
accomplishment for which the Corporation was organized."
Not of de minimis importance in a proper approach to the problem at
hand, is the nature of a general manager's position in the corporate
structure. A rule that has gained acceptance through the years is that a
corporate officer "intrusted with the general management and control of
its business, has implied authority to make any contract or do any other
act which is necessary or appropriate to the conduct of the ordinary
business of the corporation. 21As such officer, "he may, without any
special authority from the Board of Directors perform all acts of an
ordinary nature, which by usage or necessity are incident to his office,
and may bind the corporation by contracts in matters arising in the usual
course of business. 22
The problem, therefore, is whether the case at bar is to be taken out of
the general concept of the powers of a general manager, given the cited
provision of the NACOCO by-laws requiring prior directorate approval of
NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express
articulation. Ordinary in this enterprise are copra sales for future delivery.
The movement of the market requires that sales agreements be entered
into, even though the goods are not yet in the hands of the seller. Known
in business parlance as forward sales, it is concededly the practice of the
trade. A certain amount of speculation is inherent in the undertaking.
NACOCO was much more conservative than the exporters with big
capital. This short-selling was inevitable at the time in the light of other
factors such as availability of vessels, the quantity required before being
accepted for loading, the labor needed to prepare and sack the copra for
market. To NACOCO, forward sales were a necessity. Copra could not stay
long in its hands; it would lose weight, its value decrease. Above all,
NACOCO's limited funds necessitated a quick turnover. Copra contracts
then had to be executed on short notice at times within twenty-four
hours. To be appreciated then is the difficulty of calling a formal meeting
of the board.
Such were the environmental circumstances when Kalaw went into copra
trading.

Long before the disputed contracts came into being, Kalaw contracted
by himself alone as general manager for forward sales of copra. For
the fiscal year ending June 30, 1947, Kalaw signed some 60 such
contracts for the sale of copra to divers parties. During that period, from
those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So
pleased was NACOCO's board of directors that, on December 5, 1946, in
Kalaw's absence, it voted to grant him a special bonus "in recognition of
the signal achievement rendered by him in putting the Corporation's
business on a self-sufficient basis within a few months after assuming
office, despite numerous handicaps and difficulties."
These previous contract it should be stressed, were signed by
Kalaw without prior authority from the board. Said contracts were known
all along to the board members. Nothing was said by them. The aforesaid
contracts stand to prove one thing: Obviously, NACOCO board met the
difficulties attendant to forward sales by leaving the adoption of means to
end, to the sound discretion of NACOCO's general manager Maximo M.
Kalaw.
Liberally spread on the record are instances of contracts executed by
NACOCO's general manager and submitted to the board after their
consummation, not before. These agreements were not Kalaw's alone.
One at least was executed by a predecessor way back in 1940, soon after
NACOCO was chartered. It was a contract of lease executed on November
16, 1940 by the then general manager and board chairman, Maximo
Rodriguez, and A. Soriano y Cia., for the lease of a space in Soriano
Building On November 14, 1946, NACOCO, thru its general manager
Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru
Sebastian Palanca. On December 22, 1947, when the controversy over
the present contract cropped up, the board voted to approve a lease
contract previously executed between Kalaw and Fidel Isberto and
Ulpiana Isberto covering a warehouse of the latter. On the same date, the
board gave its nod to a contract for renewal of the services of Dr. Manuel
L. Roxas. In fact, also on that date, the board requested Kalaw to report
for action all copra contracts signed by him "at the meeting immediately
following the signing of the contracts." This practice was observed in a
later instance when, on January 7, 1948, the board approved two
previous contracts for the sale of 1,000 tons of copra each to a certain
"SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the
brokerage commission of 2% of Smith, Bell and Co., Ltd., in the sale of
4,300 long tons of copra to the French Government. Such ratification was
necessary because, as stated by Kalaw in that same meeting, "under an
existing resolution he is authorized to give a brokerage fee of only 1% on
sales of copra made through brokers." On January 15, 1947, the

brokerage fee agreements of 1-1/2% on three export contracts, and 2%


on three others, for the sale of copra were approved by the board with a
proviso authorizing the general manager to pay a commission up to the
amount of 1-1/2% "without further action by the Board." On February 5,
1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000
tons of copra was favorably acted upon by the board. On March 19, 1947,
a 2% brokerage commission was similarly approved by the board for
Pacific Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee
agreements were passed upon by the board,not the sales contracts
themselves. And even those fee agreements were submitted only when
the commission exceeded the ceiling fixed by the board.
Knowledge by the board is also discernible from other recorded
instances.1wph1.t
When the board met on May 10, 1947, the directors discussed the copra
situation: There was a slow downward trend but belief was entertained
that the nadir might have already been reached and an improvement in
prices was expected. In view thereof, Kalaw informed the board that "he
intends to wait until he has signed contracts to sell before starting to buy
copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra price
conditions then current: The copra market appeared to have become
fairly steady; it was not expected that copra prices would again rise very
high as in the unprecedented boom during January-April, 1947; the prices
seemed to oscillate between $140 to $150 per ton; a radical rise or
decrease was not indicated by the trends. Kalaw continued to say that
"the Corporation has been closing contracts for the sale of
copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same board
meeting of July 29, 1947:
521. In connection with the buying and selling of copra the Board
inquired whether it is the practice of the management to close
contracts of sale first before buying. The General Manager replied
that this practice is generally followed but that it is not always
possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires
that it should not cease buying even when it does not have actual

contracts of sale since the suspension of buying by the Nacoco


will result in middlemen taking advantage of the temporary
inactivity of the Corporation to lower the prices to the detriment
of the producers.

4. But if more were required, we need but turn to the board's ratification
of the contracts in dispute on January 30, 1948, though it is our (and the
lower court's) belief that ratification here is nothing more than a mere
formality.

(2) The movement of the market is such that it may not be


practical always to wait for the consummation of contracts of sale
before beginning to buy copra.

Authorities, great in number, are one in the idea that "ratification by a


corporation of an unauthorized act or contract by its officers or others
relates back to the time of the act or contract ratified, and is equivalent
to original authority;" and that " [t]he corporation and the other party to
the transaction are in precisely the same position as if the act or contract
had been authorized at the time." 30 The language of one case is
expressive: "The adoption or ratification of a contract by a corporation is
nothing more or less than the making of an original contract. The theory
of corporate ratification is predicated on the right of a corporation to
contract, and any ratification or adoption is equivalent to a grant of prior
authority." 31

The General Manager explained that in this connection a certain


amount of speculation is unavoidable. However, he said that the
Nacoco is much more conservative than the other big exporters
in this respect.25
Settled jurisprudence has it that where similar acts have been approved
by the directors as a matter of general practice, custom, and policy, the
general manager may bind the company without formal authorization of
the board of directors. 26 In varying language, existence of such authority
is established, by proof of the course of business, the usage and
practices of the company and by the knowledge which the board of
directors has, or must bepresumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. 27 So also,
x x x authority to act for and bind a corporation may be
presumed from acts of recognition in other instances where the
power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a corporation,
an officer has been allowed in his official capacity to manage its
affairs, his authority to represent the corporation may be implied
from the manner in which he has been permitted by the directors
to manage its business.29
In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra trading
activities for and in NACOCO's behalf without prior board approval. If the
by-laws were to be literally followed, the board should give its stamp of
prior approval on all corporate contracts. But that board itself, by its acts
and through acquiescence, practically laid aside the by-law requirement
of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate
acts.

Indeed, our law pronounces that "[r]atification cleanses the contract from
all its defects from the moment it was constituted." 32 By corporate
confirmation, the contracts executed by Kalaw are thus purged of
whatever vice or defect they may have. 33
In sum, a case is here presented whereunder, even in the face of an
express by-law requirement of prior approval, the law on corporations is
not to be held so rigid and inflexible as to fail to recognize equitable
considerations. And, the conclusion inevitably is that the embattled
contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms
of "bad faith and/or breach of trust" in the board's ratification of the
contracts without prior approval of the board. For, in reality, all that we
have on the government's side of the scale is that the board knew that
the contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the
contracts without need of prior approval. Everybody, including Kalaw
himself, thought so, and for a long time. Doubts were first thrown on the
way only when the contracts turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong; it means breach of a known duty
thru some motive or interest or ill will; it partakes of the nature of
fraud.34 Applying this precept to the given facts herein, we find that there
was no "dishonest purpose," or "some moral obliquity," or "conscious

doing of wrong," or "breach of a known duty," or "Some motive or interest


or ill will" that "partakes of the nature of fraud."

who lost money in the trade."


usual business risk.

Nor was it even intimated here that the NACOCO directors acted for
personal reasons, or to serve their own private interests, or to pocket
money at the expense of the corporation. 35 We have had occasion to
affirm that bad faith contemplates a "state of mind affirmatively
operating with furtive design or with some motive of self-interest or ill will
or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149,
35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in
Spering's App., 71 Pa. 11), the following: "Upon a close examination of all
the reported cases, although there are many dicta not easily reconcilable,
yet I have found no judgment or decree which has held directors to
account, except when they have themselves been personally guilty of
some fraud on the corporation, or have known and connived at some
fraud in others, or where such fraud might have been prevented had they
given ordinary attention to their duties. . . ." Plaintiff did not even dare
charge its defendant-directors with any of these malevolent acts.

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits
filed by Louis Dreyfus & Co. by pleading in its answers force majeure as
an affirmative defense and there vehemently asserted that "as a result of
the said typhoons, extensive damage was caused to the coconut trees in
the copra producing regions of the Philippines and according to estimates
of competent authorities, it will take about one year until the coconut
producing regions will be able to produce their normal coconut yield and
it will take some time until the price of copra will reach normal levels;"
and that "it had never been the intention of the contracting parties in
entering into the contract in question that, in the event of a sharp rise in
the price of copra in the Philippine market produce by force majeureor by
caused beyond defendant's control, the defendant should buy the copra
contracted for at exorbitant prices far beyond the buying price of the
plaintiff under the contract." 40

Obviously, the board thought that to jettison Kalaw's contracts would


contravene basic dictates of fairness. They did not think of raising their
voice in protest against past contracts which brought in enormous profits
to the corporation. By the same token, fair dealing disagrees with the
idea that similar contracts, when unprofitable, should not merit the same
treatment. Profit or loss resulting from business ventures is no
justification for turning one's back on contracts entered into. The truth,
then, of the matter is that in the words of the trial court the
ratification of the contracts was "an act of simple justice and fairness to
the general manager and the best interest of the corporation whose
prestige would have been seriously impaired by a rejection by the board
of those contracts which proved disadvantageous." 37
The directors are not liable."

38

39

NACOCO was not immune from such

A high regard for formal judicial admissions made in court pleadings


would suffice to deter us from permitting plaintiff to stray away
therefrom, to charge now that the damage suffered was because of
Kalaw's negligence, or for that matter, by reason of the board's
ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease,
met its contractual obligations. Stock accessibility was no problem.
NACOCO had 90 buying agencies spread throughout the islands. It could
purchase 2,000 tons of copra a day. The various contracts involved
delivery of but 16,500 tons over a five-month period. Despite the
typhoons, NACOCO was still able to deliver a little short of 50% of the
tonnage required under the contracts.

6. To what then may we trace the damage suffered by NACOCO.

As the trial court correctly observed, this is a case of damnum absque


injuria. Conjunction of damage and wrong is here absent. There cannot
be an actionable wrong if either one or the other is wanting. 43

The facts yield the answer. Four typhoons wreaked havoc then on our
copra-producing regions. Result: Copra production was impaired, prices
spiralled, warehouses destroyed. Quick turnovers could not be expected.
NACOCO was not alone in this misfortune. The record discloses that
private traders, old, experienced, with bigger facilities, were not spared;
also suffered tremendous losses. Roughly estimated, eleven principal
trading concerns did run losses to about P10,300,000.00. Plaintiff's
witness Sisenando Barretto, head of the copra marketing department of
NACOCO, observed that from late 1947 to early 1948 "there were many

7. On top of all these, is that no assertion is made and no proof is


presented which would link Kalaw's acts ratified by the board to a
matrix for defraudation of the government. Kalaw is clear of the stigma of
bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along
thought that he had authority to enter into the contracts, that he did so in
the best interests of the corporation; that he entered into the contracts in
pursuance of an overall policy to stabilize prices, to free the producers
from the clutches of the middlemen. The prices for which NACOCO
contracted in the disputed agreements, were at a level calculated to

produce profits and higher than those prevailing in the local market.
Plaintiff's witness, Barretto, categorically stated that "it would be foolish
to think that one would sign (a) contract when you are going to lose
money" and that no contract was executed "at a price unsafe for the
Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO
envisioned a profit of around P752,440.00. 46

questions of policy of management are left solely to the honest decision


of officers and directors of a corporation, and the court is without
authority to substitute its judgment for the judgment of the board of
directors; the board is the business manager of the corporation,
and solong as it acts in good faith its orders are not reviewable by the
courts." (Fletcher on Corporations, Vol. 2, p. 390.)48

Kalaw's acts were not the result of haphazard decisions either. Kalaw
invariably consulted with NACOCO's Chief Buyer, Sisenando Barretto, or
the Assistant General Manager. The dailies and quotations from abroad
were guideposts to him.

Kalaw's good faith, and that of the other directors, clinch the case for
defendants. 49

Of course, Kalaw could not have been an insurer of profits. He could not
be expected to predict the coming of unpredictable typhoons. And even
as typhoons supervened Kalaw was not remissed in his duty. He exerted
efforts to stave off losses. He asked the Philippine National Bank to
implement its commitment to extend a P400,000.00 loan. The bank did
not release the loan, not even the sum of P200,000.00, which, in October,
1947, was approved by the bank's board of directors. In frustration, on
December 12, 1947, Kalaw turned to the President, complained about the
bank's short-sighted policy. In the end, nothing came out of the
negotiations with the bank. NACOCO eventually faltered in its contractual
obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as
simple negligence, would seem to be supported by the fact that even as
the contracts were being questioned in Congress and in the NACOCO
board itself, President Roxas defended the actuations of Kalaw. On
December 27, 1947, President Roxas expressed his desire "that the Board
of Directors should reelect Hon. Maximo M. Kalaw as General Manager of
the National Coconut Corporation." 47 And, on January 7, 1948, at a time
when the contracts had already been openly disputed, the board, at its
regular meeting, appointed Maximo M. Kalaw as acting general manager
of the corporation.
Well may we profit from the following passage from Montelibano vs.
Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962:
"They (the directors) hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they cannot
be controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss
during a business depression, or closed down at a smaller loss, is a purely
business and economic problem to be determined by the directors of the
corporation, and not by the court. It is a well known rule of law that

Viewed in the light of the entire record, the judgment under review must
be, as it is hereby, affirmed.
Without costs. So ordered.

G.R. No. L-15092

May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,


vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of
Occidental Negros, in its Civil Case No. 2603, dismissing plaintiff's
complaint that sought to compel the defendant Milling Company to
increase plaintiff's share in the sugar produced from their cane, from 60%
to 62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro
Montelibano, and the Limited co-partnership Gonzaga and Company, had
been and are sugar planters adhered to the defendant-appellee's sugar
central mill under identical milling contracts. Originally executed in 1919,
said contracts were stipulated to be in force for 30 years starting with the
1920-21 crop, and provided that the resulting product should be divided
in the ratio of 45% for the mill and 55% for the planters. Sometime in
1936, it was proposed to execute amended milling contracts, increasing
the planters' share to 60% of the manufactured sugar and resulting
molasses, besides other concessions, but extending the operation of the
milling contract from the original 30 years to 45 years. To this effect, a

printed Amended Milling Contract form was drawn up. On August 20,
1936, the Board of Directors of the appellee Bacolod-Murcia Milling Co.,
Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1) granting further
concessions to the planters over and above those contained in the
printed Amended Milling Contract. The bone of contention is paragraph 9
of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

xxx

xxx

Acuerdo No. 1. Previa mocion debidamente secundada,


la Junta en consideracion a una peticion de los
plantadores hecha por un comite nombrado por los
mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx

xxx

xxx

9.a Que si durante la vigencia de este contrato de


Molienda Enmendado, lascentrales azucareras, de Negros
Occidental, cuya produccion anual de azucar
centrifugado sea mas de una tercera parte de la
produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores
mejores condiciones que la estipuladas en el presente
contrato, entonces esas mejores condiciones se
concederan y por el presente se entenderan concedidas a
los platadores que hayan otorgado este Contrato de
Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on
September 10, 1936, but a copy of the resolution of August 10, 1936,
signed by the Central's General Manager, was not attached to the printed
contract until April 17, 1937; with the notation
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por y la Bacolod-Murcia Milling
Co., Inc.
In 1953, the appellants initiated the present action, contending that three
Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos),

with a total annual production exceeding one-third of the production of all


the sugar central mills in the province, had already granted increased
participation (of 62.5%) to their planters, and that under paragraph 9 of
the resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs
(appellants herein). The appellee Bacolod-Murcia Milling Co., inc., resisted
the claim, and defended by urging that the stipulations contained in the
resolution were made without consideration; that the resolution in
question was, therefore, null and void ab initio, being in effect a donation
that was ultra vires and beyond the powers of the corporate directors to
adopt.
After trial, the court below rendered judgment upholding the stand of the
defendant Milling company, and dismissed the complaint. Thereupon,
plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It
must be remembered that the controverted resolution was adopted by
appellee corporation as a supplement to, or further amendment of, the
proposed milling contract, and that it was approved on August 20, 1936,
twenty-one days prior to the signing by appellants on September 10, of
the Amended Milling Contract itself; so that when the Milling Contract
was executed, the concessions granted by the disputed resolution had
been already incorporated into its terms. No reason appears of record
why, in the face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended milling
contract, specially taking into account that appellant Alfredo Montelibano
was, at the time, the President of the Planters Association (Exhibit 4, p.
11) that had agitated for the concessions embodied in the resolution of
August 20, 1936. That the resolution formed an integral part of the
amended milling contract, signed on September 10, and not a separate
bargain, is further shown by the fact that a copy of the resolution was
simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of
August 20, 1936 were supported by the same causa or consideration
underlying the main amended milling contract; i.e., the promises and
obligations undertaken thereunder by the planters, and, particularly, the
extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the
conclusion of the court below that the resolution constituted gratuitous
concessions not supported by any consideration is legally untenable.

All disquisition concerning donations and the lack of power of the


directors of the respondent sugar milling company to make a gift to the
planters would be relevant if the resolution in question had embodied a
separate agreement after the appellants had already bound themselves
to the terms of the printed milling contract. But this was not the case.
When the resolution was adopted and the additional concessions were
made by the company, the appellants were not yet obligated by the
terms of the printed contract, since they admittedly did not sign it until
twenty-one days later, on September 10, 1936. Before that date, the
printed form was no more than a proposal that either party could modify
at its pleasure, and the appellee actually modified it by adopting the
resolution in question. So that by September 10, 1936 defendant
corporation already understood that the printed terms were not
controlling, save as modified by its resolution of August 20, 1936; and we
are satisfied that such was also the understanding of appellants herein,
and that the minds of the parties met upon that basis. Otherwise there
would have been no consent or "meeting of the minds", and no binding
contract at all. But the conduct of the parties indicates that they
assumed, and they do not now deny, that the signing of the contract on
September 10, 1936, did give rise to a binding agreement. That
agreement had to exist on the basis of the printed terms as modified by
the resolution of August 20, 1936, or not at all. Since there is no rational
explanation for the company's assenting to the further concessions asked
by the planters before the contracts were signed, except as further
inducement for the planters to agree to the extension of the contract
period, to allow the company now to retract such concessions would be
to sanction a fraud upon the planters who relied on such additional
stipulations.
The same considerations apply to the "void innovation" theory of
appellees. There can be no novation unless two distinct and successive
binding contracts take place, with the later designed to replace the
preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20,
1936 was not attached to the printed contract until April 17, 1937. But,
except in the case of statutory forms or solemn agreements (and it is not
claimed that this is one), it is the assent and concurrence (the "meeting
of the minds") of the parties, and not the setting down of its terms, that
constitutes a binding contract. And the fact that the addendum is only
signed by the General Manager of the milling company emphasizes that
the addition was made solely in order that the memorial of the terms of
the agreement should be full and complete.

Much is made of the circumstance that the report submitted by the Board
of Directors of the appellee company in November 19, 1936 (Exhibit 4)
only made mention of 90%, the planters having agreed to the 60-40
sharing of the sugar set forth in the printed "amended milling contracts",
and did not make any reference at all to the terms of the resolution of
August 20, 1936. But a reading of this report shows that it was not
intended to inventory all the details of the amended contract; numerous
provisions of the printed terms are alao glossed over. The Directors of the
appellee Milling Company had no reason at the time to call attention to
the provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major change
was paragraph 9 heretofore quoted; but when the report was made, that
paragraph was not yet in effect, since it was conditioned on other
centrals granting better concessions to their planters, and that did not
happen until after 1950. There was no reason in 1936 to emphasize a
concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other
contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of
the act to the corporate purpose expressed in the charter. If that
act is one which is lawful in itself, and not otherwise prohibited, is
done for the purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a substantial, and not
in a remote and fanciful sense, it may fairly be considered within
charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6,
Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no authority to review
them.
They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing
they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation
should be operated at a loss during depression, or close down at

a smaller loss, is a purely business and economic problem to be


determined by the directors of the corporation and not by the
court. It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the
business manager of the corporation, and so long as it acts in
good faith its orders are not reviewable by the courts. (Fletcher
on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La
Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which produce
over one-third of the entire annual sugar production in Occidental
Negros) have granted progressively increasing participations to their
adhered planter at an average rate of
62.333
%

for the 1951-52 crop


year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

4.3% for the 1953-1954 crop year;


4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the
time they were withheld; and the right is reserved to plaintiffs-appellants
to sue for such additional increases as they may be entitled to for the
crop years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

[G.R. No. 125469. October 27, 1997]

PHILIPPINE
STOCK
EXCHANGE,
INC., petitioner,
vs. THE
HONORABLE COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO AZUL LAND,
INC., respondents.
DECISION

the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and
judgment is decreed sentencing the defendant-appellee to pay plaintiffsappellants the differential or increase of participation in the milled sugar
in accordance with paragraph 9 of the appellee Resolution of August 20,
1936, over and in addition to the 60% expressed in the printed Amended
Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year,
said appellants having received an additional 2% corresponding
to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
and to all appellants thereafter
4.2% for the 1952-1953 crop year;

TORRES, JR., J.:


The Securities and Exchange Commission is the government agency,
under the direct general supervision of the Office of the President, [1] with
the immense task of enforcing the Revised Securities Act, and all other
duties assigned to it by pertinent laws. Among its inumerable functions,
and one of the most important, is the supervision of all corporations,
partnerships or associations, who are grantees or primary franchise
and/or a license or permit issued by the government to operate in the
Philippines.[2] Just how far this regulatory authority extends, particularly,
with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue
in the case at bar.
In this Petition for Review of Certiorari, petitioner assails the
resolution of the respondent Court of Appeals, dated June 27, 1996, which
affirmed the decision of the Securities and Exchange Commission
ordering the petitioner Philippine Stock Exchange, Inc. to allow the
private respondent Puerto Azul Land, Inc. to be listed in its stock market,
thus paving the way for the public offering of PALIs shares.

The facts of the case are undisputed, and are hereby restated in
sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation,
had sought to offer its shares to the public in order to raise funds
allegedly to develop its properties and pay its loans with several banking
institutions. In January, 1995, PALI was issued a Permit to Sell its shares
to the public by the Securities and Exchange Commission (SEC). To
facilitate the trading of its shares among investors, PALI sought to course
the trading of its shares through the Philippine Stock Exchange, Inc.
(PSE), for which purpose it filed with the said stock exchange an
application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a
perusal of PALIs application, recommended to the PSEs Board of
Governors the approval of PALIs listing application.
On February 14, 1996, before it could act upon PALIs application,
the Board of Governors of PSE received a letter from the heirs of
Ferdinand E. Marcos, claiming that the late President Marcos was the
legal and beneficial owner of certain properties forming part of the Puerto
Azul Beach Hotel and Resort Complex which PALI claims to be among its
assets and that the Ternate Development Corporation, which is among
the stockholders of PALI, likewise appears to have been held and continue
to be held in trust by one Rebecco Panlilio for then President Marcos and
now, effectively for his estate, and requested PALIs application to be
deferred. PALI was requested to comment upon the said letter.
PALIs answer stated that the properties forming part of Puerto Azul
Beach Hotel and Resort Complex were not claimed by PALI as its
assets. On the contrary, the resort is actually owned by Fantasia Filipina
Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI.
Furthermore, the Ternate Development Corporation owns only 1.20% of
PALI. The Marcoses responded that their claim is not confined to the
facilities forming part of the Puerto Azul Hotel and Resort Complex,
thereby implying that they are also asserting legal and beneficial
ownership of other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol
Gunigundo of the Presidential Commission on Good Government (PCGG)
requesting for comments on the letter of the PALI and the Marcoses. On
March 4, 1996, the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining the Marcoses
from, among others, further impeding, obstructing, delaying or
interfering in any manner by or any means with the consideration,
processing and approval by the PSE of the initial public offering of PALI.
The TRO was issued by Judge Martin S. Villarama, Executive Judge of the
RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of


Governors of the PSE reached its decision to reject PALIs application,
citing the existence of serious claims, issues and circumstances
surrounding PALIs ownership over its assets that adversely affect the
suitability of listing PALIs shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the
then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SECs
attention the action taken by the PSE in the application of PALI for the
listing of its shares with the PSE, and requesting that the SEC, in the
exercise of its supervisory and regulatory powers over stock exchanges
under Section 6(j) of P.D. No. 902-A, review the PSEs action on PALIs
listing application and institute such measures as are just and proper and
under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE,
attaching thereto the letter of PALI and directing the PSE to file its
comments thereto within five days from its receipt and for its authorized
representative to appear for an inquiry on the matter. On April 22,
1996, the PSE submitted a letter to the SEC containing its comments to
the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSEs
decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioners
authority and jurisdiction under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of the Presidential Decree No.
902-A, the decision of the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby
set aside, and the PSE is hereby ordered to immediately cause the listing
of the PALI shares in the Exchange, without prejudice to its authority to
require PALI to disclose such other material information it deems
necessary for the protection of the investing public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29,
1996, which was, however denied by the Commission in its May 9, 1996
Order which states:
WHEREFORE, premises considered, the Commission finds no compelling
reason to consider its order dated April 24, 1996, and in the light of
recent developments on the adverse claim against the PALI properties,

PSE should require PALI to submit full disclosure of material facts and
information to protect the investing public. In this regard, PALI is hereby
ordered to amend its registration statements filed with the Commission
to incorporate the full disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals
on May 17, 1996 a Petition for Review (with application for Writ of
Preliminary Injunction and Temporary Restraining Order), assailing the
above mentioned orders of the SEC, submitting the following as errors of
the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT
POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER
TO ORDER THE LISTING AND SALE OF SHARES OF PALI
WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY
AND ABUSIVE MANNER IN DISAPPROVING PALIS LISTING
APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR
ALLOWING
FURTHER
DISPOSITION
OF
PROPERTIES
IN CUSTODIA
LEGIS AND
WHICH
FORM
PART
OF
NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY
PROMULGATED
AND
ITS
IMPLEMENTATION
AND
APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS
CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review
and subsequently, a Comment and Motion to Dismiss. On June 10, 1996,
PSE filed its Reply to Comment and Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution
dismissing the PSEs Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and
authority to look into the decision of the petitioner PSE, pursuant to
Section 3[3] of the Revised Securities Act in relation to Section 6(j) and
6(m)[4] of P.D. No. 902-A, and Section 38(b) [5] of the Revised Securities
Act, and for the purpose of ensuring fair administration of the exchange.
Both as a corporation and as a stock exchange, the petitioner is subject
to public respondents jurisdiction, regulation and control. Accepting the
argument that the public respondent has the authority merely to
supervise or regulate, would amount to serious consequences,

considering that the petitioner is a stock exchange whose business is


impressed with public interest. Abuse is not remote if the public
respondent is left without any system of control. If the securities act
vested the public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock
exchanges; the right to supervise and regulate the same; and the power
to alter and supplement rules of the exchange in the listing or delisting of
securities, then the law certainly granted to the public respondent the
plenary authority over the petitioner; and the power of review necessarily
comes within its authority.
All in all, the court held that PALI complied with all the requirements
for public listing, affirming the SECs ruling to the effect that:
x x x the Philippine Stock Exchange has acted in an arbitrary and
abusive manner in disapproving the application of PALI for listing of its
shares in the face of the following considerations:
1.
PALI has clearly and admittedly complied with the Listing Rules
and full disclosure requirements of the Exchange;
2.
In applying its clear and reasonable standards on the suitability
for listing of shares, PSE has failed to justify why it acted differently on
the application of PALI, as compared to the IPOs of other companies
similarly that were allowed listing in the Exchange;
3.
It appears that the claims and issues on the title to PALIs
properties were even less serious than the claims against the assets of
the other companies in that, the assertions of the Marcoses that they are
owners of the disputed properties were not substantiated enough to
overcome the strength of a title to properties issued under the Torrens
System as evidence of ownership thereof;
4.
No action has been filed in any court of competent jurisdiction
seeking to nullify PALIs ownership over the disputed properties, neither
has the government instituted recovery proceedings against these
properties. Yet the import of PSEs decision in denying PALIs application
is that it would be PALI, not the Marcoses, that must go to court to prove
the legality of its ownership on these properties before its shares can be
listed.
In addition, the argument that the PALI properties belong to the
Military/Naval Reservation does not inspire belief. The point is, the PALI
properties are now titled. A property losses its public character the
moment it is covered by a title. As a matter of fact, the titles have long

been settled by a final judgment; and the final decree having been
registered, they can no longer be re-opened considering that the one
year period has already passed. Lastly, the determination of what
standard to apply in allowing PALIs application for listing, whether the
discretion method or the system of public disclosure adhered to by the
SEC, should be addressed to the Securities Commission, it being the
government agency that exercises both supervisory and regulatory
authority over all corporations.
On August 15, 1996, the PSE, after it was granted an extension, filed
an instant Petition for Review on Certiorari, taking exception to the
rulings of the SEC and the Court of Appeals. Respondent PALI filed its
Comment to the petition on October 17, 1996. On the same date, the
PCGG filed a Motion for Leave to file a Petition for Intervention. This was
followed up by the PCGGs Petition for Intervention on October 21,
1996. A supplemental Comment was filed by PALI on October 25,
1997. The Office of the Solicitor General, representing the SEC and the
Court of Appeals, likewise filed its Comment on December 26, 1996. In
answer to the PCGGs motion for leave to file petition for intervention,
PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed
its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the
comments of respondent PALI (October 17, 1996) and the Solicitor
General (December 26, 1996). On may 16, 1997, PALI filed its Rejoinder
to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC
had authority to order the PSE to list the shares of PALI in the stock
exchange. Under presidential decree No. 902-A, the powers of the SEC
over stock exchanges are more limited as compared to its authority over
ordinary corporations. In connection with this, the powers of the SEC
over stock exchanges under the Revised Securities Act are specifically
enumerated, and these do not include the power to reverse the decisions
of the stock exchange. Authorities are in abundance even in the United
States, from which the countrys security policies are patterned, to the
effect of giving the Securities Commission less control over stock
exchanges, which in turn are given more lee-way in making the decision
whether or not to allow corporations to offer their stock to the public
through the stock exchange. This is in accord with the business
judgment rule whereby the SEC and the courts are barred from intruding
into business judgments of corporations, when the same are made in
good faith. The said rule precludes the reversal of the decision of the PSE
to deny PALIs listing application, absent a showing a bad faith on the
part of the PSE. Under the listing rule of the PSE, to which PALI had
previously agreed to comply, the PSE retains the discretion to accept or
reject applications for listing. Thus, even if an issuer has complied with
the PSE listing rules and requirements, PSE retains the discretion to

accept or reject the issuers listing application if the PSE determines that
the listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over
sequestered corporations, nor with corporations whose properties are
under sequestration. A reading of Republic of the Philippines vs.
Sandiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the Ternate Development
Corporation (TDC) and the Monte del Sol Development Corporation
(MSDC), are under sequestration by the PCGG, and the subject of
forfeiture proceedings in the Sandiganbayan. This ruling of the Court is
the law of the case between the Republic and the TDC and MSDC. It
categorically declares that the assets of these corporations were
sequestered by the PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimidated that the Court of Appeals sanction that
PALIs ownership over its properties can no longer be questioned, since
certificates of title have been issued to PALI and more than one year has
since lapsed, is erroneous and ignores well settled jurisprudence on land
titles. That a certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute rule and admits
certain exceptions. It is fundamental that forest lands or military
reservations are non-alienable. Thus, when a title covers a forest reserve
or a government reservation, such title is void.
PSE, likewise, assails the SECs and the Court of Appeals reliance on
the alleged policy of full disclosure to uphold the listing of the PALIs
shares with the PSE, in the absence of a clear mandate for the effectivity
of such policy. As it is, the case records reveal the truth that PALI did not
comply with the listing rules and disclosure requirements. In fact, PALIs
documents supporting its application contained misrepresentations and
misleading statements, and concealed material information. The matter
of sequestration of PALIs properties and the fact that the same form part
of military/naval/forest reservations were not reflected in PALIs
application.
It is undeniable that the petitioner PSE is not an ordinary
corporation, in that although it is clothed with the marking of a corporate
entity, its functions as the primary channel through which the vessels of
capital trade ply. The PSEs relevance to the continued operation and
filtration of the securities transactions in the country gives it a distinct
color of importance such that government intervention in its affairs
becomes justified, if not necessary. Indeed, as the only operational stock
exchange in the country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the
countrys economy.

Due to this special nature of stock exchanges, the countrys


lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges. [6]
These provisions, read together with the general grant of
jurisdiction, and right of supervision and control over all corporations
under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be
vigilant in the supervision of the affairs of stock exchanges so that the
interests of the investing public may be fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone, is enough
authority to uphold the SECs challenged control authority over the
petitioner PSE even as it provides that 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 The SECs regulatory authority over private corporations
encompasses a wide margin of areas, touching nearly all of a
corporations concerns. This authority springs from the fact that a
corporation owes its existence to the concession of its corporate
franchise from the state.
The SECs power to look into the subject ruling of the PSE, therefore,
may be implied from or be considered as necessary or incidental to the
carrying out of the SECs express power to insure fair dealing in securities
traded upon a stock exchange or to ensure the fair administration of such
exchange.[7] It is, likewise, observed that the principal function of the SEC
is the supervision and control over corporations, partnerships and
associations with the end in view that investment in these entities may
be encouraged and protected, and their activities pursued for the
promotion of economic development.[8]
Thus, it was in the alleged exercise of this authority that the SEC
reversed the decision of the PSE to deny the application for listing in the
stock exchange of the private respondent PALI. The SECs action was
affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a corporation, may
be traded or not in the stock exchange. This is in line with the SECs
mission to ensure proper compliance with the laws, such as the Revised
Securities Act and to regulate the sale and disposition of securities in the
country.[9] As the appellate court explains:
Paramount policy also supports the authority of the public respondent to
review petitioners denial of the listing. Being a stock exchange, the
petitioner performs a function that is vital to the national economy, as
the business is affected with public interest. As a matter of fact, it has

often been said that the economy moves on the basis of the rise and fall
of stocks being traded. By its economic power, the petitioner certainly
can dictate which and how many users are allowed to sell securities thru
the facilities of a stock exchange, if allowed to interpret its own rules
liberally as it may please. Petitioner can either allow or deny the entry to
the market of securities. To repeat, the monopoly, unless accompanied
by control, becomes subject to abuse; hence, considering public interest,
then it should be subject to government regulation.
The role of the SEC in our national economy cannot be
minimized. The legislature, through the Revised Securities Act,
Presidential Decree No. 902-A, and other pertinent laws, has entrusted to
it the serious responsibility of enforcing all laws affecting corporations
and other forms of associations not otherwise vested in some other
government office.[10]
This is not to say, however, that the PSEs management prerogatives
are under the absolute control of the SEC. The PSE is, after all, a
corporation authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSEs main concerns,
as such, is still the generation of profit for its stockholders. Moreover, the
PSE has all the rights pertaining to corporations, including the right to sue
and be sued, to hold property in its own name, to enter (or not to enter)
into contracts with third persons, and to perform all other legal acts
within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact
under an assumed corporate name, and with a distinct legal
personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such body. [11] As
to its corporate and management decisions, therefore, the state will
generally not interfere with the same. Questions of policy and of
management are left to the honest decision of the officers and directors
of a corporation, and the courts are without authority to substitute their
judgment for the judgment of the board of directors. The board is the
business manager of the corporation, and so long as it acts in good faith,
its orders are not reviewable by the courts.[12]
Thus, notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSEs decision in matters of
application for listing in the market, the SEC may exercise such power
only if the PSEs judgment is attended by bad faith. In board of
Liquidators vs. Kalaw,[13] it was held that bad faith does not simply
connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It means a breach of
a known duty through some motive or interest of ill will, partaking of the
nature of fraud.

In reaching its decision to deny the application for listing of PALI, the
PSE considered important facts, which in the general scheme, brings to
serious question the qualification of PALI to sell its shares to the public
through the stock exchange. During the time for receiving objections to
the application, the PSE heard from the representative of the late
President Ferdinand E. Marcos and his family who claim the properties of
the private respondent to be part of the Marcos estate. In time, the
PCGG confirmed this claim. In fact, an order of sequestration has been
issued covering the properties of PALI, and suit for reconveyance to the
state has been filed in the Sandiganbayan Court. How the properties
were effectively transferred, despite the sequestration order, from the
TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in
only a short span of time, are not yet explained to the Court, but it is
clear that such circumstances give rise to serious doubt as to the
integrity of PALI as a stock issuer. The petitioner was in the right when it
refused application of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the Revised Securities Act,
after all, is to give adequate and effective protection to the investing
public against fraudulent representations, or false promises, and the
imposition of worthless ventures. [14]
It is to be observed that the U.S. Securities Act emphasized its
avowed protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the truth in securities Act, was
designed not only to provide investors with adequate information upon
which to base their decisions to buy and sell securities, but also to
protect legitimate business seeking to obtain capital through honest
presentation against competition form crooked promoters and to
prevent fraud in the sale of securities. (Tenth Annual Report, U.S.
Securities and Exchange Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1)
prevention of excesses and fraudulent transactions, merely by
requirement of that details be revealed; (2) placing the market during the
early stages of the offering of a security a body of information, which
operating indirectly through investment services and expert investors,
will tend to produce a more accurate appraisal of a security. x x x. Thus,
the Commission may refuse to permit a registration statement to become
effective if it appears on its face to be incomplete or inaccurate in any
material respect, and empower the Commission to issue a stop order
suspending the effectiveness of any registration statement which is found
to include any untrue statement of a material fact or to omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. (Idem).

Also, as the primary market for securities, the PSE has established
its name and goodwill, and it has the right to protect such goodwill by
maintaining a reasonable standard of propriety in the entities who choose
to transact through its facilities. It was reasonable for PSE, therefore, to
exercise its judgment in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and public welfare is
safeguarded.
In this connection, it is proper to observe that the concept of
government absolutism in a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute
and can no longer be assailed is of no moment. At this juncture, there is
the claim that the properties were owned by the TDC and MSDC and were
transferred in violation of sequestration orders, to Rebecco Panlilio and
later on to PALI, besides the claim of the Marcoses that such properties
belong to Marcos estate, and were held only in trust by Rebecco
Panlilio. It is also alleged by the petitioner that these properties belong to
naval and forest reserves, and therefore beyond private dominion. If any
of these claims is established to be true, the certificates of title over the
subject properties now held by PALI may be disregarded, as it is an
established rule that a registration of a certificate of title does not confer
ownership over the properties described therein to the person named as
owner. The inscription in the registry, to be effective, must be made in
good faith. The defense of indefeasibility of a Torrens Title does not
extend to a transferee who takes the certificate of title with notice of a
flaw.
In any case, for the purpose of determining whether PSE acted
correctly in refusing the application of PALI, the true ownership of the
properties of PALI need not be determined as an absolute fact. What is
material is that the uncertainty of the properties ownership and
alienability exists, and this puts to question the qualification of PALIs
public offering. In sum, the Court finds that the SEC had acted arbitrarily
in arrogating unto itself the discretion of approving the application for
listing in the PSE of the private respondent PALI, since this is a matter
addressed to the sound discretion of the PSE, a corporate entity, whose
business judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the SEC is not for the
Court to determine, but is left to the sound discretion of the Securities
and Exchange Commission. In mandating the SEC to administer the
Revised Securities Act, and in performing its other functions under
pertinent laws, the Revised Securities Act, under Section 3 thereof, gives
the SEC the power to promulgate such rules and regulations as it may
consider appropriate in the public interest for the enforcement of the said
laws. The second paragraph of Section 4 of the said law, on the other

hand, provides that no security, unless exempt by law, shall be issued,


endorsed, sold, transferred or in any other manner conveyed to the
public, unless registered in accordance with the rules and regulations
that shall be promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A, on the
other hand, provides that the SEC, as regulatory agency, has supervision
and control over all corporations and over the securities market as a
whole, and as such, is given ample authority in determining appropriate
policies. Pursuant to this regulatory authority, the SEC has manifested
that it has adopted the policy of full material disclosure where all
companies, listed or applying for listing, are required to divulge truthfully
and accurately, all material information about themselves and the
securities they sell, for the protection of the investing public, and under
pain of administrative, criminal and civil sanctions. In connection with
this, a fact is deemed material if it tends to induce or otherwise effect the
sale or purchase of its securities. [15] While the employment of this policy
is recognized and sanctioned by laws, nonetheless, the Revised Securities
Act sets substantial and procedural standards which a proposed issuer of
securities must satisfy.[16] Pertinently, Section 9 of the Revised Securities
Act sets forth the possible Grounds for the Rejection of the registration of
a security:
- - The Commission may reject a registration statement and refuse to
issue a permit to sell the securities included in such registration
statement if it finds that - (1)
The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue statement of a
material fact or omits to state a material facts required to be stated
therein or necessary to make the statements therein not misleading; or
(2)
(i)

The issuer or registrant - is not solvent or not is sound financial condition;

(ii) has violated or has not complied with the provisions of this Act, or
the rules promulgated pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable requirements and
conditions that the Commission may, in the public interest and for the
protection of investors, impose before the security can be registered;
(iv) had been engaged or is engaged or is about to engaged in
fraudulent transactions;

(v)

is in any was dishonest of is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged
in a business that is illegal or contrary or government rules and
regulations.
(3)
The enterprise or the business of the issuer is not shown to be
sound or to be based on sound business principles;
(4)
An officer, member of the board of directors, or principal
stockholder of the issuer is disqualified to such officer, director or
principal stockholder; or
(5)
The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the prejudice
to the public interest or as a fraud upon the purchaser or investors.
(Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the
lawmakers to make the registration and issuance of securities dependent,
to a certain extent, on the merits of the securities themselves, and of the
issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interest of the
investing public against fraudulent and worthless securities, and the SEC
is mandated by law to safeguard these interests, following the policies
and rules therefore provided. The absolute reliance on the full disclosure
method in the registration of securities is, therefore, untenable. At it is,
the Court finds that the private respondent PALI, on at least two points
(nos. 1 and 5) has failed to support the propriety of the issue of its shares
with unfailing clarity, thereby lending support to the conclusion that the
PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the
SEC, in the exercise of its vested authority, chooses in setting the
standard for public offerings of corporations wishing to do so. However,
the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be
amended or supplanted my mere administrative issuance.
In resum, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of arbitrariness
and whimsical animation on its part. Its action in refusing to allow the
listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court
hereby GRANTS the Petition for Review on Certiorari. The decisions of the

Court of Appeals and the Securities and Exchage Commission dated July
27, 1996 and April 24, 1996, respectively, are hereby REVERSED and SET
ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of
the Philippine Stock Exchange to deny the application for listing of the
private respondent Puerto Azul Land, Inc.
SO ORDERED.

G.R. No. L-45911 April 11, 1979


JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO
PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR.,
and EDUARDO R. VISAYA, respondents.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer
for issuance of writ of preliminary injunction, arose out of two cases filed
by petitioner with the Securities and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel
Corporation, filed with the Securities and Exchange Commission (SEC) a
petition for "declaration of nullity of amended by-laws, cancellation of
certificate of filing of amended by- laws, injunction and damages with
prayer for a preliminary injunction" against the majority of the members
of the Board of Directors and San Miguel Corporation as an unwilling
petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano,
Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao,
Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel
Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976,
individual respondents amended by bylaws of the corporation, basing
their authority to do so on a resolution of the stockholders adopted on
March 13, 1961, when the outstanding capital stock of respondent
corporation was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at P100.00 per

share. At the time of the amendment, the outstanding and paid up shares
totalled 30,127,047 with a total par value of P301,270,430.00. It was
contended that according to section 22 of the Corporation Law and
Article VIII of the by-laws of the corporation, the power to amend, modify,
repeal or adopt new by-laws may be delegated to the Board of Directors
only by the affirmative vote of stockholders representing not less than
2/3 of the subscribed and paid up capital stock of the corporation, which
2/3 should have been computed on the basis of the capitalization at the
time of the amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without
authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in
1961 had already been exercised in 1962 and 1963, after which the
authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the
Board of Directors had changed since the authority was given in 1961,
there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned
amendment, petitioner had all the qualifications to be a director of
respondent corporation, being a Substantial stockholder thereof; that as
a stockholder, petitioner had acquired rights inherent in stock ownership,
such as the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested
right as afore-mentioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no
inherent power to disqualify a stockholder from being elected as a
director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other
corporations, entered into contracts (specifically a management contract)
with respondent corporation, which was allowed because the questioned
amendment gave the Board itself the prerogative of determining whether
they or other persons are engaged in competitive or antagonistic
business; that the portion of the amended bylaws which states that in
determining whether or not a person is engaged in competitive business,
the Board may consider such factors as business and family relationship,
is unreasonable and oppressive and, therefore, void; and that the portion
of the amended by-laws which requires that "all nominations for election
of directors ... shall be submitted in writing to the Board of Directors at
least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and
void and the certificate of filing thereof be cancelled, and that individual
respondents be made to pay damages, in specified amounts, to
petitioner.
On October 28, 1976, in connection with the same case, petitioner filed
with the Securities and Exchange Commission an "Urgent Motion for
Production and Inspection of Documents", alleging that the Secretary of
respondent corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so.
Among the documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the
management contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds of
respondent corporation in San Miguel International, Inc.; and (e) lists of
salaries, allowances, bonuses, and other compensation, if any, received
by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was
opposed by respondents, alleging, among others that the motion has no
legal basis; that the demand is not based on good faith; that the motion
is premature since the materiality or relevance of the evidence sought
cannot be determined until the issues are joined, that it fails to show
good cause and constitutes continued harrasment, and that some of the
information sought are not part of the records of the corporation and,
therefore, privileged.
During the pendency of the motion for production, respondents San
Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto
filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action taken
by the Board of Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend, modify,
repeal or adopt new By-laws" delegated to said Board on March 13, 1961
and long prior thereto has never been revoked of SMC"; that contrary to
petitioner's claim, "the vote requirement for a valid delegation of the
power to amend, repeal or adopt new by-laws is determined in relation to
the total subscribed capital stock at the time the delegation of said power
is made, not when the Board opts to exercise said delegated power"; that
petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of
the stockholders representing a majority of the subscribed capital stock

at any regular or special meeting, as provided in Article VIII, section I of


the by-laws and section 22 of the Corporation law, hence the, petition is
premature; that petitioner is estopped from questioning the amendments
on the ground of lack of authority of the Board. since he failed, to object
to other amendments made on the basis of the same 1961 authorization:
that the power of the corporation to amend its by-laws is broad, subject
only to the condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures
to minimize or eliminate situations where its directors might be tempted
to put their personal interests over t I hat of the corporation; that the
questioned amended by-laws is a matter of internal policy and the
judgment of the board should not be interfered with: That the by-laws, as
amended, are valid and binding and are intended to prevent the
possibility of violation of criminal and civil laws prohibiting combinations
in restraint of trade; and that the petition states no cause of action. It
was, therefore, prayed that the petition be dismissed and that petitioner
be ordered to pay damages and attorney's fees to respondents. The
application for writ of preliminary injunction was likewise on various
grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their
opposition to the petition, denying the material averments thereof and
stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares
therein. until September 1976 when its total holding amounted to
622,987 shares: that in October 1972, the Consolidated Foods
Corporation (CFC) likewise began acquiring shares in respondent
(corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president
and controlling shareholder of Robina and CFC (both closed corporations)
purchased 5,000 shares of stock of respondent corporation, and
thereafter, in behalf of himself, CFC and Robina, "conducted malevolent
and malicious publicity campaign against SMC" to generate support from
the stockholder "in his effort to secure for himself and in representation
of Robina and CFC interests, a seat in the Board of Directors of SMC", that
in the stockholders' meeting of March 18, 1976, petitioner was rejected
by the stockholders in his bid to secure a seat in the Board of Directors
on the basic issue that petitioner was engaged in a competitive business
and his securing a seat would have subjected respondent corporation to
grave disadvantages; that "petitioner nevertheless vowed to secure a
seat in the Board of Directors at the next annual meeting; that thereafter
the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages,


expenses of litigation and attorney's fees were presented against
petitioner.

hereby DENIED, as petitioner-movant is not a stockholder


of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;

Subsequently, a Joint Omnibus Motion for the striking out of the motion
for production and inspection of documents was filed by all the
respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed
to intervene as oppositors and they accordingly filed their oppositionsintervention to the petition.

3. In view of the Manifestation of petitioner-movant dated


November 29, 1976, withdrawing his request to copy and
inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal
and amendments thereof for the reason that he had
already obtained the same, the Commission takes note
thereof; and

On December 29, 1976, the Securities and Exchange Commission


resolved the motion for production and inspection of documents by
issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the
Commission by the petitioner and respondents in the
above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection,
copying and photographing, by or on behalf of the
petitioner-movant, John Gokongwei, Jr., of the minutes of
the stockholders' meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the
issues involved in the main case. Accordingly, the
respondents should allow petitioner-movant entry in the
principal office of the respondent Corporation, San Miguel
Corporation on January 14, 1977, at 9:30 o'clock in the
morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying
and photographing of the said documents shall be
undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents
and/or papers not heretofore included are not covered by
this Order and any inspection thereof shall require the
prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International,
Inc. as well as the list of salaries, allowances, bonuses,
compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from
San Miguel International, Inc. and/or its successors-ininterest, the Petition to produce and inspect the same is

4. Finally, the Commission holds in abeyance the


resolution on the matter of production and inspection of
the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation
in San Miguel International, Inc., until after the hearing on
the merits of the principal issues in the above-entitled
case.
This Order is immediately executory upon its approval.

Dissatisfied with the foregoing Order, petitioner moved for its


reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be
heard, respondent corporation issued a notice of special stockholders'
meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10, 1977.
This prompted petitioner to ask respondent Commission for a summary
judgment insofar as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the amendments
of September 18, 1976. The motion for summary judgment was opposed
by private respondents. Pending action on the motion, petitioner filed an
"Urgent Motion for the Issuance of a Temporary Restraining Order",
praying that pending the determination of petitioner's application for the
issuance of a preliminary injunction and/or petitioner's motion for
summary judgment, a temporary restraining order be issued, restraining
respondents from holding the special stockholder's meeting as
scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying
the motion for issuance of temporary restraining order. After receipt of
the order of denial, respondents conducted the special stockholders'

meeting wherein the amendments to the by-laws were ratified. On


February 14, 1977, petitioner filed a consolidated motion for contempt
and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for
summary judgment was filed by petitioner before respondent
Commission on March 10, 1977. Petitioner alleges that up to the time of
the filing of the instant petition, the said motion had not yet been
scheduled for hearing. Likewise, the motion for reconsideration of the
order granting in part and denying in part petitioner's motion for
production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent
corporation had been scheduled for May 10, 1977, petitioner filed with
respondent Commission a Manifestation stating that he intended to run
for the position of director of respondent corporation. Thereafter,
respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent
corporation disqualifying and precluding petitioner from being a
candidate for director unless he could submit evidence on May 3, 1977
that he does not come within the disqualifications specified in the
amendment to the by-laws, subject matter of SEC Case No. 1375. By
reason thereof, petitioner filed a manifestation and motion to resolve
pending incidents in the case and to issue a writ of injunction, alleging
that private respondents were seeking to nullify and render ineffectual
the exercise of jurisdiction by the respondent Commission, to petitioner's
irreparable damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was not
heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability
on the part of the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent
corporation has been investing corporate funds in other corporations and
businesses outside of the primary purpose clause of the corporation, in
violation of section 17 1/2 of the Corporation Law, he filed with
respondent Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as
the respondent corporation declared guilty of such violation, and ordered
to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private


respondents, to which a consolidated motion to strike and to declare
individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were
filed as early as February 4, 1977, the commission acted thereon only on
April 25, 1977, when it denied respondents' motion to dismiss and gave
them two (2) days within which to file their answer, and set the case for
hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting,
including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of
Directors by the stockholders at the meeting on March
20, 1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose
for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the
SEC an urgent motion for the issuance of a writ of preliminary injunction
to restrain private respondents from taking up Item 6 of the Agenda at
the annual stockholders' meeting, requesting that the same be set for
hearing on May 3, 1977, the date set for the second hearing of the case
on the merits. Respondent Commission, however, cancelled the dates of
hearing originally scheduled and reset the same to May 16 and 17, 1977,
or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on
May 3, 1977, but this notwithstanding, no action has been taken up to
the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's
contention before this Court that respondent Commission gravely abused
its discretion when it failed to act with deliberate dispatch on the motions
of petitioner seeking to prevent illegal and/or arbitrary impositions or
limitations upon his rights as stockholder of respondent corporation, and
that respondent are acting oppressively against petitioner, in gross
derogation of petitioner's rights to property and due process. He prayed
that this Court direct respondent SEC to act on collateral incidents
pending before it.
On May 6, 1977, this Court issued a temporary restraining order
restraining private respondents from disqualifying or preventing
petitioner from running or from being voted as director of respondent

corporation and from submitting for ratification or confirmation or from


causing the ratification or confirmation of Item 6 of the Agenda of the
annual stockholders' meeting on May 10, 1977, or from Making effective
the amended by-laws of respondent corporation, until further orders from
this Court or until the Securities and Ex-change Commission acts on the
matters complained of in the instant petition.

Miguel International. Inc. and thereafter to decide SEC Cases No. 1375
and 1423 on the merits.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that


after a restraining order had been issued by this Court, or on May 9,
1977, the respondent Commission served upon petitioner copies of the
following orders:

(1) that the petitioner the interest he represents are engaged in business
competitive and antagonistic to that of respondent San Miguel
Corporation, it appearing that the owns and controls a greater portion of
his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in
business directly and substantially competing with the allied businesses
of respondent SMC and of corporations in which SMC has substantial
investments. Further, when CFC and Robina had accumulated
investments. Further, when CFC and Robina had accumulated shares in
SMC, the Board of Directors of SMC realized the clear and present danger
that competitors or antagonistic parties may be elected directors and
thereby have easy and direct access to SMC's business and trade secrets
and plans;

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying
petitioner's motion for reconsideration, with its supplement, of the order
of the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying
the issuance of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated motion to
declare respondents in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing
petitioner to run as a director of respondent corporation but stating that
he should not sit as such if elected, until such time that the Commission
has decided the validity of the bylaws in dispute, and denying deferment
of Item 6 of the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying
petitioner's motion for reconsideration of the order of respondent
Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that
respondent Commission acted with indecent haste and without
circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of
petitioner's right to due process when it decided en banc an issue not
raised before it and still pending before one of its Commissioners, and
without hearing petitioner thereon despite petitioner's request to have
the same calendared for hearing , and (3) that the respondents acted
oppressively against the petitioner in violation of his rights as a
stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained
of be declared null and void and that respondent Commission be ordered
to allow petitioner to undertake discovery proceedings relative to San

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M.
Soriano filed their comment, alleging that the petition is without merit for
the following reasons:

(2) that the amended by law were adopted to preserve and protect
respondent SMC from the clear and present danger that business
competitors, if allowed to become directors, will illegally and unfairly
utilize their direct access to its business secrets and plans for their own
private gain to the irreparable prejudice of respondent SMC, and,
ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that
the Constitution and pertinent laws against combinations in restraint of
trade;
(3) that by laws are valid and binding since a corporation has the
inherent right and duty to preserve and protect itself by excluding
competitors and antogonistic parties, under the law of self-preservation,
and it should be allowed a wide latitude in the selection of means to
preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos.
1375 and 1423 was due to petitioner's own acts or omissions, since he
failed to have the petition to suspend, pendente lite the amended bylaws calendared for hearing. It was emphasized that it was only on April
29, 1977 that petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The instant petition
being dated May 4, 1977, it is apparent that respondent Commission was
not given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has
become moot and academic because respondent Commission has acted
on the pending incidents, complained of. It was, therefore, prayed that
the petition be dismissed.

know, deliberate upon and/or to express their wishes regarding


disposition of corporate funds considering that their investments are the
ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his


comment, alleging that the petition has become moot and academic for
the reason, among others that the acts of private respondent sought to
be enjoined have reference to the annual meeting of the stockholders of
respondent San Miguel Corporation, which was held on may 10, 1977;
that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director;
and that in the same meeting, Item 6 of the Agenda was discussed, voted
upon, ratified and confirmed. Further it was averred that the questions
and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and
no hearing on the merits has been had; hence the elevation of these
issues before the Supreme Court is premature.

On September 29,1977, petitioner filed a second supplemental petition


with prayer for preliminary injunction, alleging that the actuations of
respondent SEC tended to deprive him of his right to due process, and
"that all possible questions on the facts now pending before the
respondent Commission are now before this Honorable Court which has
the authority and the competence to act on them as it may see fit."
(Reno, pp. 927-928.)

Petitioner filed a reply to the aforesaid comments, stating that the


petition presents justiciable questions for the determination of this Court
because (1) the respondent Commission acted without circumspection,
unfairly and oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is not rendered
academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case
moot; that the amendment to the bylaws which specifically bars
petitioner from being a director is void since it deprives him of his vested
rights.
Respondent Commission, thru the Solicitor General, filed a separate
comment, alleging that after receiving a copy of the restraining order
issued by this Court and noting that the restraining order did not
foreclose action by it, the Commission en banc issued Orders Nos. 449,
450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that
Order No. 450 which denied deferment of Item 6 of the Agenda of the
annual stockholders' meeting of respondent corporation, took into
consideration an urgent manifestation filed with the Commission by
petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the
corporation as well as falling within the sphere of stockholders' right to

Petitioner, in his memorandum, submits the following issues for


resolution;
(1) whether or not the provisions of the amended by-laws of respondent
corporation, disqualifying a competitor from nomination or election to the
Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in
denying petitioner's request for an examination of the records of San
Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion
in allowing discussion of Item 6 of the Agenda of the Annual Stockholders'
Meeting on May 10, 1977, and the ratification of the investment in a
foreign corporation of the corporate funds, allegedly in violation of
section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question
which public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the
case to respondent SEC for an appropriate ruling on the intrinsic validity
of the amended by-laws in compliance with the principle of exhaustion of
administrative remedies", considering that: first: "whether or not the
provisions of the amended by-laws are intrinsically valid ... is purely a
legal question. There is no factual dispute as to what the provisions are
and evidence is not necessary to determine whether such amended bylaws are valid as framed and approved ... "; second: "it is for the interest

and guidance of the public that an immediate and final ruling on the
question be made ... "; third: "petitioner was denied due process by SEC"
when "Commissioner de Guzman had openly shown prejudice against
petitioner ... ", and "Commissioner Sulit ... approved the amended bylaws ex-parte and obviously found the same intrinsically valid; and finally:
"to remand the case to SEC would only entail delay rather than serve the
ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that
this Court resolve the legal issues raised by the parties in keeping with
the "cherished rules of procedure" that "a court should always strive to
settle the entire controversy in a single proceeding leaving no root or
branch to bear the seeds of future ligiation", citingGayong v. Gayos. 3 To
the same effect is the prayer of San Miguel Corporation that this Court
resolve on the merits the validity of its amended by laws and the rights
and obligations of the parties thereunder, otherwise "the time spent and
effort exerted by the parties concerned and, more importantly, by this
Honorable Court, would have been for naught because the main question
will come back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be
remanded to the SEC for hearing and decision of the issues involved,
invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always
strive to settle the entire controversy in a single proceeding, leaving nor
root or branch to bear the seeds of future litigation. 4 Thus, in Francisco v.
City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the
ends of justice would not be subserved by the remand of the case.
In Republic v. Security Credit and Acceptance Corporation, et al., 6 this
Court, finding that the main issue is one of law, resolved to decide the
case on the merits "because public interest demands an early disposition
of the case", and in Republic v. Central Surety and Insurance
Company, 7 this Court denied remand of the third-party complaint to the
trial court for further proceedings, citing precedent where this Court, in
similar situations resolved to decide the cases on the merits, instead of
remanding them to the trial court where (a) the ends of justice would not
be subserved by the remand of the case; or (b) where public interest
demand an early disposition of the case; or (c) where the trial court had
already received all the evidence presented by both parties and the
Supreme Court is now in a position, based upon said evidence, to decide
the case on its merits. 8 It is settled that the doctrine of primary
jurisdiction has no application where only a question of law is

involved. 8a Because uniformity may be secured through review by a


single Supreme Court, questions of law may appropriately be determined
in the first instance by courts. 8b In the case at bar, there are facts which
cannot be denied, viz.: that the amended by-laws were adopted by the
Board of Directors of the San Miguel Corporation in the exercise of the
power delegated by the stockholders ostensibly pursuant to section 22 of
the Corporation Law; that in a special meeting on February 10, 1977 held
specially for that purpose, the amended by-laws were ratified by more
than 80% of the stockholders of record; that the foreign investment in the
Hongkong Brewery and Distellery, a beer manufacturing company in
Hongkong, was made by the San Miguel Corporation in 1948; and that in
the stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by
the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a
competitor from nomination or election to the Board of Directors of SMC
are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a
question of law. 9 Whether the by-law is in conflict with the law of the
land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is
subject, however, to the limitation that where the reasonableness of a bylaw is a mere matter of judgment, and one upon which reasonable minds
must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make
by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable
because they were tailored to suppress the minority and prevent them
from having representation in the Board", at the same time depriving
petitioner of his "vested right" to be voted for and to vote for a person of
his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano
and San Miguel Corporation content that ex. conclusion of a competitor
from the Board is legitimate corporate purpose, considering that being a
competitor, petitioner cannot devote an unselfish and undivided Loyalty
to the corporation; that it is essentially a preventive measure to assure
stockholders of San Miguel Corporation of reasonable protective from the
unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a

competitor may result either in the promotion of the interest of the


competitor at the expense of the San Miguel Corporation, or the
promotion of both the interests of petitioner and respondent San Miguel
Corporation, which may, therefore, result in a combination or agreement
in violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued
that there is not vested right of any stockholder under Philippine Law to
be voted as director of a corporation. It is alleged that petitioner, as of
May 6, 1978, has exercised, personally or thru two corporations owned or
controlled by him, control over the following shareholdings in San Miguel
Corporation, vis.: (a) John Gokongwei, Jr. 6,325 shares; (b) Universal
Robina Corporation 738,647 shares; (c) CFC Corporation 658,313
shares, or a total of 1,403,285 shares. Since the outstanding capital stock
of San Miguel Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares owned or
controlled by petitioner represents 4.2344% of the total outstanding
capital stock of San Miguel Corporation. It is also contended that
petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled
by petitioner and members of his family. It is also claimed that both the
Universal Robina Corporation and the CFC Corporation are engaged in
businesses directly and substantially competing with the alleged
businesses of San Miguel Corporation, and of corporations in which SMC
has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
CORPORATIONS AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of,
competition are enumerated in its Board the areas of competition are
enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition
affecting SMC involved product sales of over P400 million or more than

20% of the P2 billion total product sales of SMC. Significantly, the


combined market shares of SMC and CFC-Robina in layer pullets dressed
chicken, poultry and hog feeds ice cream, instant coffee and woven
fabrics would result in a position of such dominance as to affect the
prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct
competition on product lines which, for SMC, represented sales
amounting to more than ?478 million. In addition, CFC-Robina was
directly competing in the sale of coffee with Filipro, a subsidiary of SMC,
which product line represented sales for SMC amounting to more than
P275 million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct competition
with Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to
more than P95 million. The areas of competition between SMC and CFCRobina in 1977 represented, therefore, for SMC, product sales of more
than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of
March 18, 1976, 9,894 stockholders, in person or by proxy, owning
23,436,754 shares in SMC, or more than 90% of the total outstanding
shares of SMC, rejected petitioner's candidacy for the Board of Directors
because they "realized the grave dangers to the corporation in the event
a competitor gets a board seat in SMC." On September 18, 1978, the
Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At
the meeting of February 10, 1977, these amendments were confirmed
and ratified by 5,716 shareholders owning 24,283,945 shares, or more
than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At
the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders,
owning 27,257.014 shares, or more than 90% of the outstanding shares,
rejected petitioner's candidacy, while 946 stockholders, representing
1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders'
Meeting, 12,480 shareholders, owning more than 30 million shares, or
more than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF
DIRECTORS EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were
adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board
may cause upon the corporation and the other stockholders inseparable

prejudice. Submitted for resolution, therefore, is the issue whether or


not respondent San Miguel Corporation could, as a measure of selfprotection, disqualify a competitor from nomination and election to its
Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent
power to adopt by-laws 'for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself
and among themselves in reference to the management of its
affairs. 12 At common law, the rule was "that the power to make and
adopt by-laws was inherent in every corporation as one of its necessary
and inseparable legal incidents. And it is settled throughout the United
States that in the absence of positive legislative provisions limiting it,
every private corporation has this inherent power as one of its necessary
and inseparable legal incidents, independent of any specific enabling
provision in its charter or in general law, such power of self-government
being essential to enable the corporation to accomplish the purposes of
its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws "the qualifications, duties and compensation
of directors, officers and employees ... " This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right at least
one share of the capital stock of the stock corporation of which he is a
director ... " InGovernment v. El Hogar, 14 the Court sustained the validity
of a provision in the corporate by-law requiring that persons elected to
the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and
is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge
that its affairs are dominated by a majority of the stockholders and
that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he has invested
in the capital stock of the corporation, and surrendered it to the will of
the majority of his fellow incorporators. ... It cannot therefore be justly
said that the contract, express or implied, between the corporation and

the stockholders is infringed ... by any act of the former which is


authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting
minority has only one right, viz.: "to object thereto in writing and demand
payment for his share." Under section 22 of the same law, the owners of
the majority of the subscribed capital stock may amend or repeal any bylaw or adopt new by-laws. It cannot be said, therefore, that petitioner has
a vested right to be elected director, in the face of the fact that the law at
the time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be considered
is whether the disqualification of a competitor from being elected to the
Board of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION
AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." 18 "The ordinary trust relationship of directors of a
corporation and stockholders", according to Ashaman v. Miller, 19 "is not a
matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders. Equity recognizes
that stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard
of fiduciary obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in
trust. ... He who is in such fiduciary position cannot serve
himself first and his cestuis second. ... He cannot

manipulate the affairs of his corporation to their


detriment and in disregard of the standards of common
decency. He cannot by the intervention of a corporate
entity violate the ancient precept against serving two
masters ... He cannot utilize his inside information and
strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot
violate rules of fair play by doing indirectly though the
corporation what he could not do so directly. He cannot
use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter
how absolute in terms that power may be and no matter
how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable
limitation that it may not be exercised for the
aggrandizement, preference or advantage of the fiduciary
to the exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co.,

21

it was said:

... A person cannot serve two hostile and adverse master,


without detriment to one of them. A judge cannot be
impartial if personally interested in the cause. No more
can a director. Human nature is too weak -for this. Take
whatever statute provision you please giving power to
stockholders to choose directors, and in none will you find
any express prohibition against a discretion to select
directors having the company's interest at heart, and it
would simply be going far to deny by mere implication
the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a
competing company from being a director, the same reasoning would
apply to disqualify the wife and immediate member of the family of such
stockholder, on account of the supposed interest of the wife in her
husband's affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested.
So it is also true that we cannot condemn as selfish and dangerous and
unreasonable the action of the board in passing the by-law. The strife
over the matter of control in this corporation as in many others is
perhaps carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or not the
action of the Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases. 23


AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN
A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF
THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid."24 This is based upon the
principle that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other. Such
an amendment "advances the benefit of the corporation and is good." An
exception exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only qualification, and
therefore the corporation was not empowered to add additional
qualifications. 25 This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation
Law expressly provides that a corporation may make by-laws for the
qualifications of directors. Thus, it has been held that an officer of a
corporation cannot engage in a business in direct competition with that of
the corporation where he is a director by utilizing information he has
received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise which
cripples or injures the business of the corporation of which he is an officer
or director. 26
It is also well established that corporate officers "are not permitted to use
their position of trust and confidence to further their private
interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products,
and after establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of its
products, the court held that equity would regard the new contract as an
offshoot of the old contract and, therefore, for the benefit of the
corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by
the courts that the fiduciary standards could not be upheld where the
fiduciary was acting for two entities with competing interests. This

doctrine rests fundamentally on the unfairness, in particular


circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information,
such as: (a) marketing strategies and pricing structure; (b) budget for
expansion and diversification; (c) research and development; and (d)
sources of funding, availability of personnel, proposals of mergers or tieups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a
competing corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two
corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge
effectively his duty, to satisfy his loyalty to both corporations and place
the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court
sustained as valid and reasonable an amendment to the by-laws of a
bank, requiring that its directors should not be directors, officers,
employees, agents, nominees or attorneys of any other banking
corporation, affiliate or subsidiary thereof. Chief Judge Parker,
in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of
information concerning the business and plans of a bank
which would likely be injurious to the bank if known to
another bank, and it was reasonable and prudent to
enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney
of any other bank in California. The Ashkins case, supra,
specifically recognizes protection against rivals and
others who might acquire information which might be
used against the interests of the corporation as a
legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is
attorney for another bank, in addition to the direct
conflict or potential conflict of interest, there is also the
danger of inadvertent leakage of confidential information

through casual office discussions or accessibility of files.


Defendant's directors determined that its welfare was
best protected if this opportunity for conflicting loyalties
and potential misuse and leakage of confidential
information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the
courts, as follows:
(1) A director shall not be directly or indirectly interested
as a stockholder in any other firm, company, or
association which competes with the subject corporation.
(2) A director shall not be the immediate member of the
family of any stockholder in any other firm, company, or
association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or
association which compete with the subject corporation.
(4) A director shall be of good moral character as an
essential qualification to holding office.
(5) No person who is an attorney against the corporation
in a law suit is eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience
that a person cannot serve two hostile masters without detriment to
one of them.
The offer and assurance of petitioner that to avoid any possibility of his
taking unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which confidential
matters would be discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the impractical
results that would ensue from such arrangement, it would be inconsistent
with petitioner's primary motive in running for board membership
which is to protect his investments in San Miguel Corporation. More
important, such a proposed norm of conduct would be against all
accepted principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and enforce
responsible corporate management. As explained by Oleck: 31 "The law
win not tolerate the passive attitude of directors ... without active and

conscientious participation in the managerial functions of the company.


As directors, it is their duty to control and supervise the day to day
business activities of the company or to promulgate definite policies and
rules of guidance with a vigilant eye toward seeing to it that these
policies are carried out. It is only then that directors may be said to have
fulfilled their duty of fealty to the corporation."

2. Any person who shag monopolize any merchandise or


object of trade or commerce, or shall combine with any
other person or persons to monopolize said merchandise
or object in order to alter the price thereof by spreading
false rumors or making use of any other artifice to
restrain free competition in the market.

Sound principles of corporate management counsel against sharing


sensitive information with a director whose fiduciary duty of loyalty may
well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director
such as the petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations, the director
has an economic incentive to appropriate for the benefit of his own
corporation the corporate plans and policies of the corporation where he
sits as director.

3. Any person who, being a manufacturer, producer, or


processor of any merchandise or object of commerce or
an importer of any merchandise or object of commerce
from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in
any manner with any person likewise engaged in the
manufacture, production, processing, assembling or
importation of such merchandise or object of commerce
or with any other persons not so similarly engaged for the
purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any part
of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed,
assembled in or imported into the Philippines, or of any
article in the manufacture of which such manufactured,
produced, processed, or imported merchandise or object
of commerce is used.

Indeed, access by a competitor to confidential information regarding


marketing strategies and pricing policies of San Miguel Corporation would
subject the latter to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies
for the development of existing or new markets of existing or new
products could enable said competitor to utilize such knowledge to his
advantage. 32
There is another important consideration in determining whether or not
the amended by-laws are reasonable. The Constitution and the law
prohibit combinations in restraint of trade or unfair competition. Thus,
section 2 of Article XIV of the Constitution provides: "The State shall
regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall
be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of
trade. The penalty of prision correccional in its
minimum period or a fine ranging from two hundred to six
thousand pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or
agreement or shall take part in any conspiracy or
combination in the form of a trust or otherwise, in
restraint of trade or commerce or to prevent by artificial
means free competition in the market.

There are other legislation in this jurisdiction, which prohibit monopolies


and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels of
competition by improving the consumers' effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and
unfettered competition as the rule of trade. "It rests on the premise that
the unrestrained interaction of competitive forces will yield the best
allocation of our economic resources, the lowest prices and the highest
quality ... ." 34 they operate to forestall concentration of economic
power. 35 The law against monopolies and combinations in restraint of
trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by
unduly restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair
competition" appear to have a well defined meaning in other
jurisdictions. A "monopoly" embraces any combination the tendency of

which is to prevent competition in the broad and general sense, or to


control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised
and competition actually excluded, but that power exists to raise prices
or exclude competition when desired. 38 Further, it must be considered
that the Idea of monopoly is now understood to include a condition
produced by the mere act of individuals. Its dominant thought is the
notion of exclusiveness or unity, or the suppression of competition by the
qualification of interest or management, or it may be thru agreement and
concert of action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of
petitioner are not in accord with reality. The election of petitioner to the
Board of respondent Corporation can bring about an illegal situation. This
is because an express agreement is not necessary for the existence of a
combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to
the arrangements, 41and what is to be considered is what the parties
actually did and not the words they used. For instance, the Clayton Act
prohibits a person from serving at the same time as a director in any two
or more corporations, if such corporations are, by virtue of their business
and location of operation, competitors so that the elimination of
competition between them would constitute violation of any provision of
the anti-trust laws. 42 There is here a statutory recognition of the anticompetitive dangers which may arise when an individual simultaneously
acts as a director of two or more competing corporations. A common
director of two or more competing corporations would have access to
confidential sales, pricing and marketing information and would be in a
position to coordinate policies or to aid one corporation at the expense of
another, thereby stifling competition. This situation has been aptly
explained by Travers, thus:
The argument for prohibiting competing corporations
from sharing even one director is that the interlock
permits the coordination of policies between nominally
independent firms to an extent that competition between
them may be completely eliminated. Indeed, if a director,
for example, is to be faithful to both corporations, some
accommodation must result. Suppose X is a director of
both Corporation A and Corporation B. X could hardly
vote for a policy by A that would injure B without violating
his duty of loyalty to B at the same time he could hardly
abstain from voting without depriving A of his best
judgment. If the firms really do compete in the sense
of vying for economic advantage at the expense of the

other there can hardly be any reason for an interlock


between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S.
Congress on section 9 of the Clayton Act, it was established that: "By
means of the interlocking directorates one man or group of men have
been able to dominate and control a great number of corporations ... to
the detriment of the small ones dependent upon them and to the injury
of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly,
shared information on production, orders, shipments, capacity and
inventories may lead to control of production for the purpose of
controlling prices.
Obviously, if a competitor has access to the pricing policy and cost
conditions of the products of San Miguel Corporation, the essence of
competition in a free market for the purpose of serving the lowest priced
goods to the consuming public would be frustrated, The competitor could
so manipulate the prices of his products or vary its marketing strategies
by region or by brand in order to get the most out of the consumers.
Where the two competing firms control a substantial segment of the
market this could lead to collusion and combination in restraint of trade.
Reason and experience point to the inevitable conclusion that the
inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry
between the corporations, to seek out ways of compromising opposing
interests, and thus eliminate competition. As respondent SMC aptly
observes, knowledge by CFC-Robina of SMC's costs in various industries
and regions in the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming population
by geographical areas or income groups and change varying prices in
order to maximize profits from every market segment. CFC-Robina could
determine the most profitable volume at which it could produce for every
product line in which it competes with SMC. Access to SMC pricing policy
by CFC-Robina would in effect destroy free competition and deprive the
consuming public of opportunity to buy goods of the highest possible
quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent,
engaged in agriculture, then the election of petitioner to the Board of
SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any
stockholder of more than one corporation organized for the purpose of

engaging in agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or attempting to
bring about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-law
were to be applied in the case of one stockholder but waived in the case
of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to
run for director, there must be hearing and evidence must be submitted
to bring his case within the ambit of the disqualification. Sound principles
of public policy and management, therefore, support the view that a bylaw which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide
latitude may be accorded to the corporation in adopting measures to
protect legitimate corporation interests. Thus, "where the reasonableness
of a by-law is a mere matter of judgment, and upon which reasonable
minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present
Board powers to perpetua themselves in power such fears appear to be
misplaced. This power, but is very nature, is subject to certain well
established limitations. One of these is inherent in the very convert and
definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree, certain
characteristics essential to the business sought. It means an independent
endeavor of two or more persons to obtain the business patronage of a
third by offering more advantageous terms as an inducement to secure
trade. 46 The test must be whether the business does in fact compete, not
whether it is capable of an indirect and highly unsubstantial duplication
of an isolated or non-characteristics activity. 47 It is, therefore, obvious
that not every person or entity engaged in business of the same kind is a
competitor. Such factors as quantum and place of business, Identity of
products and area of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers a
substantial portion of the same markets for similar products to the extent
of not less than 10% of respondent corporation's market for competing
products. While We here sustain the validity of the amended by-laws, it

does not follow as a necessary consequence that petitioner is ipso


facto disqualified. Consonant with the requirement of due process, there
must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As
trustees of the corporation and of the stockholders, it is the responsibility
of directors to act with fairness to the stockholders. 48 Pursuant to this
obligation and to remove any suspicion that this power may be utilized by
the incumbent members of the Board to perpetuate themselves in power,
any decision of the Board to disqualify a candidate for the Board of
Directors should be reviewed by the Securities behind Exchange
Commission en banc and its decision shall be final unless reversed by this
Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by
statute, or is against public policy, or is ultra vires, or is a fraud upon
minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power
to grant appropriate relief.50
III
Whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel
International Inc., a fully owned subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that
petitioner's claim that he was denied inspection rights as stockholder of
SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for
use at the annual stockholders' meeting of May 18, 1975; (3) a copy of
the minutes of the stockholders' meeting of March 18,1976; (4) a
breakdown of SMC's P186.6 million investment in associated companies
and other companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or remunerations
received by the directors and corporate officers of SMC; (6) a copy of the
US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of
the minutes of all meetings of the Board of Directors from January 1975
to May 1976, with deletions of sensitive data, which deletions were not
objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in
writing on September 18, 1976; (1) that SMC's foreign investments are
handled by San Miguel International, Inc., incorporated in Bermuda and
wholly owned by SMC; this was SMC's first venture abroad, having started

in 1948 with an initial outlay of ?500,000.00, augmented by a loan of


Hongkong $6 million from a foreign bank under the personal guaranty of
SMC's former President, the late Col. Andres Soriano; (2) that as of
December 31, 1975, the estimated value of SMI would amount to almost
P400 million (3) that the total cash dividends received by SMC from SMI
since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975,
SMI did not declare cash or stock dividends, all earnings having been
used in line with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate
Secretary, enclosing photocopies of the afore-mentioned documents.

51

Pursuant to the second paragraph of section 51 of the Corporation Law,


"(t)he record of all business transactions of the corporation and minutes
of any meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and
records is based upon their ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable
ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with
respect to his interest as a stockholder and for some purpose germane
thereto or in the interest of the corporation. 53 In other words, the
inspection has to be germane to the petitioner's interest as a stockholder,
and has to be proper and lawful in character and not inimical to the
interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held
that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity,
or for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. The weight of judicial opinion appears
to be, that on application for mandamus to enforce the right, it is proper
for the court to inquire into and consider the stockholder's good faith and
his purpose and motives in seeking inspection. 56 Thus, it was held that
"the right given by statute is not absolute and may be refused when the
information is not sought in good faith or is used to the detriment of the
corporation." 57But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to
take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of showing
impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the

corporation and the manner of expenditure of its funds, and to inspection


to obtain such information, especially where it appears that the company
is being mismanaged or that it is being managed for the personal benefit
of officers or directors or certain of the stockholders to the exclusion of
others." 59
While the right of a stockholder to examine the books and records of a
corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different
thing.
Some state courts recognize the right under certain conditions, while
others do not. Thus, it has been held that where a corporation owns
approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding
company, the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the corporations
may be required to be produced for examination, 60 and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all
incontents and purposes, the records of the parent even though
subsidiary was not named as a party. 61mandamus was likewise held
proper to inspect both the subsidiary's and the parent corporation's
books upon proof of sufficient control or dominion by the parent showing
the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused
where the subsidiary corporation is a separate and distinct corporation
domiciled and with its books and records in another jurisdiction, and is
not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. 63Likewise,
inspection of the books of an allied corporation by stockholder of the
parent company which owns all the stock of the subsidiary has been
refused on the ground that the stockholder was not within the class of
"persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and records of
the corporation included the right to inspect corporation's subsidiaries'
books and records which were in corporation's possession and control in
its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to
inspect the records of a controlled subsidiary corporation which used the
same offices and had Identical officers and directors.

In his "Urgent Motion for Production and Inspection of Documents" before


respondent SEC, petitioner contended that respondent corporation "had
been attempting to suppress information for the stockholders" and that
petitioner, "as stockholder of respondent corporation, is entitled to copies
of some documents which for some reason or another, respondent
corporation is very reluctant in revealing to the petitioner
notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to
inspect the books and records of a corporation in order to investigate the
conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the
officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned
by respondent San Miguel Corporation and, therefore, under its control, it
would be more in accord with equity, good faith and fair dealing to
construe the statutory right of petitioner as stockholder to inspect the
books and records of the corporation as extending to books and records
of such wholly subsidiary which are in respondent corporation's
possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing
the stockholders of respondent corporation to ratify the investment of
corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent
corporation invested corporate funds in SMI without prior authority of the
stockholders, thus violating section 17-1/2 of the Corporation Law, and
alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the
stockholders.
Respondent SEC's position is that submission of the investment to the
stockholders for ratification is a sound corporate practice and should not
be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its
funds in any other corporation or business or for any purpose other than
the main purpose for which it was organized" provided that its Board of
Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting
power. If the investment is made in pursuance of the corporate purpose,
it does not need the approval of the stockholders. It is only when the

purchase of shares is done solely for investment and not to accomplish


the purpose of its incorporation that the vote of approval of the
stockholders holding shares entitling them to exercise at least two-thirds
of the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing
facilities by SMC was an investment in the same business stated as its
main purpose in its Articles of Incorporation, which is to manufacture and
market beer. It appears that the original investment was made in 19471948, when SMC, then San Miguel Brewery, Inc., purchased a beer
brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the
manufacture and marketing of San Miguel beer thereat. Restructuring of
the investment was made in 1970-1971 thru the organization of SMI in
Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar
Central Co., Inc., supra, appears relevant. In said case, one of the issues
was the legality of an investment made by Manao Sugar Central Co., Inc.,
without prior resolution approved by the affirmative vote of 2/3 of the
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The lower court said
that "there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would
be to unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof.
Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities.
A private corporation, in order to accomplish is purpose
as stated in its articles of incorporation, and subject to
the limitations imposed by the Corporation Law, has the
power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of
stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case,
the purchase of such shares or securities must be subject
to the limitations established by the Corporations law;
namely, (a) that no agricultural or mining corporation
shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation;

and (c) that such holdings shall be solely for investment


and not for the purpose of bringing about a monopoly in
any line of commerce of combination in restraint of
trade." The Philippine Corporation Law by Sulpicio S.
Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

meeting of May 10, 1977 cannot be construed as an admission that


respondent corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for the
gratification of their stockholders the acts of their directors, officers and
managers.

40. Power to invest corporate funds. A private


corporation has the power to invest its corporate funds
"in any other corporation or business, or for any purpose
other than the main purpose for which it was organized,
provide that 'its board of directors has been so authorized
in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that
purpose,' and provided further, that no agricultural or
mining corporation shall in anywise be interested in any
other agricultural or mining corporation. When the
investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the
approval of the stockholders is not necessary."" (Id., p.
108) (Emphasis ours.) (pp. 258-259).

WHEREFORE, judgment is hereby rendered as follows:

Assuming arguendo that the Board of Directors of SMC had no authority


to make the assailed investment, there is no question that a corporation,
like an individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents. 70 This is true
because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract
which is within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of the law
that the investment must be authorized by the affirmative vote of the
stockholders holding two-thirds of the voting power. This requirement is
for the benefit of the stockholders. The stockholders for whose benefit
the requirement was enacted may, therefore, ratify the investment and
its ratification by said stockholders obliterates any defect which it may
have had at the outset. "Mere ultra vires acts", said this Court in
Pirovano, 71 "or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the
stockholders.
Besides, the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate
purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual

The Court voted unanimously to grant the petition insofar as it prays that
petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San
Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar,
Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity
per se of the amended by-laws in question and to dismiss the petition
without prejudice to the question of the actual disqualification of
petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and
proper hearing by the Board of Directors of said corporation, whose
decision shall be appealable to the respondent Securities and Exchange
Commission deliberating and acting en banc and ultimately to this Court.
Unless disqualified in the manner herein provided, the prohibition in the
afore-mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando,
voted to declare the issue on the validity of the foreign investment of
respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the
amended by-laws, pending hearing by this Court on the applicability of
section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment
to the by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez
and Guerrero filed a separate opinion, wherein they voted against the
validity of the questioned amended bylaws and that this question should
properly be resolved first by the SEC as the agency of primary
jurisdiction. They concur in the result that petitioner may be allowed to
run for and sit as director of respondent SMC in the scheduled May 6,
1979 election and subsequent elections until disqualified after proper
hearing by the respondent's Board of Directors and petitioner's

disqualification shall have been sustained by respondent SEC en


banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby
rendered GRANTING the petition by allowing petitioner to examine the
books and records of San Miguel International, Inc. as specified in the
petition. The petition, insofar as it assails the validity of the amended bylaws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

G.R. No. 93695 February 4, 1992


RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between two
parties in this case? Who owns the stocks of the corporation under the
terms of the voting trust agreement? How long can a voting trust
agreement remain valid and effective? Did a director of the corporation
cease to be such upon the creation of the voting trust agreement? These
are the questions the answers to which are necessary in resolving the
principal issue in this petition for certiorari whether or not there was
proper service of summons on Alfa Integrated Textile Mills (ALFA, for
short) through the petitioners as president and vice-president, allegedly,
of the subject corporation after the execution of a voting trust agreement
between ALFA and the Development Bank of the Philippines (DBP, for
short).
From the records of the instant case, the following antecedent facts
appear:
On November 15, 1985, a complaint for a sum of money was filed by the
International Corporate Bank, Inc. against the private respondents who,
in turn, filed a third party complaint against ALFA and the petitioners on
March 17, 1986.

On September 17, 1987, the petitioners filed a motion to dismiss the


third party complaint which the Regional Trial Court of Makati, Branch 58
denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party
complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the
issuance of an alias summons upon ALFA through the DBP as a
consequence of the petitioner's letter informing the court that the
summons for ALFA was erroneously served upon them considering that
the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not
authorized to receive summons on behalf of ALFA since the DBP had not
taken over the company which has a separate and distinct corporate
personality and existence.
On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and
Motion for the Declaration of Proper Service of Summons which the trial
court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration
submitting that Rule 14, section 13 of the Revised Rules of Court is not
applicable since they were no longer officers of ALFA and that the private
respondents should have availed of another mode of service under Rule
14, Section 16 of the said Rules, i.e.,through publication to effect proper
service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27,
1988, the private respondents argued that the voting trust agreement
dated March 11, 1981 did not divest the petitioners of their positions as
president and executive vice-president of ALFA so that service of
summons upon ALFA through the petitioners as corporate officers was
proper.
On January 2, 1989, the trial court upheld the validity of the service of
summons on ALFA through the petitioners, thus, denying the latter's
motion for reconsideration and requiring ALFA to filed its answer through
the petitioners as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by


the petitioners reiterating their stand that by virtue of the voting trust
agreement they ceased to be officers and directors of ALFA, hence, they
could no longer receive summons or any court processes for or on behalf
of ALFA. In support of their second motion for reconsideration, the
petitioners attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (the petitioners included), on the
one hand, and the DBP, on the other hand, whereby the management
and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its
previous Order dated January 2, 1989 and declared that service upon the
petitioners who were no longer corporate officers of ALFA cannot be
considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of
the above Order which was affirmed by the court in its Order dated
August 14, 1989 denying the private respondent's motion for
reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted
by the private respondent before the public respondent which,
nonetheless, resolved to give due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the
pending petition for certiorari with public respondent issued an Order
declaring as final the Order dated April 25, 1989. The private respondents
in the said Order were required to take positive steps in prosecuting the
third party complaint in order that the court would not be constrained to
dismiss the same for failure to prosecute. Subsequently, on October 25,
1989 the private respondents filed a motion for reconsideration on which
the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private
respondents' petition for certiorari, the public respondent rendered its
decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of
respondent judge dated April 25, 1989 and August 14,
1989 are hereby SET ASIDE and respondent corporation is
ordered to file its answer within the reglementary period.
(CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the


decision of the public respondent which resolved to deny the same on
May 10, 1990. Hence, the petitioners filed this certiorari petition imputing
grave abuse of discretion amounting to lack of jurisdiction on the part of
the public respondent in reversing the questioned Orders dated April 25,
1989 and August 14, 1989 of the court a quo, thus, holding that there
was proper service of summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of
judgment on July 16, 1990 erroneously applying the rule that the period
during which a motion for reconsideration has been pending must be
deducted from the 15-day period to appeal. However, in its Resolution
dated January 3, 1991, the public respondent set aside the aforestated
entry of judgment after further considering that the rule it relied on
applies to appeals from decisions of the Regional Trial Courts to the Court
of Appeals, not to appeals from its decision to us pursuant to our ruling in
the case of Refractories Corporation of the Philippines v. Intermediate
Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments,
to wit:
(1) that the execution of the voting trust agreement by a
stockholders whereby all his shares to the corporation
have been transferred to the trustee deprives the
stockholders of his position as director of the corporation;
to rule otherwise, as the respondent Court of Appeals did,
would be violative of section 23 of the Corporation Code
( Rollo, pp. 270-3273); and
(2) that the petitioners were no longer acting or holding
any of the positions provided under Rule 14, Section 13 of
the Rules of Court authorized to receive service of
summons for and in behalf of the private domestic
corporation so that the service of summons on ALFA
effected through the petitioners is not valid and
ineffective; to maintain the respondent Court of Appeals'
position that ALFA was properly served its summons
through the petitioners would be contrary to the general
principle that a corporation can only be bound by such
acts which are within the scope of its officers' or agents'
authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the
instant case, we dwell first on the nature of a voting trust agreement and

the consequent effects upon its creation in the light of the provisions of
the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the
stockholders of a corporation and the trustee or by a
group of identical agreements between individual
stockholders and a common trustee, whereby it is
provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is
terminated, control over the stock owned by such
stockholders, either for certain purposes or for all
purposes, is to be lodged in the trustee, either with or
without a reservation to the owners, or persons
designated by them, of the power to direct how such
control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J
2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly
recognizes voting trust agreements, a more definitive meaning may be
gathered. The said provision partly reads:
Sec. 59. Voting Trusts One or more stockholders of a
stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the share for a
period rights pertaining to the shares for a period not
exceeding five (5) years at any one time: Provided, that
in the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be
for a period exceeding (5) years but shall automatically
expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy
of such agreement shall be filed with the corporation and
with the Securities and Exchange Commission; otherwise,
said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books
of the corporation, it shall be noted that the transfer in
the name of the trustee or trustees is made pursuant to
said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of


the voting rights of a stockholder from his other rights such as the right
to receive dividends, the right to inspect the books of the corporation, the
right to sell certain interests in the assets of the corporation and other
rights to which a stockholder may be entitled until the liquidation of the
corporation. However, in order to distinguish a voting trust agreement
from proxies and other voting pools and agreements, it must pass three
criteria or tests, namely: (1) that the voting rights of the stock are
separated from the other attributes of ownership; (2) that the voting
rights granted are intended to be irrevocable for a definite period of time;
and (3) that the principal purpose of the grant of voting rights is to
acquire voting control of the corporation. (5 Fletcher, Cyclopedia of the
Law on Private Corporations, section 2075 [1976] p. 331citing Tankersly
v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust
agreement may confer upon a trustee not only the stockholder's voting
rights but also other rights pertaining to his shares as long as the voting
trust agreement is not entered "for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or used
for purposes of fraud." (section 59, 5th paragraph of the Corporation
Code) Thus, the traditional concept of a voting trust agreement primarily
intended to single out a stockholder's right to vote from his other rights
as such and made irrevocable for a limited duration may in practice
become a legal device whereby a transfer of the stockholder's shares is
effected subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a
dichotomy between the equitable or beneficial ownership of the
corporate shares of a stockholders, on the one hand, and the legal title
thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in
writing whereby one or more stockholders of a corporation consent to
transfer his or their shares to a trustee in order to vest in the latter voting
or other rights pertaining to said shares for a period not exceeding five
years upon the fulfillment of statutory conditions and such other terms
and conditions specified in the agreement. The five year-period may be
extended in cases where the voting trust is executed pursuant to a loan
agreement whereby the period is made contingent upon full payment of
the loan.
In the instant case, the point of controversy arises from the effects of the
creation of the voting trust agreement. The petitioners maintain that with
the execution of the voting trust agreement between them and the other

stockholders of ALFA, as one party, and the DBP, as the other party, the
former assigned and transferred all their shares in ALFA to DBP, as
trustee. They argue that by virtue to of the voting trust agreement the
petitioners can no longer be considered directors of ALFA. In support of
their contention, the petitioners invoke section 23 of the Corporation
Code which provides, in part, that:
Every director must own at least one (1) share of the
capital stock of the corporation of which he is a director
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of
at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease
to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust
agreement between ALFA and the DBP had all the more safeguarded the
petitioners' continuance as officers and directors of ALFA inasmuch as the
general object of voting trust is to insure permanency of the tenure of the
directors of a corporation. They cited the commentaries by Prof. Aguedo
Agbayani on the right and status of the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing
stockholder", is equitable owner for the stocks
represented by the voting trust certificates and the stock
reversible on termination of the trust by surrender. It is
said that the voting trust agreement does not destroy the
status of the transferring stockholders as such, and thus
render them ineligible as directors. But a more accurate
statement seems to be that for some purposes the
depositing stockholder holding voting trust certificates in
lieu of his stock and being the beneficial owner thereof,
remains and is treated as a stockholder. It seems to be
deducible from the case that he may sue as a stockholder
if the suit is in equity or is of an equitable nature, such as,
a technical stockholders' suit in right of the corporation.
[Commercial Laws of the Philippines by Agbayani, Vol. 3
pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as
to the most immediate effect of a voting trust agreement on the status of
a stockholder who is a party to its execution from legal titleholder or
owner of the shares subject of the voting trust agreement, he becomes

the equitable or beneficial owner. (Salonga,Philippine Law on Private


Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private
Corporations and Corporate Practice, 1969 ed., p. 175; Campos and
Lopez-Campos, The Corporation Code; Comments, Notes & Selected
Cases, 1981, ed., p. 386; Agbayani, Commentaries and Jurisprudence on
the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The
penultimate question, therefore, is whether the change in his status
deprives the stockholder of the right to qualify as a director under section
23 of the present Corporation Code which deletes the phrase "in his own
right." Section 30 of the old Code states that:
Every director must own in his own right at least one
share of the capital stock of the stock corporation of
which he is a director, which stock shall stand in his name
on the books of the corporation. A director who ceases to
be the owner of at least one share of the capital stock of
a stock corporation of which is a director shall thereby
cease to be a director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly
speaking, cannot be adversely affected by the simple act of such director
being a party to a voting trust agreement inasmuch as he remains owner
(although beneficial or equitable only) of the shares subject of the voting
trust agreement pursuant to which a transfer of the stockholder's shares
in favor of the trustee is required (section 36 of the old Corporation
Code). No disqualification arises by virtue of the phrase "in his own right"
provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees
and other persons who in fact are not beneficial owners of the shares
registered in their names on the books of the corporation becomes
formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence,
this is a clear indication that in order to be eligible as a director, what is
material is the legal title to, not beneficial ownership of, the stock as
appearing on the books of the corporation (2 Fletcher, Cyclopedia of the
Law of Private Corporations, section 300, p. 92 [1969]citing People v.
Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting
trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of the DBP, as trustee. Consequently,
the petitioners ceased to own at least one share standing in their names
on the books of ALFA as required under Section 23 of the new Corporation
Code. They also ceased to have anything to do with the management of
the enterprise. The petitioners ceased to be directors. Hence, the transfer

of the petitioners' shares to the DBP created vacancies in their respective


positions as directors of ALFA. The transfer of shares from the stockholder
of ALFA to the DBP is the essence of the subject voting trust agreement
as evident from the following stipulations:

be deemed to have retained their status as officers of ALFA which was the
case before the execution of the subject voting trust agreement. There
appears to be no dispute from the records that DBP has taken over full
control and management of the firm.

1. The TRUSTORS hereby assign and deliver to the


TRUSTEE the certificate of the shares of the stocks owned
by them respectively and shall do all things necessary for
the transfer of their respective shares to the TRUSTEE on
the books of ALFA.

Moreover, in the Certification dated January 24, 1989 issued by the DBP
through one Elsa A. Guevarra, Vice-President of its Special Accounts
Department II, Remedial Management Group, the petitioners were no
longer included in the list of officers of ALFA "as of April 1982." (CA Rollo,
pp. 140-142)

2. The TRUSTEE shall issue to each of the TRUSTORS a


trust certificate for the number of shares transferred,
which shall be transferrable in the same manner and with
the same effect as certificates of stock subject to the
provisions of this agreement;

Inasmuch as the private respondents in this case failed to substantiate


their claim that the subject voting trust agreement did not deprive the
petitioners of their position as directors of ALFA, the public respondent
committed a reversible error when it ruled that:

3. The TRUSTEE shall vote upon the shares of stock at all


meetings of ALFA, annual or special, upon any resolution,
matter or business that may be submitted to any such
meeting, and shall possess in that respect the same
powers as owners of the equitable as well as the legal
title to the stock;
4. The TRUSTEE may cause to be transferred to any
person one share of stock for the purpose of qualifying
such person as director of ALFA, and cause a certificate of
stock evidencing the share so transferred to be issued in
the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may
transfer his shares to the same trustees without the need
of revising this agreement, and this agreement shall have
the same force and effect upon that said stockholder.
(CA Rollo, pp. 137-138; Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the
DBP as trustee, the latter became the stockholder of record with respect
to the said shares of stocks. In the absence of a showing that the DBP
had caused to be transferred in their names one share of stock for the
purpose of qualifying as directors of ALFA, the petitioners can no longer

. . . while the individual respondents (petitioners Lee and


Lacdao) may have ceased to be president and vicepresident, respectively, of the corporation at the time of
service of summons on them on August 21, 1987, they
were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the express
terms of Stipulation No. 4 of the subject voting trust agreement. Both
parties, ALFA and the DBP, were aware at the time of the execution of the
agreement that by virtue of the transfer of shares of ALFA to the DBP, all
the directors of ALFA were stripped of their positions as such.
There can be no reliance on the inference that the five-year period of the
voting trust agreement in question had lapsed in 1986 so that the legal
title to the stocks covered by the said voting trust agreement ipso
facto reverted to the petitioners as beneficial owners pursuant to the 6th
paragraph of section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting
trust agreement shall automatically expire at the end of
the agreed period, and the voting trust certificate as well
as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the
transferors.
On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the

agreement is contingent upon the fulfillment of certain obligations of


ALFA with the DBP. This is shown by the following portions of the
agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA,
and its credit is secured by a first mortgage on the
manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for
various financial accomodations and because of the
burden of these obligations is encountering very serious
difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations
from the TRUSTEE, ALFA had offered and the TRUSTEE
has accepted participation in the management and
control of the company and to assure the aforesaid
participation by the TRUSTEE, the TRUSTORS have
agreed to execute a voting trust covering their
shareholding in ALFA in favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the
purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years,
and is renewable for as long as the obligations of ALFA
with DBP, or any portion thereof, remains outstanding;
(CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986,
the DBP would not have transferred all its rights, titles and interests in
ALFA "effective June 30, 1986" to the national government through the
Asset Privatization Trust (APT) as attested to in a Certification dated
January 24, 1989 of the Vice President of the DBP's Special Accounts
Department II. In the same certification, it is stated that the DBP, from
1987 until 1989, had handled APT's account which included ALFA's assets
pursuant to a management agreement by and between the DBP and APT
(CA Rollo, p. 142) Hence, there is evidence on record that at the time of
the service of summons on ALFA through the petitioners on August 21,

1987, the voting trust agreement in question was not yet terminated so
that the legal title to the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was
proper service of summons on ALFA through the petitioners is readily
answered in the negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided
that:
Sec. 13. Service upon private domestic corporation or
partnership. If the defendant is a corporation organized
under the laws of the Philippines or a partnership duly
registered, service may be made on the president,
manager, secretary, cashier, agent or any of its directors.
It is a basic principle in Corporation Law that a corporation has a
personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976];
Osias Academy v. Department of Labor and Employment, et al., G.R. Nos.
83257-58, December 21, 1990). Thus, the above rule on service of
processes of a corporation enumerates the representatives of a
corporation who can validly receive court processes on its behalf. Not
every stockholder or officer can bind the corporation considering the
existence of a corporate entity separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a
representative so integrated with the corporation sued as to make it a
priori supposable that he will realize his responsibilities and know what
he should do with any legal papers served on him. (Far Corporation v.
Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East
Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated
officers. The service of summons upon ALFA, through the petitioners,
therefore, is not valid. To rule otherwise, as correctly argued by the
petitioners, will contravene the general principle that a corporation can
only be bound by such acts which are within the scope of the officer's or
agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The
appealed decision dated March 19, 1990 and the Court of Appeals'
resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25,

1989 and October 17, 1989 issued by the Regional Trial Court of Makati,
Branch 58 are REINSTATED.

the current account of his conduit corporation, Intervest Merchant


Finance (Intervest, for brevity) which the latter maintained with the
defendant bank under account No. 0200-02027-8;

SO ORDERED.

[G.R. No. 96551. November 4, 1996]

PREMIUM MARBLE RESOURCES, INC., petitioner, vs. THE COURT


OF
APPEALS
and
INTERNATIONAL
CORPORATE
BANK, respondents.
PRINTLINE CORPORATION, petitioner, vs. THE COURT OF APPEALS
and INTERNATIONAL CORPORATE BANK, respondents.
DECISION
TORRES, JR., J.:
Assailed in the instant petition for review is the decision [1] of the
Court of Appeals in CA-G.R. CV No. 16810 dated September 28,
1990 which affirmed the trial courts dismissal of petitioners complaint
for damages.
The antecedents:
On July 18, 1986, Premium Marble Resources, Inc. (Premium for brevity),
assisted by Atty. Arnulfo Dumadag as counsel, filed an action for
damages against International Corporate Bank which was docketed as
Civil Case No. 14413. The complaint states, inter alia:
3. Sometime in August to October 1982, Ayala Investment and
Development Corporation issued three (3) checks [Nos. 097088, 097414
& 27884] in the aggregate amount of P31,663.88 payable to the plaintiff
and drawn against Citibank;
xxx
5. On or about August to October 1982, former officers of the plaintiff
corporation headed by Saturnino G. Belen, Jr., without any authority
whatsoever from the plaintiff deposited the above-mentioned checks to

6. Although the checks were clearly payable to the plaintiff corporation


and crossed on their face and for payees account only, defendant bank
accepted the checks to be deposited to the current account of Intervest
and thereafter presented the same for collection from the drawee bank
which subsequently cleared the same thus allowing Intervest to make use
of the funds to the prejudice of the plaintiff;
xxx
14. The plaintiff has demanded upon the defendant to restitute the
amount representing the value of the checks but defendant refused and
continue to refuse to honor plaintiffs demands up to the present;
15. As a result of the illegal and irregular acts perpetrated by the
defendant bank, the plaintiff was damaged to the extent of the amount
of P31,663.88.
Premium prayed that judgment be rendered ordering defendant bank to
pay the amount of P31,663.88 representing the value of the checks plus
interest, P100,000.00 as exemplary damages; and P30,000.00 as
attorneys fees.
In its Answer International Corporate Bank alleged, inter alia, that
Premium has no capacity/personality/authority to sue in this instance and
the complaint should, therefore, be dismissed for failure to state a cause
of action.
A few days after Premium filed the said case, Printline Corporation, a
sister company of Premium also filed an action for damages against
International Corporate Bank docketed as Civil Case No. 14444.
Thereafter, both civil cases were consolidated.
Meantime, the same corporation, i.e., Premium, but this time
represented by Siguion Reyna, Montecillio and Ongsiako Law Office as
counsel, filed a motion to dismiss on the ground that the filing of the case
was without authority from its duly constituted board of directors as
shown by the excerpt of the minutes of the Premiums board of directors
meeting.[2]
In its opposition to the motion to dismiss, Premium thru Atty.
Dumadag contended that the persons who signed the board resolution
namely Belen, Jr., Nograles & Reyes, are not directors of the corporation

and were allegedly former officers and stockholders of Premium who


were dismissed for various irregularities and fraudulent acts; that Siguion
Reyna Law office is the lawyer of Belen and Nograles and not of Premium
and that the Articles of Incorporation of Premium shows that Belen,
Nograles and Reyes are not majority stockholders.
On the other hand, Siguion Reyna Law firm as counsel of Premium in
a rejoinder, asserted that it is the general information sheet filed with the
Securities and Exchange Commission, among others, that is the best
evidence that would show who are the stockholders of a corporation and
not the Articles of Incorporation since the latter does not keep track of
the many changes that take place after new stockholders subscribe to
corporate shares of stocks.
In the interim, defendant bank filed a manifestation that it is
adopting in toto Premiums motion to dismiss and, therefore, joins it in
praying for the dismissal of the present case on the ground that Premium
lacks authority from its duly constituted board of directors to institute the
action.
In its Order, the lower court concluded that:
Considering that the officers (directors) of plaintiff corporation
enumerated in the Articles of Incorporation, filed on November 9, 1979,
were to serve until their successors are elected and qualified and
considering further that as of March 4, 1981, the officers of the plaintiff
corporation were Alberto Nograles, Fernando Hilario, Augusto Galace,
Jose L.R. Reyes, Pido Aguilar and Saturnino Belen, Jr., who presumably are
the officers represented by the Siguion Reyna Law Firm, and that
together with the defendants, they are moving for the dismissal of the
above-entitled case, the Court finds that the officers represented by Atty.
Dumadag do not as yet have the legal capacity to sue for and in behalf of
the plaintiff corporation and/or the filing of the present action (Civil Case
14413) by them before Case No. 2688 of the SEC could be decided is a
premature exercise of authority or assumption of legal capacity for and in
behalf of plaintiff corporation.
The issues raised in Civil Case No. 14444 are similar to those raised in
Civil Case No. 14413. This Court is of the opinion that before SEC Case
No. 2688 could be decided, neither the set of officers represented by Atty.
Dumadag nor that set represented by the Siguion Reyna, Montecillo and
Ongsiako Law Office, may prosecute cases in the name of the plaintiff
corporation.
It is clear from the pleadings filed by the parties in these two cases that
the existence of a cause of action against the defendants is dependent

upon the resolution of the case involving intra-corporate controversy still


pending before the SEC.[3]
On appeal, the Court of Appeals affirmed the trial courts
Order[4] which dismissed the consolidated cases. Hence, this petition.
Petitioner submits the following assignment of errors:
I
The Court of Appeals erred in giving due course to the motion to
dismiss filed by the Siguion Reyna Law Office when the said motion
is clearly filed not in behalf of the petitioner but in behalf of the
group of Belen who are the clients of the said law office.
II
The Court of Appeals erred in giving due course to the motion to
dismiss filed by the Siguion Reyna Law Office in behalf of petitioner
when the said law office had already appeared in other cases
wherein the petitioner is the adverse party.
III
The Court of Appeals erred when it ruled that undersigned counsel
was not authorized by the Board of Directors to file Civil Case Nos.
14413 and 14444.
IV
The Court of Appeals erred in concluding that under SEC Case No.
2688 the incumbent directors could not act for and in behalf of the
corporation.
V
The Court of Appeals is without jurisdiction to prohibit the
incumbent Board of Directors from acting and filing this case when
the SEC where SEC Case No. 2688 is pending has not even made the
prohibition.
We find the petition without merit.

The only issue in this case is whether or not the filing of the case for
damages against private respondent was authorized by a duly
constituted Board of Directors of the petitioner corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar
Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare,
presented the Minutes [5] of the meeting of its Board of Directors held
on April 1, 1982, as proof that the filing of the case against private
respondent was authorized by the Board. On the other hand, the second
set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose
L.R. Reyes, presented a Resolution [6] dated July 30, 1986, to show that
Premium did not authorize the filing in its behalf of any suit against the
private respondent International Corporate Bank.
Later
on,
petitioner
submitted
its
Articles
of
Incorporation[7] dated November 6, 1979 with the following as Directors:
Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and Jose
Ma. Silva.
However, it appears from the general information sheet and the
Certification issued by the SEC on August 19, 1986[8] that as of March 4,
1981, the officers and members of the board of directors of the Premium
Marble Resources, Inc. were:
Alberto C. Nograles President/Director
Fernando D. Hilario Vice President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director

action must necessarily fail. The power of the corporation to sue and be
sued in any court is lodged with the board of directors that exercises its
corporate powers. Thus, the issue of authority and the invalidity of
plaintiff-appellants subscription which is still pending, is a matter that is
also addressed, considering the premises, to the sound judgment of the
Securities & Exchange Commission.[9]
By the express mandate of the Corporation Code (Section 26), all
corporations duly organized pursuant thereto are required to submit
within the period therein stated (30 days) to the Securities and Exchange
Commission the names, nationalities and residences of the directors,
trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
Sec. 26.
Report of election of directors, trustees and officers.
Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and residences of
the directors, trustees and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26 is to
give the public information, under sanction of oath of responsible officers,
of the nature of business, financial condition and operational status of the
company together with information on its key officers or managers so
that those dealing with it and those who intend to do business with it
may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility. [10]
The claim, therefore, of petitioners as represented by Atty.
Dumadag, that Zaballa, et al., are the incumbent officers of Premium has
not been fully substantiated. In the absence of an authority from the
board of directors, no person, not even the officers of the corporation,
can validly bind the corporation. [11]

Saturnino G. Belen, Jr. Chairman of the Board.

We find no reversible error in the decision sought to be reviewed.

While the Minutes of the Meeting of the Board on April 1, 1982 states
that the newly elected officers for the year 1982 were Oscar Gan, Mario
Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show
proof that this election was reported to the SEC. In fact, the last entry in
their General Information Sheet with the SEC, as of 1986 appears to be
the set of officers elected in March 1981.

ACCORDINGLY, for lack of merit, the petition is hereby DENIED.

We agree with the finding of public respondent Court of Appeals,


that in the absence of any board resolution from its board of directors
the [sic] authority to act for and in behalf of the corporation, the present

SO ORDERED.

G.R. No. L-26555

November 16, 1926

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J.


LACSON, petitioners,
vs.
Honorable MARIANO DE LA ROSA, Auxiliary Judge of First
Instance of Occidental Negros, AGUSTIN CORUNA, MAURO
LEDESMA and BINALBAGAN ESTATE, INC., respondents.
STREET, J.:
This is an original petition for the writ of certiorari whereby the
petitioners, Baldomeo Roxas, Enrique Echaus, and Roman J. Lacson, seek
to procure the abrogation of an order of the respondent judge granting a
preliminary injunction in an action in the Court of First Instance of
Occidental Negros, instituted by Agustin Coruna and Mauro Ledesma
against the petitioners and the Binalbagan Estate, Inc. The cause is now
before us upon the issues made by the answers filed by the respondents.
It appears that the Binalbagan Estate, Inc., is a corporation having
its principal plant in Occidental Negros where it is engaged in the
manufacture of raw sugar from canes grown upon farms accessible to its
central. In July, 1924, the possessors of a majority of the shares of the
Binalbagan Estate, Inc., formed a voting trust composed of three
members, namely, Salvador Laguna, Segunda Monteblanco, and Arthur F.
Fisher, as trustee. By the document constituting this voting trust the
trustees were authorized to represent and vote the shares pertaining to
their constituents, and to this end the shareholders undertook to assign
their shares to the trustees on the books of the company. The total
number of outstanding shares of the corporation is somewhat over 5,500,
while the number of shares controlled by the voting trust is less than
3,000.
On February 1, 1926, the general annual meeting of the
shareholders of the Binalbagan Estate, Inc., took place, at which Mr. J. P.
Heilbronn appeared as representative of the voting trust, his authority
being recognized by the holders of all the other shares present at this
meeting. Upon said occasion Heilbronn, by virtue of controlling the
majority of the shares, was able to nominate and elect a board of
directors to his own liking, without opposition from the minority. After the

board of directors had been thus elected and had qualified, they chose a
set of officers constituting of Jose M. Yusay, president, Timoteo Unson,
vice-president, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and
Agustin Coruna, as members. Said officials immediately entered upon the
discharged of their duties and have continued in possession of their
respective offices until the present time.
Since the creation of the voting trust there have been a number of
vacancies caused by resignation or the absence of members from the
Philippine Islands, with the result that various substitutions have been
made in the personnel of the voting trust. At the present time the
petitioners Roxas, Echaus, and Lacson presumably constitute its
membership. We say presumably, because in the present proceedings an
issue of fact is made by the respondents upon the point whether the
three individuals named have been regularly substituted for their several
predecessors. In the view we take of the case it is not necessary to
determine this issue; and we shall assume provisionally that the three
petitioners are the lawful components of the voting trust.
Although the present officers of the Binalbagan Estate, Inc., were
elected by the representative of the voting trust, the present trustee are
apparently desirous of ousting said officers, without awaiting the
termination of their official terms at the expiration of one year from the
date of their election. In other to effect this purpose the petitioners in
their character as members of the voting trust, on August 2, 1926,
caused the secretary of the Binalbagan Estate, Inc., to issue to the
shareholders a notice calling for a special general meeting of
shareholders to be held at 10 a. m., on August 16, 1926, "for the election
of the board of directors, for the amendment of the By-Laws, and for any
other business that can be dealt with in said meeting."
Within a few days after said notice was issued Agustin Corua, as
member of the existing board, and Mauro Ledesma, as a simple
shareholder of the corporation, instituted a civil action (No. 3840) in the
Court of First Instance of Occidental Negros against the trustees and the
Binalbagan Estate, Inc., for the purpose of enjoining the meeting
completed in the notice above-mentioned.
In response to a proper for a preliminary injunction, in connection
with said action, the respondent judge issued the restraining order, or
preliminary injunction, which gave rise to the present petition for the writ
of certiorari. In the dispositive part of said order the Binalbagan Estate,
Inc., its lawyers, agents, representatives, and all others who may be
assisting or corroborating with them, are restrained from holding the
general shareholders' meeting called for the date mentioned and from

electing new directors for the company in substitution of the present


incumbents, said injunction to be effective until further order of the court.
it is now asserted here by the petitioners that the making of this order
was beyond the legitimate powers of the respondent judge, and it is
accordingly prayed that said order be set aside.
We are of the opinion that this contention is untenable and that the
respondent judge acted within his legitimate powers in making the order
against which relief is sought. In order to expose the true inwardness of
the situation before us it is necessary to take not of the fact that under
the law the directors of a corporation can only be removed from office by
a vote of the stockholders representing at least two-thirds of the
subscribed capital stock entitled to vote (Act No. 1459, sec. 34); while
vacancies in the board, when they exist, can be filled by mere majority
vote, (Act No. 1459, sec. 25). Moreover, the law requires that when action
is to be taken at a special meeting to remove the directors, such purpose
shall be indicated in the call (Act No. 1459, sec. 34).
Now, upon examining into the number of shares controlled by the
voting trust, it will be seen that, while the trust controls a majority of the
stock, it does not have a clear two-thirds majority. It was therefore
impolitic for the petitioners, in forcing the call for the meeting of August
16, to come out frankly and say in the notice that one of the purpose of
the meeting was to removed the directors of the corporation from office.
Instead, the call was limited to the election of the board of directors, it
being the evident intention of the voting trust to elect a new board as if
the directorate had been then vacant.
But the complaint in civil No. 3840 directly asserts that the
members of the present directorate were regularly elected at the general
annual meeting held in February, 1926; and if that assertion be true, the
proposal to elect, another directorate, as per the call of August 2, if
carried into effect, would result in the election of a rival set of directors,
who would probably need the assistance of judgment of court in an
independent action of quo warranto to get them installed into office, even
supposing that their title to the office could be maintained. That the trial
judge had jurisdiction to forestall that step and enjoin the contemplated
election is a matter about which there cannot be the slightest doubt. The
law contemplates and intends that there will be one of directors at a time
and that new directors shall be elected only as vacancies occur in the
directorate by death, resignation, removal, or otherwise. lawphil.net
It is instituted that there was some irregularity or another in the
election of the present directorate. We see nothing upon which this
suggestion can be safely planted; And at any rate the present board of

directors are de facto incumbents of the office whose acts will be valid
until they shall be lawfully removed from the office or cease from the
discharge of their functions. In this case it is not necessary for us to
agitate ourselves over the question whether the respondent judge
properly exercised his judicial discretion in granting the order complained
of. If suffices to know that in making the order he was acting within the
limits of his judicial powers.
It will be noted that the order in question enjoins the defendants
from holding the meeting called for August 16; and said order must not
be understood as constituting any obstacle for the holding of the regular
meeting at the time appointed in the by-laws of the corporation.
For the reasons stated the petition will be denied, and it is so
ordered, with costs.

[G.R. No. 113032. August 21, 1997]

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS,


DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F.
VILLASIS,petitioners, vs. RICARDO T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS
& HON. JUDGE PORFIRIO PARIAN, respondents.
DECISION
HERMOSISIMA, JR., J.:
Up for review on certiorari are: (1) the Decision September 6, 1993
and (2) the order dated November 23, 1993 of Branch 33 of the Regional
Trial Court of Iloilo City in Criminal Cases Nos. 37097 and 37098
for estafa and falsification of a public document, respectively. The
judgment acquitted the private respondents of both charges, but
petitioners seek to hold them civilly liable.
Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad
Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the
same family, are the majority and controlling members of the Board of
Trustees of Western Institute of Technology, Inc. (WIT, for short), a stock
corporation engaged in the operation, among others, of an educational
institution. According to petitioners, the minority stockholders of WIT,

sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo


City, a Special Board meeting was held. In attendance were other
members of the Board including one of the petitioners Reginald Villasis.
Prior to aforesaid Special Board Meeting, copies of notice thereof, dated
May 24, 1986, were distributed to all Board Members. The notice
allegedly indicated that the meeting to be held on June 1, 1986 included
item No. 6 which states:
"Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of
Western Institute of Technology, Inc. on compensation of all officers of the
corporation." [1]
In said meeting, the Board of Trustees passed Resolution No. 48, s.
1986, granting monthly compensation to the private respondents as
corporate officers retroactive June 1, 1985, viz.:

A few years later, that is, on March 13, 1991, petitioners Homero
Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed an
affidavit-complaint against private respondents before the Office of the
City Prosecutor of Iloilo, as a result of which two (2) separate criminal
informations, one for falsification of a public document under Article 171
of the Revised Penal Code and the other for estafa under Article 315, par.
1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of
Iloilo City. The charge for falsification of public document was anchored
on the private respondents submission of WITs income statement for
the fiscal year 1985-1986 with the Securities and Exchange Commission
(SEC) reflecting therein the disbursement of corporate funds for the
compensation of private respondents based on Resolution No. 4, series of
1986, making it appear that the same was passed by the board on March
30, 1986, when in truth, the same was actually passed on June 1, 1986, a
date not covered by the corporations fiscal year 1985-1986 (beginning
May 1, 1985 and ending April 30, 1986). The information for falsification
of a public document states:

Resolution No. 48 s. 1986


On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for
services rendered as follows: Chairman - P9,000.00/month, ViceChairman - P3,500.00/month, Corporate Treasurer - P3,500.00/month and
Corporate Secretary - P3,500.00/month, retroactive June 1, 1985 and the
ten percentum of the net profits shall be distributed equally among the
ten members of the Board of Trustees. This shall amend and
superceed(sic) any previous resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March
30, 1986 is true and correct to the best of my knowledge and belief.
(Sgd) ANTONIO
S. SALAS
Corporate
Secretary[2]

The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR


T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S.
SALAS (whose dates and places of birth cannot be ascertained) of the
crime of FALSIFICATION OF A PUBLC DOCUMENT, Art. 171 of the Revised
Penal Code, committed as follows:
That on or about the 10th day of June, 1986, in the City of Iloilo,
Philippines and within the jurisdiction of this Honorable Court, the abovenamed accused, being then the Chairman, Vice-Chairman, Treasurer,
Secretary and Trustee (who later became the secretary), respectively, of
the board of trustees of the Western Institute of Technology, Inc., a
corporation duly organized and existing under the laws of the Republic of
the Philippines, conspiring and confederating together and mutually
helping one another, to better realized (sic) their purpose, did then and
there wilfully, unlawfully and criminally prepare and execute and
subsequently cause to be submitted to the Securities and Exchange
Commission an income statement of the corporation for the fiscal year
1985-1986, the same being required to be submitted every end of the
corporation fiscal year by the aforesaid Commission and therefore, a
public document, including therein the disbursement of the retroactive
compensation of accused corporate officers in the amount
of P186,470.70, by then and there making it appear that the basis
thereof Resolution No. 4, Series of 1986 was passed by the board of
trustees on March 30, 1986, a date covered by the corporations fiscal
year 1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when in truth
and in fact, as said accused well knew, no such Resolution No. 48, Series
of 1986 was passed on March 30, 1986.

CONTRARY TO LAW.
Iloilo City, Philippines, November 22,1991.[3] [Underscoring ours].
The Information, on the other hand, for estafa reads:
The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T.
SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S.
SALAS (whose dates and places of birth cannot be ascertained) of the
crime of ESTAFA, Art. 315, par 1(b) of the Revised Penal Code, committed
as follows:
That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines
and within the jurisdiction of this Honorable Court, the above-named
accused, being then the Chairman, Vice-Chairman, Treasurer, Secretary
and Trustee (who later became the secretary), respectively, of the board
of trustees of the Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the Philippines,
conspiring and confederating together and mutually helping one another,
to better realize their purpose, did then and there wilfully, unlawfully and
feloniously defraud the said corporation (and its stockholders) in the
following manner, to wit: herein accused, knowing fully well that they
have no sufficient, lawful authority to disburse--- let alone violation of
applicable laws and jurisprudence, disbursed the funds of the corporation
by effecting payment of their retroactive salaries in the amount
of P186,470.70 and subsequently paying themselves every 15 th and
30th of the month starting June 15, 1986 until the present, in the amount
ofP19,500.00 per month, as if the same were their own, and when herein
accused were informed of the illegality of these disbursements by the
minority stockholders by way of objections made in an annual
stockholders meeting held on June 14, 1986 and every year thereafter,
they refused, and still refuse, to rectify the same to the damage and
prejudice of the corporation (and its stockholders) in the total sum
of P1,453,970.79 as of November 15, 1991.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22,1991.[4] [Underscoring ours]
Thereafter, trial for the two criminal cases, docketed as Criminal
Cases Nos. 37097 and 37098, was consolidated. After a full-blown
hearing, Judge Porfirio Parian handed down a verdict of acquittal on both
counts[5] dated September 6, 1993 without imposing any civil liability
against the accused therein.

Petitioners filed a Motion for Reconsideration [6] of the civil aspect of


the RTC Decision which was, however, denied in an Order dated
November 23, 1993.[7]
Hence, the instant petition.
Significantly on December 8, 1994, a Motion for Intervention, dated
December 2, 1994, was filed before this Court by Western Institute of
Technology, Inc., supposedly one of the petitioners herein, disowning its
inclusion in the petition and submitting that Atty. Tranquilino R. Gale,
counsel for the other petitioners, had no authority whatsoever to
represent the corporation in filing the petition. Intervenor likewise prayed
for the dismissal of the petition for being utterly without merit. The
Motion for Intervention was granted on January 16, 1995.[8]
Petitioners would like us to hold private respondents civilly liable
despite their acquittal in Criminal Cases Nos. 37097 and 37098. They
base their claim on the alleged illegal issuance by private respondents of
Resolution No. 48, series of 1986 ordering the disbursement of corporate
funds in the amount of P186,470.70 representing the retroactive
compensation as of June 1, 1985 in favor of private respondents, board
members of WIT, plus P1,453,970.79 for the subsequent collective
salaries of private respondent every 15 th and 30th of the month until the
filing of the criminal complaints against them on March 1991. Petitioners
maintain that this grant of compensation to private respondents is
proscribed under Section 30 of the Corporation Code. Thus, private
respondents are obliged to return these amounts to the corporation with
interest.
We cannot sustain the petitioners. The pertinent section of the
Corporation Code provides:
Sec. 30. Compensation of directors.--- In the absence of any provision in
the by-laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per
diems:Provided, however, That any such compensation (other than per
diems) may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of
the net income before income tax of the corporation during the preceding
year. [Underscoring ours]
There is no argument that directors or trustees, as the case may be,
are not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office. This rule
is founded upon a presumption that directors /trustees render service

gratuitously and that the return upon their shares adequately furnishes
the motives for service, without compensation [9] Under the foregoing
section, there are only two (2) ways by which members of the board can
be granted compensation apart from reasonable per diems: (1) when
there is a provision in the by-laws fixing their compensation; and (2)
when the stockholders representing a majority of the outstanding capital
stock at a regular or special stockholders meeting agree to give it to
them.
This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of note
is the clear phraseology of Section 30 which states: xxx [T]he directors
shall not receive any compensation, as such directors, xxx. The
phrase as such directors is not without significance for it delimits the
scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render
services to the corporation in a capacity other than as directors/trustees.
[10]
In the case at bench, Resolution No. 48, s. 1986 granted monthly
compensation to private respondents not in their capacity as members of
the board, but rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of
Technology. We quote once more Resolution No. 48, s. 1986 for easy
reference, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for
services rendered as follows: Chairman - P9,000.00/month, ViceChairman - P3,500.00/month, Corporate Treasurer - P3,500.00/month
andCorporate Secretary - P3,500.00/month, retroactive June 1, 1985 and
the ten percentum of the net profits shall be distributed equally among
the ten members of the Board of Trustees. This shall amend and
superceed(sic) any previous resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March
30, 1986 is true and correct to the best of my knowledge and belief.
(Sgd) ANTONI
O S. SALAS
Corporate
Secretary[11] [Underscoring ours]
Clearly, therefore , the prohibition with respect to granting compensation
to corporate directors/trustees as such under Section 30 is not violated in
this particular case. Consequently, the last sentence of Section 30 which
provides:
xxx xxx. In no case shall the total yearly compensation of directors, as
such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. [Underscoring
ours]
does not likewise find application in this case since the compensation is
being given to private respondents in their capacity as officers of WIT and
not as board members.
Petitioners assert that the instant case is a derivative suit brought by
them as minority shareholders of WIT for and on behalf of the corporation
to annul Resolution No. 48, s. 1986 which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by
minority shareholders in the name of the corporation to redress wrongs
committed against it, for which the directors refuse to sue. [12] It is a
remedy designed by equity and has been the principal defense of the
minority shareholders against abuses by the majority. [13] Here, however,
the case is not a derivative suit but is merely an appeal on the civil
aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo
for estafa and falsification of public document. Among the basic
requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege
his complaint before the proper forum that he is suing on a derivative
cause of action on behalf of the corporation and all other shareholders
similarly situated who wish to join. [14] This is necessary to vest jurisdiction
upon the tribunal in line with the rule that it is the allegations in the
complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. [15] This was
not complied with by the petitioners either in their complaint before the
court a quo nor in the instant petition which, in part, merely states that
this is a petition for review on certiorari on pure questions of law to set

aside a portion of the RTC decision in Criminal Cases Nos. 37097 and
37098[16] since the trial courts judgment of acquittal failed to impose
any civil liability against the private respondents. By no amount of equity
considerations, if at all deserved, can a mere appeal on the civil aspect of
a criminal case be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as
insisted by petitioners, which it is not, the same is outrightly dismissible
for having been wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The case should have been filed
with the Securities and Exchange Commission (SEC) which exercises
original and exclusive jurisdiction over derivative suits, they being intracorporate disputes, per Section 5(b) of P.D. No. 902-A:
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

b) Controversies arising out of intra-corporate 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;
xxx xxx

xxx. [Underscoring ours]

Once the case is decided by the SEC, the losing party may file a petition
for review before the Court of Appeals raising questions of fact, of law, or
mixed questions of fact and law.[17] It is only after the case has ran this
course, and not earlier, can it be brought to us via a petition for review
on certiorari under Rule 45 raising only pure questions of law.
[18]
Petitioners, in pleading that we treat the instant petition as a
derivative suit, are trying to short-circuit the entire process which we
cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and
37098 for falsification of public document and estafa, which this petition
truly is, we have to deny the petition just the same. It will be well to
quote the respondent courts ratiocinations acquitting the private
respondents on both counts:

The prosecution wants this Court to believe and agree that there is
falsification of public document because, as claimed by the prosecution,
Resolution No. 48, Series of 1986 (Exh. 1-E-1) was not taken up and
passed during the Regular Meeting of the Board of Trustees of the
western Institute of Technology (WIT), Inc. on March 30, 1986, but on June
1, 1986 special meeting of the same board of trustees.
This Court is reluctant to accept this claim of falsification. The
prosecution omitted to submit the complete minutes of the regular
meeting of the Board of Trustees on March 30, 1986. It only presented in
evidence Exh. C, which is page 5 or the last page of the said minutes.
Had the complete minutes (Exh. 1 consisting of five (5) pages, been
submitted, it can readily be seen and understood that Resolution No. 48,
Series of 1986 (Exh. 1-E-1) giving compensation to corporate officers,
was indeed included in Other Business, No. 6 of the Agenda, and was
taken up and passed on March 30, 1986. The mere fact of existence of
Exh. C also proves that it was passed on March 30, 1986 for Exh,. C is
a part and parcel of the whole minutes of the Board of Trustees Regular
Meeting on March 30, 1986. No better and more credible proof can be
considered other than the Minutes (Exh. 1) itself of the Regular Meeting
of the Board of Trustees on March 30, 1986. The imputation that said
Resolution No.48 was neither taken up nor passed on March 30, 1986
because the matter regarding compensation was not specifically stated
or written in the Agenda and that the words possible implementation of
said Resolution No. 48, was expressly written in the Agenda for the
Special Meeting of the Board on June 1, 1986, is simply an
implication. This evidence by implication to the mind of the court cannot
prevail over the Minutes (Exh. 1) and cannot ripen into proof beyond
reasonable doubt which is demanded in all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh. 3-D-1) of the
Articles of Incorporation (Exh. 3-B) of the Panay Educational Institution,
Inc., now the Western Institute of Technology, Inc., the officers of the
corporation shall receive such compensation as the Board of Directors
may provide. These Articles of Incorporation was adopted on May 17,
1957 (Exh. 3-E). The Officers of the corporation and their corresponding
duties are enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of
the Amended By-Laws of the Corporation (Exh. 4-A) which was adopted
on May 31, 1957. According to Sec. 6, Art. III of the same By-Laws, all
officers shall receive such compensation as may be fixed by the Board of
Directors.
It is the perception of this Court that the grant of compensation or salary
to the accused in their capacity as officers of the corporation, through
Resolution No. 48, enacted on March 30, 1986 by the Board of Trustees, is
authorized by both the Articles of Incorporation and the By-Laws of the

Corporation. To state otherwise is to depart from the clear terms of the


said articles and by-laws. In their defense the accused have properly and
rightly asserted that the grant of salary is not for directors, but for their
being officers of the corporation who oversee the day to day activities
and operations of the school.
xxx xxx

xxx

xxx [O]n the question of whether or not the accused can be held liable
for estafa under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is
perceived by this Court that the receipt and the holding of the money by
the accused as salary on basis of the authority granted by the Articles
and By-Laws of the corporation are not tainted with abuse of
confidence. The money they received belongs to them and cannot be
said to have been converted and/or misappropriated by them.
xxx xxx

xxx.[19] [Underscoring ours]

From the foregoing factual findings, which we find to be amply


substantiated by the records, it is evident that there is simply no basis to
hold the accused, private respondents herein, civilly liable. Section 2(b)
of Rule 111 on the New Rules on Criminal Procedure provides:
SEC. 2. Institution of separate civil action.
xxx xxx

xxx

(b) Extinction of the penal action does not carry with it extinction of the
civil, unless the extinction proceeds from a declaration in a final
judgment that the fact from which the civil might arise did not
exist.[Underscoring ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
SEC. 2. Form and contents of judgment.
xxx xxx

xxx

In case of acquittal, unless there is a clear showing that the act from
which the civil liability might arise did not exist, the judgment shall make
a finding on the civil liability of the accused in favor of the offended
party. [Underscoring ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely
based on reasonable doubt but rather on a finding that the accusedprivate respondents did not commit the criminal acts complained of.
Thus, pursuant to the above rule and settled jurisprudence, any civil
action ex delicto cannot prosper. Acquittal in a criminal action bars the
civil action arising therefrom where the judgment of acquittal holds that
the accused did not commit the criminal acts imputed to them. [20]
WHEREFORE, the instant petition is hereby DENIED with costs
against petitioners.
SO ORDERED.

G.R. No. L-14441

December 17, 1966

PEDRO R. PALTING, petitioner,


vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later
supplemented and amplified by another dated September 9, 1958, of the
Securities and Exchange Commission denying the opposition to, and
instead, granting the registration, and licensing the sale in the
Philippines, of 5,000,000 shares of the capital stock of the respondentappellee San Jose Petroleum, Inc. (hereafter referred to as SAN JOSE
PETROLEUM), a corporation organized and existing in the Republic of
Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine
Securities and Exchange Commission a sworn registration statement, for
the registration and licensing for sale in the Philippines Voting Trust
Certificates representing 2,000,000 shares of its capital stock of a par
value of $0.35 a share, at P1.00 per share. It was alleged that the entire
proceeds of the sale of said securities will be devoted or used exclusively
to finance the operations of San Jose Oil Company, Inc. (a domestic
mining corporation hereafter to be referred to as SAN JOSE OIL) which has
14 petroleum exploration concessions covering an area of a little less
than 1,000,000 hectares, located in the provinces of Pangasinan, Tarlac,
Nueva Ecija, La Union, Iloilo, Cotabato, Davao and Agusan. It was the
express condition of the sale that every purchaser of the securities shall
not receive a stock certificate, but a registered or bearer-voting-trust
certificate from the voting trustees named therein James L. Buckley and

Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second
in New York City. While this application for registration was pending
consideration by the Securities and Exchange Commission, SAN JOSE
PETROLEUM filed an amended Statement on June 20, 1958, for
registration of the sale in the Philippines of its shares of capital stock,
which was increased from 2,000,000 to 5,000,000, at a reduced offering
price of from P1.00 to P0.70 per share. At this time the par value of the
shares has also been reduced from $.35 to $.01 per share. 1

2. Whether or not the issue raised herein is already moot and


academic;

Pedro R. Palting and others, allegedly prospective investors in the shares


of SAN JOSE PETROLEUM, filed with the Securities and Exchange
Commission an opposition to registration and licensing of the securities
on the grounds that (1) the tie-up between the issuer, SAN JOSE
PETROLEUM, a Panamanian corporation and SAN JOSE OIL, a domestic
corporation, violates the Constitution of the Philippines, the Corporation
Law and the Petroleum Act of 1949; (2) the issuer has not been licensed
to transact business in the Philippines; (3) the sale of the shares of the
issuer is fraudulent, and works or tends to work a fraud upon Philippine
purchasers; and (4) the issuer as an enterprise, as well as its business, is
based upon unsound business principles. Answering the foregoing
opposition of Palting, et al., the registrant SAN JOSE PETROLEUM claimed
that it was a "business enterprise" enjoying parity rights under the
Ordinance appended to the Constitution, which parity right, with respect
to mineral resources in the Philippines, may be exercised, pursuant to the
Laurel-Langley Agreement, only through the medium of a corporation
organized under the laws of the Philippines. Thus, registrant which is
allegedly qualified to exercise rights under the Parity Amendment, had to
do so through the medium of a domestic corporation, which is the SAN
JOSE OIL. It refused the contention that the Corporation Law was being
violated, by alleging that Section 13 thereof applies only to foreign
corporations doing business in the Philippines, and registrant was not
doing business here. The mere fact that it was a holding company of SAN
JOSE OIL and that registrant undertook the financing of and giving
technical assistance to said corporation did not constitute transaction of
business in the Philippines. Registrant also denied that the offering for
sale in the Philippines of its shares of capital stock was fraudulent or
would work or tend to work fraud on the investors. On August 29, 1958,
and on September 9, 1958 the Securities and Exchange Commissioner
issued the orders object of the present appeal.

4. Whether or not the sale of respondent's securities is


fraudulent, or would work or tend to work fraud to purchasers of
such securities in the Philippines.

The issues raised by the parties in this appeal are as follows:


1. Whether or not petitioner Pedro R. Palting, as a "prospective
investor" in respondent's securities, has personality to file the
present petition for review of the order of the Securities and
Exchange Commission;

3. Whether or not the "tie-up" between the respondent SAN JOSE


PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY,
INC., a domestic mining corporation, is violative of the
Constitution, the Laurel-Langley Agreement, the Petroleum Act of
1949, and the Corporation Law; and

1. In answer to the notice and order of the Securities and Exchange


Commissioner, published in 2 newspapers of general circulation in the
Philippines, for "any person who is opposed" to the petition for
registration and licensing of respondent's securities, to file his opposition
in 7 days, herein petitioner so filed an opposition. And, the Commissioner,
having denied his opposition and instead, directed the registration of the
securities to be offered for sale, oppositor Palting instituted the present
proceeding for review of said order.
Respondent raises the question of the personality of petitioner to bring
this appeal, contending that as a mere "prospective investor", he is not
an "Aggrieved" or "interested" person who may properly maintain the
suit. Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that
the phrase "party aggrieved" used in the Securities Act 3 and the Rules of
Court4 as having the right to appeal should refer only to issuers, dealers
and salesmen of securities.
It is true that in the cited case, it was ruled that the phrase "person
aggrieved" is that party "aggrieved by the judgment or decree where it
operates on his rights of property or bears directly upon his interest", that
the word "aggrieved" refers to "a substantial grievance, a denial of some
personal property right or the imposition upon a party of a burden or
obligation." But a careful reading of the case would show that the appeal
therein was dismissed because the court held that an order of
registration was not final and therefore not appealable. The foregoing
pronouncement relied upon by herein respondent was made in construing
the provision regarding an order of revocation which the court held was
the one appealable. And since the law provides that in revoking the
registration of any security, only the issuer and every registered dealer of
the security are notified, excluding any person or group of persons having
no such interest in the securities, said court concluded that the phrase

"interested person" refers only to issuers, dealers or salesmen of


securities.
We cannot consider the foregoing ruling by the Utah State Court as
controlling on the issue in this case. Our Securities Act in Section 7(c)
thereof, requires the publication and notice of the registration statement.
Pursuant thereto, the Securities and Exchange Commissioner caused the
publication of an order in part reading as follows:
. . . Any person who is opposed with this petition must file his
written opposition with this Commission within said period (2
weeks). . . .
In other words, as construed by the administrative office entrusted with
the enforcement of the Securities Act, any person (who may not be
"aggrieved" or "interested" within the legal acceptation of the word) is
allowed or permitted to file an opposition to the registration of securities
for sale in the Philippines. And this is in consonance with the generally
accepted principle that Blue Sky Laws are enacted to protect investors
and prospective purchasers and to prevent fraud and preclude the sale of
securities which are in fact worthless or worth substantially less than the
asking price. It is for this purpose that herein petitioner duly filed his
opposition giving grounds therefor. Respondent SAN JOSE PETROLEUM
was required to reply to the opposition. Subsequently both the petition
and the opposition were set for hearing during which the petitioner was
allowed to actively participate and did so by cross-examining the
respondent's witnesses and filing his memorandum in support of his
opposition. He therefore to all intents and purposes became a party to
the proceedings. And under the New Rules of Court,5 such a party can
appeal from a final order, ruling or decision of the Securities and
Exchange Commission. This new Rule eliminating the word "aggrieved"
appearing in the old Rule, being procedural in nature,6 and in view of the
express provision of Rule 144 that the new rules made effective on
January 1, 1964 shall govern not only cases brought after they took effect
but all further proceedings in cases then pending, except to the extent
that in the opinion of the Court their application would not be feasible or
would work injustice, in which event the former procedure shall apply, we
hold that the present appeal is properly within the appellate jurisdiction
of this Court.
The order allowing the registration and sale of respondent's securities is
clearly a final order that is appealable. The mere fact that such authority
may be later suspended or revoked, depending on future developments,
does not give it the character of an interlocutory or provisional ruling.
And the fact that seven days after the publication of the order, the

securities are deemed registered (Sec. 7, Com. Act 83, as amended),


points to the finality of the order. Rights and obligations necessarily arise
therefrom if not reviewed on appeal.
Our position on this procedural matter that the order is appealable and
the appeal taken here is proper is strengthened by the intervention of
the Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as
the constitutional issues herein presented affect the validity of Section 13
of the Corporation Law, which, according to the respondent, conflicts with
the Parity Ordinance and the Laurel-Langley Agreement recognizing, it is
claimed, its right to exploit our petroleum resources notwithstanding said
provisions of the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30 days from
September 3, 1958, and since no stay order has been issued by the
Supreme Court, respondent's shares became registered and licensed
under the law as of October 3, 1958. Consequently, it is asserted, the
present appeal has become academic. Frankly we are unable to follow
respondent's argumentation. First it claims that the order of August 29
and that of September 9, 1958 are not final orders and therefor are not
appealable. Then when these orders, according to its theory became final
and were implemented, it argues that the orders can no longer be
appealed as the question of registration and licensing became moot and
academic.
But the fact is that because of the authority to sell, the securities are, in
all probabilities, still being traded in the open market. Consequently the
issue is much alive as to whether respondent's securities should continue
to be the subject of sale. The purpose of the inquiry on this matter is not
fully served just because the securities had passed out of the hands of
the issuer and its dealers. Obviously, so long as the securities are
outstanding and are placed in the channels of trade and commerce,
members of the investing public are entitled to have the question of the
worth or legality of the securities resolved one way or another.
But more fundamental than this consideration, we agree with the late
Senator Claro M. Recto, who appeared asamicus curiae in this case, that
while apparently the immediate issue in this appeal is the right of
respondent SAN JOSE PETROLEUM to dispose of and sell its securities to
the Filipino public, the real and ultimate controversy here would actually
call for the construction of the constitutional provisions governing the
disposition, utilization, exploitation and development of our natural
resources. And certainly this is neither moot nor academic.

3. We now come to the meat of the controversy the "tie-up" between


SAN JOSE OIL on the one hand, and the respondent SAN JOSE
PETROLEUM and its associates, on the other. The relationship of these
corporations involved or affected in this case is admitted and established
through the papers and documents which are parts of the records: SAN
JOSE OIL, is a domestic mining corporation, 90% of the outstanding
capital stock of which is owned by respondent SAN JOSE PETROLEUM, a
foreign (Panamanian) corporation, the majority interest of which is owned
by OIL INVESTMENTS, Inc., another foreign (Panamanian) company. This
latter corporation in turn is wholly (100%) owned by PANTEPEC OIL
COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A., both
organized and existing under the laws of Venezuela. As of September 30,
1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found
in 49 American states and U.S. territories, holding 3,476,988 shares of
stock; whereas, as of November 30, 1956, PANTEPEC OIL COMPANY was
said to have 3,077,916 shares held by 12,373 stockholders scattered in
49 American state. In the two lists of stockholders, there is no indication
of the citizenship of these stockholders, 7 or of the total number of
authorized stocks of each corporation, for the purpose of determining the
corresponding percentage of these listed stockholders in relation to the
respective capital stock of said corporation.
Petitioner, as well as the amicus curiae and the Solicitor General8 contend
that the relationship between herein respondent SAN JOSE PETROLEUM
and its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the
Philippine Constitution, and Section 13 of the Corporation Law, which
inhibits a mining corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far from
violating the Constitution; such relationship between the two corporations
is in accordance with the Laurel-Langley Agreement which implemented
the Ordinance Appended to the Constitution, and that Section 13 of the
Corporation Law is not applicable because respondent is not licensed to
do business, as it is not doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the public
domain, waters, minerals, coal, petroleum, and other mineral oils,
all forces of potential energy, and other natural resources of the
Philippines belong to the State, and their disposition, exploitation,
development, or utilization shall be limited to citizens of the
Philippines, or to corporations or associations at least sixty per
centum of the capital of which is owned by such citizens, subject
to any existing right, grant, lease or concession at the time of the
inauguration of this Government established under this
Constitution. . . . (Emphasis supplied)

In the 1946 Ordinance Appended to the Constitution, this right (to utilize
and exploit our natural resources) was extended to citizens of the United
States, thus:
Notwithstanding the provisions of section one, Article Thirteen,
and section eight, Article Fourteen, of the foregoing Constitution,
during the effectivity of the Executive Agreement entered into by
the President of the Philippines with the President of the United
States on the fourth of July, nineteen hundred and forty-six,
pursuant to the provisions of Commonwealth Act Numbered
Seven hundred and thirty-three, but in no case to extend beyond
the third of July, nineteen hundred and seventy-four, the
disposition, exploitation, development, and utilization of all
agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum, and other mineral oils, all
forces of potential energy, and other natural resources of the
Philippines, and the operation of public utilities shall, if open to
any person, be open to citizens of the United States, and to all
forms of business enterprises owned or controlled, directly or
indirectly, by citizens of the United States in the same manner as
to, and under the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or controlled by
citizens of the Philippines (Emphasis supplied.)
In the 1954 Revised Trade Agreement concluded between the United
States and the Philippines, also known as the Laurel-Langley Agreement,
embodied in Republic Act 1355, the following provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and utilization of all
agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum and other mineral oils, all
forces and sources of potential energy, and other natural
resources of either Party, and the operation of public utilities,
shall, if open to any person, be open to citizens of the other Party
and to all forms of business enterprise owned or controlled,
directly or indirectly, by citizens of such other Party in the same
manner as to and under the same conditions imposed upon
citizens or corporations or associations owned or controlled by
citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be exercised, . . . in
the case of citizens of the United States, with respect to natural
resources in the public domain in the Philippines, only through

the medium of a corporation organized under the laws of the


Philippines and at least 60% of the capital stock of which is
owned or controlled by citizens of the United States. . . .

These concepts clarified, is herein respondent SAN JOSE PETROLEUM an


American business enterprise entitled to parity rights in the Philippines?
The answer must be in the negative, for the following reasons:

3. The United States of America reserves the rights of the several


States of the United States to limit the extent to which citizens or
corporations or associations owned or controlled by citizens of
the Philippines may engage in the activities specified in this
Article. The Republic of the Philippines reserves the power to
deny any of the rights specified in this Article to citizens of the
United States who are citizens of States, or to corporations or
associations at least 60% of whose capital stock or capital is
owned or controlled by citizens of States, which deny like rights
to citizens of the Philippines, or to corporations or associations
which are owned or controlled by citizens of the
Philippines. . . . (Emphasis supplied.)

Firstly It is not owned or controlled directly by citizens of the United


States, because it is owned and controlled by a corporation, the OIL
INVESTMENTS, another foreign (Panamanian) corporation.

Re-stated, the privilege to utilize, exploit, and develop the natural


resources of this country was granted, by Article XIII of the Constitution,
to Filipino citizens or to corporations or associations 60% of the capital of
which is owned by such citizens. With the Parity Amendment to the
Constitution, the same right was extended to citizens of the United States
and business enterprises owned or controlled directly or indirectly, by
citizens of the United States.
There could be no serious doubt as to the meaning of the word "citizens"
used in the aforementioned provisions of the Constitution. The right was
granted to 2 types of persons: natural persons (Filipino or American
citizens) and juridical persons (corporations 60% of which capital is
owned by Filipinos and business enterprises owned or controlled directly
or indirectly, by citizens of the United States). In American law, "citizen"
has been defined as "one who, under the constitution and laws of the
United States, has a right to vote for representatives in congress and
other public officers, and who is qualified to fill offices in the gift of the
people. (1 Bouvier's Law Dictionary, p. 490.) A citizen is
One of the sovereign people. A constituent member of the
sovereignty, synonymous with the people." (Scott v. Sandford, 19
Ho. [U.S.] 404, 15 L. Ed. 691.)
A member of the civil state entitled to all its privileges. (Cooley,
Const. Lim. 77. See U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed. 588;
Minor v. Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)

Secondly Neither can it be said that it is indirectly owned and


controlled by American citizens through the OIL INVESTMENTS, for this
latter corporation is in turn owned and controlled, not by citizens of the
United States, but still by two foreign (Venezuelan) corporations, the
PANTEPEC OIL COMPANY and PANCOASTAL PETROLEUM.
Thirdly Although it is claimed that these two last corporations are
owned and controlled respectively by 12,373 and 9,979 stockholders
residing in the different American states, there is no showing in the
certification furnished by respondent that the stockholders of
PANCOASTAL or those of them holding the controlling stock, are citizens
of the United States.
Fourthly Granting that these individual stockholders are American
citizens, it is yet necessary to establish that the different states of which
they are citizens, allow Filipino citizens or corporations or associations
owned or controlled by Filipino citizens, to engage in the exploitation, etc.
of the natural resources of these states (see paragraph 3, Article VI of the
Laurel-Langley Agreement, supra). Respondent has presented no proof to
this effect.
Fifthly But even if the requirements mentioned in the two immediately
preceding paragraphs are satisfied, nevertheless to hold that the set-up
disclosed in this case, with a long chain of intervening foreign
corporations, comes within the purview of the Parity Amendment
regarding business enterprises indirectly owned or controlled by citizens
of the United States, is to unduly stretch and strain the language and
intent of the law. For, to what extent must the word "indirectly" be
carried? Must we trace the ownership or control of these various
corporationsad infinitum for the purpose of determining whether the
American ownership-control-requirement is satisfied? Add to this the
admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL
which are allegedly owned or controlled directly by citizens of the United
States, are traded in the stock exchange in New York, and you have a
situation where it becomes a practical impossibility to determine at any
given time, the citizenship of the controlling stock required by the law. In
the circumstances, we have to hold that the respondent SAN JOSE

PETROLEUM, as presently constituted, is not a business enterprise that is


authorized to exercise the parity privileges under the Parity Ordinance,
the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN
JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of whose
stock is owned by SAN JOSE PETROLEUM? This is a query which we need
not resolve in this case as SAN JOSE OIL is not a party and it is not
necessary to do so to dispose of the present controversy. But it is a
matter that probably the Solicitor General would want to look into.
There is another issue which has been discussed extensively by the
parties. This is whether or not an American mining corporation may
lawfully "be in anywise interested in any other corporation (domestic or
foreign) organized for the purpose of engaging in agriculture or in
mining," in the Philippines or whether an American citizen owning stock
in more than one corporation organized for the purpose of engaging in
agriculture or in mining, may own more than 15% of the capital stock
then outstanding and entitled to vote, of each of such corporations, in
view of the express prohibition contained in Section 13 of the Philippine
Corporation Law. The petitioner in this case contends that the provisions
of the Corporation Law must be applied to American citizens and
business enterprise otherwise entitled to exercise the parity privileges,
because both the Laurel-Langley Agreement (Art. VI, par. 1) and the
Petroleum Act of 1948 (Art. 31), specifically provide that the enjoyment
by them of the same rights and obligations granted under the provisions
of both laws shall be "in the same manner as to, and under the same
conditions imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines." The
petitioner further contends that, as the enjoyment of the privilege of
exploiting mineral resources in the Philippines by Filipino citizens or
corporations owned or controlled by citizens of the Philippines (which
corporation must necessarily be organized under the Corporation Law), is
made subject to the limitations provided in Section 13 of the Corporation
Law, so necessarily the exercise of the parity rights by citizens of the
United States or business enterprise owned or controlled, directly or
indirectly, by citizens of the United States, must equally be subject to the
same limitations contained in the aforesaid Section 13 of the Corporation
Law.
In view of the conclusions we have already arrived at, we deem it not
indispensable for us to pass upon this legal question, especially taking
into account the statement of the respondent (SAN JOSE PETROLEUM)
that it is essentially a holding company, and as found by the Securities
and Exchange Commissioner, its principal activity is limited to the
financing and giving technical assistance to SAN JOSE OIL.

4. Respondent SAN JOSE PETROLEUM, whose shares of stock were


allowed registration for sale in the Philippines, was incorporated under
the laws of Panama in April, 1956 with an authorized capital stock of
$500,000.00, American currency, divided into 50,000,000 shares at par
value of $0.01 per share. By virtue of a 3-party Agreement of June 14,
1956, respondent was supposed to have received from OIL INVESTMENTS
8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of
$0.01 per share), plus a note for $250,000.00 due in 6 months, for which
respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its
capital stock, at $0.01 per share or with a value of $160,000.00, plus a
note for $230,297.97 maturing in 2 years at 6% per annum interest, 9 and
the assumption of payment of the unpaid price of 7,500,000 (of the
8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was
increased from $500,000.00 to $17,500,000.00 by increasing the par
value of the same 50,000,000 shares, from $0.01 to $0.35. Without any
additional consideration, the 16,000,000 shares of $0.01 previously
issued to OIL INVESTMENTS with a total value of $160,000.00 were
changed with 16,000,000 shares of the recapitalized stock at $0.35 per
share, or valued at $5,600,000.00. And, to make it appear that cash was
received for these re-issued 16,000,000 shares, the board of directors of
respondent corporation placed a valuation of $5,900,000.00 on the
8,000,000 shares of SAN JOSE OIL (still having par value of $0.10 per
share) which were received from OIL INVESTMENTS as part-consideration
for the 16,000,000 shares at $0.01 per share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of SAN
JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the
alleged difference between the "value" of the said shares and the
subscription price thereof which is $800,000.00 (at $0.10 per share).
From this $800,000.00, the subscription price of the SAN JOSE OIL shares,
the amount of $319,702.03 was deducted, as allegedly unpaid
subscription price, thereby giving a difference of $480,297.97, which was
placed as the amount allegedly paid in on the subscription price of the
8,000,000 SAN JOSE OIL shares. Then, by adding thereto the note
receivable from OIL INVESTMENTS, for $250,000.00 (part-consideration
for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of
$6,516.21, as deferred expenses, SAN JOSE PETROLEUM appeared to
have assets in the sum of $736,814.18.
These figures are highly questionable. Take the item $5,900,000.00 the
valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears
no basis for such valuation other than belief by the board of directors of
respondent that "should San Jose Oil Company be granted the bulk of the

concessions applied for upon reasonable terms, that it would have a


reasonable value of approximately $10,000,000." 10 Then, of this amount,
the subscription price of $800,000.00 was deducted and called it
"difference between the (above) valuation and the subscription price for
the 8,000,000 shares." Of this $800,000.00 subscription price, they
deducted the sum of $480,297.97 and the difference was placed as the
unpaid portion of the subscription price. In other words, it was made to
appear that they paid in $480,297.97 for the 8,000,000 shares of SAN
JOSE OIL. This amount ($480,297.97) was supposedly that $250,000.00
paid by OIL INVESMENTS for 7,500,000 shares of SAN JOSE OIL, embodied
in the June 14 Agreement, and a sum of $230,297.97 the amount
expended or advanced by OIL INVESTMENTS to SAN JOSE OIL. And yet,
there is still an item among respondent's liabilities, for $230,297.97
appearing as note payable to Oil Investments, maturing in two (2) years
at six percent (6%) per annum. 11 As far as it appears from the records,
for the 16,000,000 shares at $0.35 per share issued to OIL INVESTMENTS,
respondent SAN JOSE PETROLEUM received from OIL INVESTMENTS only
the note for $250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with
par value of $0.10 per share or a total of $1,050,000.00 the only
assets of the corporation. In other words, respondent actually lost
$4,550,000.00, which was received by OIL INVESTMENTS.
But this is not all. Some of the provisions of the Articles of Incorporation
of respondent SAN JOSE PETROLEUM are noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director
may be represented and may vote through a proxy who also need
not be a director or stockholder; and
(3) that no contract or transaction between the corporation and
any other association or partnership will be affected, except in
case of fraud, by the fact that any of the directors or officers of
the corporation is interested in, or is a director or officer of, such
other association or partnership, and that no such contract or
transaction of the corporation with any other person or persons,
firm, association or partnership shall be affected by the fact that
any director or officer of the corporation is a party to or has an
interest in, such contract or transaction, or has in anyway
connected with such other person or persons, firm, association or
partnership; and finally, that all and any of the persons who may
become director or officer of the corporation shall be relieved
from all responsibility for which they may otherwise be liable by
reason of any contract entered into with the corporation, whether

it be for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation law and
corporate practices in this country. These provisions alone would outlaw
any corporation locally organized or doing business in this jurisdiction.
Consider the unique and unusual provision that no contract or transaction
between the company and any other association or corporation shall be
affected except in case of fraud, by the fact that any of the directors or
officers of the company may be interested in or are directors or officers of
such other association or corporation; and that none of such contracts or
transactions of this company with any person or persons, firms,
associations or corporations shall be affected by the fact that any director
or officer of this company is a party to or has an interest in such contract
or transaction or has any connection with such person or persons, firms
associations or corporations; and that any and all persons who may
become directors or officers of this company are hereby relieved of all
responsibility which they would otherwise incur by reason of any contract
entered into which this company either for their own benefit, or for the
benefit of any person, firm, association or corporation in which they may
be interested.
The impact of these provisions upon the traditional judiciary relationship
between the directors and the stockholders of a corporation is too
obvious to escape notice by those who are called upon to protect the
interest of investors. The directors and officers of the company can do
anything, short of actual fraud, with the affairs of the corporation even to
benefit themselves directly or other persons or entities in which they are
interested, and with immunity because of the advance condonation or
relief from responsibility by reason of such acts. This and the other
provision which authorizes the election of non-stockholders as directors,
completely disassociate the stockholders from the government and
management of the business in which they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity of the
management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS,
as holder of the only subscribed stock of the former corporation and
acting "on behalf of all future holders of voting trust certificates," entered
into a voting trust agreement12 with James L. Buckley and Austin E.
Taylor, whereby said Trustees were given authority to vote the shares
represented by the outstanding trust certificates (including those that
may henceforth be issued) in the following manner:
(a) At all elections of directors, the Trustees will designate a
suitable proxy or proxies to vote for the election of directors

designated by the Trustees in their own discretion, having in


mind the best interests of the holders of the voting trust
certificates, it being understood that any and all of the Trustees
shall be eligible for election as directors;
(b) On any proposition for removal of a director, the Trustees shall
designate a suitable proxy or proxies to vote for or against such
proposition as the Trustees in their own discretion may
determine, having in mind the best interest of the holders of the
voting trust certificates;
(c) With respect to all other matters arising at any meeting of
stockholders, the Trustees will instruct such proxy or proxies
attending such meetings to vote the shares of stock held by the
Trustees in accordance with the written instructions of each
holder of voting trust certificates. (Emphasis supplied.)

Argued: Jan. 19 and 20, 1920. --- Decided: March 1, 1920

This is a bill in equity brought by the receiver of a national bank to charge


its former president and directors with the loss of a great part of its
assets through the thefts of an employe of the bank while they were in
power. The case was sent to a master who found for the defendants; but
the District Court entered a decree against all of them. 229 Fed. 772. The
Circuit Court of Appeals reversed this decree, dismissed the bill as
against all except the administrator of Edwin Dresser, the president, cut
down the amount with which he was charged

It was also therein provided that the said Agreement shall be binding
upon the parties thereto, their successors, and upon all holders of voting
trust certificates.
And these are the voting trust certificates that are offered to investors as
authorized by Security and Exchange Commissioner. It can not be
doubted that the sale of respondent's securities would, to say the least,
work or tend to work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to
dismiss this appeal, is denied and the orders of the Securities and
Exchange Commissioner, allowing the registration of Respondent's
securities and licensing their sale in the Philippines are hereby set aside.
The case is remanded to the Securities and Exchange Commission for
appropriate action in consonance with this decision. With costs. Let a
copy of this decision be furnished the Solicitor General for whatever
action he may deem advisable to take in the premises. So ordered.

[1]

and refused to add

interest from the date of the decree of the District Court. Dresser v.
Bates, 250 Fed. 525, 162 C. C. A. 541. Dresser's administrator and the
receiver both appeal, the latter contending that the decree of the District
Court should be affirmed with interest and costs.
The bank was a little bank at Cambridge with a capital of $100,000 and
average deposits of somewhere about $300,000. It had a cashier, a
bookkeeper, a teller and a messenger. Before and during the time of the
losses Dresser was its president and executive officer, a large
stockholder, with an inactive deposit of from $35,000 to $50,000. From
July, 1903, to the end, Frank L. Earl was cashier. Coleman, who made the
trouble, entered the service of the bank as messenger in September,
1903. In January, 1904, he was promoted to be bookkeeper, being then

United States Supreme Court


251 U.S. 524
BATES v. DRESSER DRESSER

not quite eighteen but having studied bookkeeping. In the previous


August an auditor employed on the retirement of a cashier had reported
that the daily balance book was very much behind, that it was impossible
to prove the deposits, and that a competent bookkeeper should be

employed upon the work immediately. Coleman kept the deposit ledger

By May 1, 1907, Coleman had abstracted $17,000, concealing the fact by

and this was the work that fell into his hands. There was no cage in the

false additions in the column of total checks, and false balances in the

bank, and in 1904 and 1905 there were some small shortages in the

deposit ledger. Then for the moment a safer concealment was effected by

accounts of three successive tellers that were not accounted for, and the

charging the whole to Dresser's account. Coleman adopted this method

last of them, Cutting, was asked by Dresser to resign on that ground.

when a bank examiner was expected. Of course when the fraud was

Before doing so he told Dresser that someone had taken the money and

disguised by overcharging a depositor it could not be discovered except

that if he might be allowed to stay he would set a trap and catch the

by calling in the passbooks, or taking all the deposit slips and comparing

man, but Dresser did not care to do that and thought that there was

them with the depositors's ledger in detail. By November, 1907, the

nothing wrong. From Cutting's resignation on October 7, 1905, Coleman

amount taken by Coleman was $30,100, and the charge on Dresser's

acted as paying and receiving teller, in addition to his other duty, until

account was $20,000. In 1908 the sum was raised from $33,000 to

November, 1907. During this time there were no shortages disclosed in

$49,671. In 1909 Coleman's activity began to increase. In January he took

the teller's accounts. In May, 1906, Coleman took $2,000 cash from th

$6,829.26; in March, $10,833.73; in June, his previous stealings

vaults of the bank, but restored it the next morning. In November of the

amounting to $83,390.94, he took $5,152.06; in July, $18,050; in August,

same year he began the thefts that come into question here. Perhaps in

$6,250; in September, $17,350; in October, $47,277.08; in November,

the beginning he took the money directly. But as he ceased to have

$51,847; in December, $46,956.44; in January, 1910, $27,395.53; in

charge of the cash in November, 1907, he invented another way. Having

February, $6,473.97; making a total of $310,143.02, when the bank

a small account at the bank, he would draw checks for the amount he

closed on February 21, 1910. As a result of this the amount of the

wanted, exchange checks with a Boston broker, get cash for the broker's

monthly deposits seemed to decline noticeably and the directors

check, and, when his own check came to the bank through the clearing

considered the matter in September, but concluded that the falling off

house, would abstract it from the envelope, enter the others on his book

was due in part to the springing up of rivals, whose deposits were

and conceal the difference by a charge to some other account or a false

increasing, but was parallel to a similar decrease in New York. An

addition in the column of drafts or deposits in the depositors' ledger. He

examination by a bank examiner in December, 1909, disclosed nothing

handed to the cashier only the slip from the clearing house that showed

wrong to him.

the totals. The cashier paid whatever appeared to be due and thus
Coleman's checks were honored. So far as Coleman thought it necessary,
in view of the absolute trust in him on the part of all concerned, he took
care that his balances should agree with those in the cashier's book.

In this connection it should be mentioned that in the previous semiannual examinations by national bank examiners nothing was discovered
pointing to malfeasance. The cashier was honest and everybody believed
that they could rely upon him, although in fact he relied too much upon

Coleman, who also was unsuspected by all. If Earl had opened the

experience had reached Cambridge before 1910. We are not prepared to

envelopes from the clearing house, and had seen the checks, or had

reverse the finding of the master and the Circuit Court of Appeals that

examined the deposit ledger with any care he would have found out what

the directors should not be held answerable for taking the cashier's

was going on. The scrutiny of anyone accustomed to such details would

statement of liabilities to be as correct as the statement of assets always

have discovered the false additions and other indicia of fraud that were

was. If he had not been negligent without their knowledge it would have

on the face of the book. But it may be doubted whether anything less

been. Their confidence seemed warranted by the semiannual

than a continuous pursuit of the figures through pages would have done

examinations by the Government examiner and they were encouraged in

so except by a lucky chance.

their belief that all was well by the president, whose responsibility, as

The question of the liability of the directors in this case is the question
whether they neglected their duty by accepting the cashier's statement
of liabilities and failing to inspect the depositors' ledger. The statements
of assets always were correct. A bylaw that had been allowed to become
obsolete or nearly so is invoked as establishing their own standard of
conduct. By that a committee was to be appointed every six months 'to
examine into the affairs of the bank, to count its cash, and compare its
assets and liabilities with the balances on the general ledger, for the
purpose of ascertaining whether or not the books re correctly kept, and
the condition of the bank in a sound and solvent condition.' Of course

executive officer; interest, as large stockholder and depositor; and


knowledge, from long daily presence in the bank, were greater than
theirs. They were not bound by virtue of the office gratuitously assumed
by them to call in the pass books and compare them with the ledger, and
until the event showed the possibility they hardly could have seen that
their failure to look at the ledger opened a way to fraud. See Briggs v.
Spaulding, 141 U.S. 132, 11 Sup. Ct. 924, 35 L. Ed. 662; Warner v.
Penoyer, 91 Fed. 587, 33 C. C. A. 222, 44 L. R. A. 761. We are not laying
down general principles, however, but confine our decision to the
circumstances of the particular case.

liabilities as well as assets must be known to know the condition and, as

The position of the president is different. Practically he was the master of

this case shows, peculations may be concealed as well by a false

the situation. He was daily at the bank for hours, he had the deposit

understatement of liabilities as by a false show of assets. But the former

ledger in his hands at times and might have had it at any time. He had

is not the direction in which fraud would have been looked for, especially

had hints and warnings in addition to those that we have mentioned,

on the part of one who at the time of his principal abstractions was not in

warnings that should not be magnified unduly, but still that taken with

contact with the funds. A debtor hardly expects to have his liability

the auditor's report of 1903, the unexplained shortages, the suggestion

understated. Some animals must have given at least one exhibition of

of the teller, Cutting, in 1905, and the final seeming rapid decline in

dangerous propensities before the owner can be held. This fraud was a

deposits, would have induced scrutiny but for an invincible repose upon

novelty in the way of swindling a bank so far as the knowledge of any

the status quo. In 1908 one Fillmore learned that a package containing

$150 left with the bank for safe keeping was not to be found, told Dresser

though the precise form that the fraud would take hardly could have been

of the loss, wrote to him that he could not conclude that the package had

foreseen. We accept with hesitation the date of December 1, 1908, as the

been destroyed or removed by someone connected with the bank, and in

beginning of Dresser's liability, but think it reasonable that interest

later conversation said that it was evident that there was a thief in the

should be charged against his estate upon the sum found by the Circuit

bank. He added that he would advise the president to look after Coleman,

Court of Appeals to be due. It is a question of discretion, not of right,

that he believed he was living at a pretty fast pace, and that he had

Lincoln v. Claflin, 7 Wall. 132, 19 L. Ed. 106; Drumm-Flato Commission Co.

pretty good authority for thinking that he was supporting a woman. In the

v. Edmission, 208 U.S. 534, 539, 28 Sup. Ct. 367, 52 L. Ed. 606; but to the

same year or the year before, Coleman, whose pay was never more than

extent that the decree of the District Court was affirmed, Kneeland v.

twelve dollars a week, set up an automobile, as was known to Dresser

American Loan & Trust Co., 138 U.S. 509, 11 Sup. Ct. 426, 34 L. Ed. 1052;

and commented on unfavorably, to him. There was also some evidence of

De La Rama v. De La Rama, 241 U.S. 154, 159, 36 Sup. Ct. 518, 60 L. Ed.

notice to Dresser that Coleman was dealing in copper stocks. In 1909

932, Ann. Cas. 1917C, 411, it seems to us just upon all the circumstances

came the great and inadequately explained seeming shrinkage in the

that it should run until the receiver interposed a delay by his appeal to

deposits. No doubt plausible explanations of his conduct came from

this Court. The Scotland, 118 U.S. 507, 520, 6 Sup. Ct. 1174, 30 L. Ed.

Coleman and the notice as to speculations may have been slight, but

153. Upon this as upon the other points our decision is confined to the

taking the whole story of the relations of the parties, we are not ready to

specific facts.

say that the two courts below erred in finding that Dresser had been put
upon his guard. However little the warnings may have pointed to the
specific facts, had they been accepted they would have led to an

Decree modified by charging the estate of Dresser with interest from


February 1, 1916, to June 1, 1918, upon the sum found to be due, and
affirmed.

examination of the depositors' ledger, a discovery of past and a


prevention of future thefts.

Mr. Justice McKENNA and Mr. Justice PITNEY dissent, upon the ground that
not only the administrator of the president of the bank but the other

We do not perceive any ground for applyi g to this case the limitations of
liability ex contractu adverted to in Globe Refining Co. v. Landa Cotton Oil

directors ought to be held liable to the extent to which they were held by
the District Court. 229 Fed. 772.

Co., 190 U.S. 540, 23 Sup. Ct. 754, 47 L. Ed. 1171. In accepting the
presidency Dresser must be taken to have contemplated responsibility for
losses to the bank, whatever they were, if chargeable to his fault. Those

Mr. Justice VAN DEVANTER and Mr. Justice BRANDEIS took no part in the
decision.

that happened were chargeable to his fault, after he had warnings that
should have led to steps that would have made fraud impossible, even

SMITH vs VAN GORKOM

488 A.2d 858, 3 EXC 112 (Del. 1985)

sued if they voted against the merger, and vague advice from Romans
who told them that the $55 was in the beginning end of the range he

Brief Fact Summary. Plaintiffs, Alden Smith and John Gosselin, brought

calculated. Van Gorkom did not disclose how he came to the $55 amount.

a class action suit against Defendant corporation, Trans Union, and its

On this advice, the Board approved the merger, and it was also later

directors, after the Board approved a merger proposal submitted by the

approved by shareholders.

CEO of Trans Union, fellow Defendant Jerome Van Gorkom.


Issue. The issue is whether the business judgment by the Board to
Synopsis of Rule of Law. Under the business judgment rule, a business

approve the merger was an informed decision.

judgment is presumed to be an informed judgment, but the judgment will


not be shielded under the rule if the decision was unadvised.
Facts. Trans Union had large investment tax credits (ITCs) coupled with
accelerated depreciation deductions with no offsetting taxable income.
Their short term solution was to acquire companies that would offset the
ITCs, but the Chief Financial Officer, Donald Romans, suggested that
Trans Union should undergo a leveraged buyout to an entity that could
offset the ITCs. The suggestion came without any substantial research,
but Romans thought that a $50-60 share price (on stock currently valued

Held. The Delaware Supreme Court held the business judgment to be


gross negligence, which is the standard for determining whether the
judgment was informed. The Board has a duty to give an informed
decision on an important decision such as a merger and can not escape
the responsibility by claiming that the shareholders also approved the
merger. The directors are protected if they relied in good faith on reports
submitted by officers, but there was no report that would qualify as a
report under the statute. The directors can not rely upon the share price
as it contrasted with the market value. And because the Board did not
disclose a lack of valuation information to the shareholders, the Board
breached their fiduciary duty to disclose all germane facts.

at a high of $39 ) would be acceptable. Van Gorkom did not


demonstrate any interest in the suggestion, but shortly thereafter
pursued the idea with a takeover specialist, Jay Pritzker. With only
Romans unresearched numbers at his disposal, Van Gorkom set up an
agreement with Pritzker to sell Pritzker Trans Union shares at $55 per
share. Van Gorkom also agreed to sell Pritzker one million shares of Trans
Union at $39 per share if Pritzker was outbid. Van Gorkom also agreed not

G.R. No. L-17327

August 30, 1963

C. N. HODGES and RICARDO GURREA, in their own behalf as


majority stockholders and for and in behalf of the La Paz Ice
Plant & Cold Storage Co., Inc., plaintiffs-appellees,
vs.
JOSE MANUEL LEZAMA, defendant,
PAQUITA B. LEZAMA, defendant-appellant.

to solicit other bids and agreed not to provide proprietary information to


other bidders. Van Gorkom only included a couple people in the
negotiations with Pritzker, and most of the senior management and the
Board of Directors found out about the deal on the day they had to vote
to approve the deal. Van Gorkom did not distribute any information at the
voting, so the Board had only the word of Van Gorkom, the word of the
President of Trans Union (who was privy to the earlier discussions with
Pritzker), advice from an attorney who suggested that the Board might be

PADILLA, J.:
Appeal from an order dated 29 November 1958 entered by the Court of
First Instance of Iloilo directing defendant Paquita B. Lezama, secretary of
the La Paz Ice Plant & Cold Storage Co., Inc., to transfer in the books of
the corporation the sale of seven shares of stock of plaintiff Ricardo
Gurrea in favor of Ricardo Jeruta, Jr., Felipe Espinosa and Isidro Perlado
upon surrender to her of the respective certificates of stock (civil case No.
4994).

The appeal involving as it does a question of jurisdiction of the trial court


(section 17, paragraph 3, of Republic Act No. 296, as amended) and
purely a question of law (section 17, paragraph 6, id.), the Court of
Appeals, pursuant to its resolution dated 25 July 1960, certified the case
to this Court as one falling within its exclusive appellate jurisdiction.
In a verified amended complaint dated 29 September 1958 filed in the
Court of First Instance of Iloilo, plaintiffs C. N. Hodges and Ricardo Gurrea
allege that the La Paz Ice Plant & Cold Storage Co., Inc., is a corporation
duly organized and existing under the laws of the Philippines, engaged in
the manufacture and sale of ice in the City of Iloilo, the defendants Jose
Manuel Lezama and Paquita B. Lezama being its President-Manager and
Secretary, respectively; that plaintiff C. N. Hodges is the registered owner
of 2,230 shares of the capital stock of the corporation as evidenced by
certificate of stock No. 17, which were sold by him to his co-plaintiff
Ricardo Gurrea on 18 September 1958 for the sum of P80,000.00; that
plaintiff Ricardo Gurrea and his wife Susie Gurrea are the registered
owners of 249 shares of stock while Esteban Salvador, brother-in-law of
defendant Lezama, is the registered owner of 1 share, or a total of 2,520
shares, of which plaintiffs and Mrs. Gurrea are the owners of 2,490 shares
as against 29 shares of herein defendants; that defendant Jose Manuel
Lezama, who has been the manager of the corporation since May, 1949,
has not rendered any accounting of the administration of the corporation
to the stockholders, particularly to plaintiff Ricardo Gurrea since 1
November 1954, to plaintiff C. N. Hodges, when the latter became the
principal stockholder; that stock certificate No. 17 was issued to plaintiff
C. N. Hodges by the defendants Jose Manuel Lezama and Paquita B.
Lezama, president and secretary of the corporation, but the plaintiffs do
not know who are the other members of the Board of Directors of the
corporation, and the stockholders have not been called to a general
meeting for the purpose of electing officers since 1949; that because of
such neglect and refusal of defendants to call a general meeting of the
stockholders, the plaintiffs ask the intervention of the court by directing
any stockholder or member of the corporation to call a meeting pursuant
to section 26 of the Corporation Law for the purpose of electing the
officers of the corporation so that the interests of the majority
stockholders could be protected; that in July and August, 1958 plaintiff
Ricardo Gurrea sold and transferred a number of his shares of stock in
the corporation to several individuals, but the defendants, as presidentmanager and secretary respectively, refused to register in the corporate
books to transfer and to issue the corresponding certificates of stock; that
from the time plaintiff Gurrea has ceased to be the manager and principal
stockholder of the corporation in 1949, the new manager Jose Manuel
Lezama, in spite of repeated demands coursed through the Securities and
Exchange Commission, has not made any financial statement showing
the operations and financial status of the corporation to the stockholders,

particularly to plaintiff Ricardo Gurrea and his wife Susie Gurrea, as well
as to C. N. Hodges who became the principal stockholder in November,
1954; that because of mismanagement and diversion of corporate funds
for personal use by its president and manager Jose Manuel Lezama and
excessive salaries and allowances or disbursements, the corporation has
suffered losses; that since 1950 the principal stockholders have not
received any dividend, unlike in previous years when Ricardo Gurrea was
then the manager, that since May, 1949 when defendant Lezama took
over the management, the corporation suffered a total loss of P100,000;
that if Lezama should continue as manager, the corporation with its
assets estimated at from P150,000 to P200,000 and its daily earnings of
P300 to P400 would suffer tremendous losses; and that since Lezama and
his wife own only 29 shares of stock, the appointment of a receiver ex
parte is necessary to preserve and administer the assets and earnings of,
and to avoid irreparable damages to, the corporation which is on the
verge of insolvency (civil case No. 4994). Upon the foregoing, the
plaintiffs pray that an order ex parte be issued appointing Ricardo Gurrea
receiver of all funds, assets and business of the corporation taking into
account the fact that he had been its manager from the time it started
operations in 1929 until 1949, and his technical knowledge as the
present manager of the Riverside Ice Plant and Cold Storage; directing
him to call a meeting of the stockholders for the purpose of electing its
officers and to preside at said meeting until after a majority of
stockholders representing a majority of the stock present and entitled to
vote shall have chosen one of their members to act as presiding officer;
and ordering defendant Jose Manuel Lezama to pay the La Paz Ice Plant &
Cold Storage Co., Inc., or the plaintiffs herein, the sum of P100,000 as
damages, interest thereon at the rate of 6% per annum from the date of
the filing of the complaint. As prayed for in the original complaint, on 26
September 1958 the court appointed Jose Dineros receiver of the
corporation and not Ricardo Gurrea who is a party to the suit, as prayed
for in the amended complaint.
In their answer dated 8 October 1958, the defendants deny that plaintiff
C. N. Hodges owned 2,300 shares of stock of the corporation as
evidenced by certificate of stock No. 17, because upon the issuance of
said certificate to Hodges, he immediately transferred the shares to
Benjamin Luis Borja, to whom certificate of stock No. 18 was issued and
whose name appears in the corporate books but not Ricardo Gurrea.
Defendant Lezama admits having failed to render any account of his
management to any stockholder including Gurrea or C. N. Hodges who
was a stockholder only for a day for the reason that his annual
accountings were made directly to the Board of Directors of the
corporation; that the annual general meeting had been held every August
from 1949 to 1958; that he admits that he had not made or furnished the
plaintiffs with a financial statement as every stockholder is free to inspect

the books of the corporation; that he denies having misused or diverted


corporate funds for his personal use, made excessive expenditures or
mismanaged the corporation, the truth of the matter being that if the
corporation had suffered losses, it was due to keen and ruinous
competition in the ice and storage business between the corporation and
four other ice manufacturers including the Riverside Ice Plant & Cold
Storage in Iloilo City established in 1950 and managed since then by
plaintiff Ricardo Gurrea; that the latter is defendant in civil case No. 2654
filed in the Court of First Instance of Iloilo by the La Paz Ice Plant & Cold
Storage Co., Inc., for alleged unauthorized withdrawals of about P100,000
made by him while he was still the manager of the corporation; and that
the plaintiffs' aim in bringing the action for appointment of a receiver is
to destroy the business of the corporation by placing it under receivership
for the sole benefit of its competitors, especially the Riverside Ice Plant &
Cold Storage owned and managed by plaintiff Gurrea; that when Gurrea
left the management of the corporation taking with him more than
P100,000, the corporation was left without enough working capital so
that even under the best management, it could not make profits; that the
properties and business of the corporation is, under lease for one year
since February, 1958 to Natalio Ventosa at a monthly rental of P1,000 and
neither is the corporation insolvent nor has it committed acts so as to
justify a declaration of insolvency. By way of counterclaim, the
defendants allege that the main purpose of plaintiff Gurrea in bringing
the action is to eliminate one competitor of the ice plant and cold storage
business personally managed by him and to discourage defendant
Lezama in his capacity as president of the La Paz Ice Plant & Cold Storage
Co., Inc., from prosecuting civil case No. 2654 against plaintiff Ricardo
Gurrea; and for that reason they pray that the amended complaint be
dismissed, the heretofore appointed receiver discharged, and the
plaintiffs ordered to pay jointly and severally damages to the La Paz Ice
Plant & Cold Storage Co., Inc., the sum of P20,000 annually and P50,000
to the herein defendants for moral damages and costs.
After the issues had been joined by the parties and while the case was
pending trial, a motion dated 4 November 1958 was filed by Ricardo
Jeruta, Jr., Felipe Espinosa and Isidro Perlado alleging that on 4 August
1958 plaintiff Ricardo Gurrea, who is the registered owner of 134 shares
of stock of the La Paz Ice Plant & Cold Storage Co., Inc., evidenced by
certificate of stock No. 14 of the corporation, had sold seven shares
thereof to the movants: (a) three common shares of stock to Ricardo
Jeruta, Jr., (b) three common shares of stock to Felipe Espinosa; and (c)
one common share of stock to Isidro Perlado; and that before and after
the court had appointed Jose Dineros receiver of the corporation on 26
September 1958 the movants exerted efforts to have said shares of stock
registered in their names in the books of the corporation, "but the
persons concerned refused to do so;" and praying that the trial court

order the receiver to record such transfer of shares of stock in the books
of the corporation and to issue in their names the certificates of the
shares of stock sold to them in lieu of those of plaintiff Gurrea. Acting
upon the motion, the court a quo on 29 November 1958 issued in order,
the pertinent part of which is:
VI. Acting upon the motion of Atty. Sorogan, the secretary of the
corporation is hereby ordered to transfer in the books of the
defendant corporation the sale of shares of stock of plaintiff
Ricardo Gurrea in favor of Ricardo Jeruta, Jr., Felipe Espinosa and
Isidro Perlado after surrendering the certificates to the secretary
of the corporation.
On 18 November 1958, the defendant secretary moved for a
reconsideration and setting aside of the above order, on the ground that
the duly-appointed receiver of the corporation should decide what to do
with the aforesaid transfer of shares, and as an additional ground, she
advanced the theory that the movants (Jeruta, Jr., Espinosa and Perlado),
who are not parties to the pending case of receivership, have no right to
come into the case and ask for the cancellation of the certificates of stock
of Ricardo Gurrea and, in lieu thereof, for the issuance of new ones in
their names, and that the issues in the case having nothing to do with the
alleged purchase and transfer of shares. On 2 January 1959 the movants
filed an objection to the defendant's (Paquita B. Lezama's) motion for
reconsideration of the order of 29 November 1958 contending that as a
result of the appointment of a receiver, the court may order the secretary
of the corporation to transfer in the corporate books the sales of the
shares of stock of plaintiff Gurrea to the three movants, the conveyance
being a business transaction and the properties of the corporation being
in the hands of the receiver, or in custodia legis.
Without acting upon the movants' motion of 12 December 1958 for
contempt of court against the secretary of the corporation, on 5 January
1959 the court denied the motion for reconsideration.
The plaintiff Ricardo Gurrea is the registered owner of 215 shares of the
capital stock of the corporation. On 4 August 1958, in a notarized
instrument, he sold seven of the shares to herein movants-appellees and
on 26 September 1958 the corporation was placed under receivership.
Despite surrender of the owner's (Gurrea's) certificate No. 14 and efforts
exerted by the purchasers (movants) to have the transfer registered in
the "stock and transfer books" of the corporation, the appellant as
secretary of the corporation refused the registration and transfer. The
appellant never questioned the legality of the transfer sought to be

registered, she having admitted in her answer that Gurrea owned 215
shares of stock of the corporation.1wph1.t
This Court has ruled and held that a trial court has jurisdiction to order a
receiver of a corporation under receivership to do any act so as to protect
and preserve his properties, and to that end it may order the secretary to
do an act within the internal affairs of the corporation aimed at protecting
the interests of the stockholders. 1Sections 35 and 52 of the Corporation
Law, as amended by Act 3471, which require that all transfers of shares
to be valid as far as the corporation is concerned must be entered and
noted upon the books of the corporation, contemplate no restriction as to
whom the shares may be transferred or sold.2 The assets and business of
the corporation having been placed under receivership, the court is in
duty bound and has the authority to require the appellant as secretary of
the corporation to perform her duties under the law.
The order appealed from is affirmed, with costs against the appellant.

G.R. No. L-68544 October 27, 1986


LORENZO C. DY, ZOSIMO DY, SR., WILLIAM IBERO, RICARDO
GARCIA AND RURAL BANK OF AYUNGON, INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION AND EXECUTIVE
LABOR ARBITER ALBERTO L. DALMACION, AND CARLITO H.
VAILOCES, respondents.
NARVASA, J.:
Petitioners assail in this Court the resolution of the National Labor
Relations Commission (NLRC) dismissing their appeal from the decision of
the Executive Labor Arbiter 1 in Cebu City which found private respondent
to have been illegally dismissed by them.
Said private respondent, Carlito H. Vailoces, was the manager of the Rural
Bank of Ayungon (Negros Oriental), a banking institution duly organized
under Philippine laws. He was also a director and stockholder of the bank.
On June 4, 1983, a special stockholders' meeting was called for the
purpose of electing the members of the bank's Board of Directors.
Immediately after the election the new Board proceeded to elect the
bank's executive officers.

Pursuant to Article IV of the bank's by-laws, 2 providing for the election by


the entire membership of the Board of the executive officers of the bank,
i.e., the president, vice-president, secretary, cashier and bank manager,
in that board meeting of June 4, 1983, petitioners Lorenzo Dy, William
Ibero and Ricardo Garcia were elected president, vice-president and
corporate secretary, respectively. Vailoces was not re-elected as bank
manager, 3 Because of this development, the Board, on July 2, 1983,
passed Resolution No. 5, series of 1983, relieving him as bank manager.
On August 3, 1983, Vailoces filed a complaint for illegal dismissal and
damages with the Ministry of Labor and Employment against Lorenzo Dy
and Zosimo Dy, Sr. The complaint was amended on September 22, 1983
to include additional respondents-William Ibero, Ricardo Garcia and the
Rural Bank of Ayungon, and additional causes of action for underpayment
of salary and non-payment of living allowance.
In his complaint and position paper, Vailoces asserted that Lorenzo Dy,
after obtaining control of the majority stock of the bank by buying the
shares of Marcelino Maximo, called an illegal stockholders' meeting and
elected a Board of Directors controlled by him; that after its illegal
constitution, said Board convened on July 2, 1983 and passed a resolution
dismissing him as manager, without giving him the opportunity to be
heard first; that his dismissal was motivated by Lorenzo Dy's desire to
take over the management and control of the bank, not to mention the
fact that he (Dy) harbored ill feelings against Vailoces on account of the
latter's filing of a complaint for violation of the corporation code against
him and another complaint for compulsory recognition of natural child
with damages against Zosimo Dy, Sr. 4
In their answer, Lorenzo Dy, et al. denied the charge of illegal dismissal.
They pointed out that Vailoces' position was an elective one, and he was
not re-elected as bank manager because of the Board's loss of confidence
in him brought about by his absenteeism and negligence in the
performance of his duties; and that the Board's action was taken to
protect the interest of the bank and was "designed as an internal control
measure to secure the check and balance of authority within the
organization." 5
The Executive Labor Arbiter found that Vailoces was:
(a) Illegally dismissed, first not because of absenteeism
and negligence, but of the resentment of petitioners
against Vailoces which arose from the latter's filing of the
cases for recognition as natural child against Zosimo Dy,
Sr. and for violation of the corporation code against

Lorenzo Dy; and second, because he was not afforded the


due process of law when he was dismissed during the
Board meeting of July 2, 1983 the validity of which is
seriously doubted;
(b) Not paid his cost of living allowance; and
(c) Underpaid with only P500 monthly salary,
and consequently ordered the individual petitioners Lorenzo Dy and
Zosimo Dy-but not the Bank itself, to:
(a) Pay Vailoces jointly and severally, the sum of
P111,480.60 representing his salary differentials, cost of
living allowances, back wages from date of dismissal up
to the date of the decision (November 29, 1983), moral
and exemplary damages, and attorney's fees; and
(b) Reinstate Vailoces to his position as bank manager,
with additional backwages from December 1, 1983 on the
adjusted salary rate of P620.00 r month until he is
actually reinstated, plus cost-of-living allowance. 6
Lorenzo Dy, et al. appealed to the NLRC, assigning error to the decision of
the Labor Arbiter on various grounds, among them: that Vailoces was not
entitled to notice of the Board meeting of July 2, 1983 which decreed his
relief because he was no longer a member of the Board on said date; that
he nonetheless had the opportunity to refute the charges against him
and seek a formal investigation because he received a copy of the
minutes of said meeting while he was still the bank manager (his removal
was to take effect only on August 15, 1983), instead of which he simply
abandoned the work he was supposed to perform up to the effective date
of his relief; and that the matter of his relief was within the adjudicatory
powers of the Securities and Exchange Commission. 7
The NLRC, however bypassed the issues raised and simply dismissed the
appeal for having been filed late. It ruled that:
The record shows that a copy of the decision sent by
registered mail to respondents' counsel, Atty. Edmund
Tubio, was received on January 11, 1984 by a certain Atty.
Ramon Elesteria, a law office partner of Atty. Tubio. ...
This fact is corroborated by the certification issued by the
Postmaster of Dumaguete City... Moreover, the same is

admitted by no less than Atty. Ramon Elesteria himself in


his affidavit. It further appears in the record that on
January 30, 1984 a certain Atty. Francisco Zerna, a new
lawyer engaged by the respondents for the appeal,
received a copy of the decision in this case as certified by
Julia Pepito in an affidavit subscribed before the Senior
Labor Arbitration Specialist. The appeal was filed only on
February 17, 1984.
Considering that it was a law partner of the respondents'
counsel who received on January 11, 1984 the registered
letter, his actual receipt thereof completes the service. ...
And even assuming that such was not a valid service,
since the respondents received another copy of the
decision on January 30, 1984, through their newly
engaged counsel, it is therefore our opinion that the
appeal herein was filed out of time, whether the time is
reckoned from the receipt by Atty. Elesteria or Atty. Zerna,
and, for this reason, we can not give due course to his
appeal. 8
In this Court, petitioners assail said ruling as an arbitrary deprivation of
their right to appeal through unreasonable adherence to procedural
technicality. They argue that they should not be bound by the service of
the Labor Arbiter's decision by Atty. Elesteria on January 11, 1984 or by
Atty. Zerna on January 30, 1984, because neither lawyer was authorized
to accept service for their counsel Atty. Tubio, and that their 10 day
period of appeal should be counted from February 10, 1984 when they
actually received the copy of the decision from Atty. Zerna. On the merits,
they assert that the Arbiter's finding of illegal dismissal was without
evidentiary basis, that it was error to impose the obligation to pay
damages upon the individual petitioners, instead of the Rural Bank of
Ayungon, which was Vailoces' real employer, and that the damages
awarded are exorbitant and oppressive.
While the comment of Vailoces traverses the averments of the petition,
that of the Solicitor General on behalf of public respondents perceives the
matter as an intracorporate controversy of the class described in Section
5, par. (c), of Presidential Decree No. 902-A, namely:
(c) Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations.

explicitly declared to be within the original and exclusive jurisdiction of


the Securities and Exchange Commission, and recommends that the
questioned resolution of the NLRC as well as the decision of the Labor
Arbiter be set aside as null and void. 9
In truth, the issue of jurisdiction is decisive and renders unnecessary
consideration of the other questions raised.
There is no dispute that the position from which private respondent
Vailoces claims to have been illegally dismissed is an elective corporate
office. He himself acquired that position through election by the bank's
Board of Directors at the organizational meeting of November 17,
1979. 10 He lost that position because the Board that was elected in the
special stockholders' meeting of June 4, 1983 did not re-elect him. And
when Vailoces, in his position paper submitted to the Labor Arbiter,
impugned said stockholders' meeting as illegally convoked and the Board
of Directors thereby elected as illegally constituted, 11 he made it clear
that at the heart of the matter was the validity of the directors' meeting
of June 4, 1983 which, by not re-electing him to the position of manager,
in effect caused termination of his services.
The case thus falls squarely within the purview of Section 5, par. (c), No.
902-A just cited. In PSBA vs. Leao, 12 this Court, confronted with a similar
controversy, ruled that the Securities and Exchange Commission, not the
NLRC, has jurisdiction:
It was at a Board regular monthly meeting held on August
1, 1981, that three directors were elected to fill
vacancies. And, it was at the regular Board meeting of
September 5, 1981 that all corporate positions were
declared vacant in order to effect a reorganization, and at
the ensuing election of officers, Tan was not re-elected as
Executive Vice-President.
Basically, therefore, the question is whether the election
of directors on August 1, 1981 and the election of officers
on September 5, 1981, which resulted in Tan's failure to
be re-elected, were validly held. This is the crux of the
question that Tan has raised before the SEC. Even in his
position paper before the NLRC, Tan alleged that the
election on August 1, 1981 of the three directors was in
contravention of the PSBA By-Laws providing that any
vacancy in the Board shall be filled by a majority vote of
the stockholders at a meeting specially called for the
purpose. Thus, he concludes, the Board meeting on

September 5, 1981 was tainted with irregularity on


account of the presence of illegally elected directors
without whom the results could have been different.
Tan invoked the same allegations in his complaint filed
with the SEC. So much so, that on December 17, 1981,
the SEC (Case No. 2145) rendered a Partial Decision
annulling the election of the three directors and ordered
the convening of a stockholders' meeting for the purpose
of electing new members of the Board. The correctness of
d conclusion is not for us to pass upon in this case. Tan
was present at said meeting and again sought the
issuance of injunctive relief from the SEC.
The foregoing indubitably show that, fundamentally, the
controversy is intra-corporate in nature. It revolves
around the election of directors, officers or managers of
the PSBA, the relation between and among its
stockholders, and between them and the corporation.
Private respondent also contends that his "ouster" was a
scheme to intimidate him into selling his shares and to
deprive him of his just and fair return on his investment
as a stockholder received through his salary and
allowances as Executive Vice-President. Vis-a-vis the
NLRC, these matters fall within the jurisdiction of the SEC.
Presidential Decree No. 902-A vests in the Securities and
Exchange Commission:
... 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 of 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, partnership or associations.
This is not a case of dismissal. The situation is that of
a corporate office having been declared vacant, and of
Tan's not having been elected thereafter. The matter of
whom to elect is a prerogative that belongs to the Board,
and involves the exercise of deliberate choice and the
faculty of discriminative selection. Generally speaking,
the relationship of a person to corporation, whether as
officer or as agent or employee, is not determined by the
nature of the services performed, but by the incidents of
the relationship as they actually exist.
Respondent Vailoces' invocation of estoppel as against petitioners with
respect to the issue of jurisdiction is unavailing. In the first place, it is not
quite correct to state that petitioners did not raise the point in the lower
tribunal. Although rather off handedly, in their appeal to the NLRC they
called attention to the Labor Arbiter's lack of jurisdiction to rule on the
validity of the meeting of July 2, 1983, but the dismissal of the appeal for
alleged tardiness effectively precluded consideration of that or any other
question raised in the appeal. More importantly, estoppel cannot be
invoked to prevent this Court from taking up the question of jurisdiction,
which has been apparent on the face of the pleadings since the start of
litigation before the Labor Arbiter. It is well settled that the decision of a
tribunal not vested with appropriate jurisdiction is null and void. Thus,
in Calimlim vs. Ramirez, 13 this Court held:
A rule that had been settled by unquestioned acceptance
and upheld in decisions so numerous to cite is that the
jurisdiction of a court over the subject matter of the
action is a matter of law and may not be conferred by
consent or agreement of the parties. The lack of
jurisdiction of a court may be raised at any stage of the
proceedings, even on appeal. This doctrine has been
qualified by recent pronouncements which stemmed
principally from the ruling in the cited case
of Sibonghanoy. It is to be regretted, however, that the
holding in said case had been applied to situations which
were obviously not contemplated therein. The exceptional
circumstances involved in Sibonghanoy which justified

the departure from the accepted concept of nonwaivability of objection to jurisdiction has been ignored
and, instead a blanket doctrine had been repeatedly
upheld that rendered the supposed ruling
in Sibonghanoy not as the exception, but rather the
general rule, virtually overthrowing altogether the timehonored principle that the issue of jurisdiction is not lost
by waiver or by estoppel.
xxx xxx xxx
It is neither fair nor legal to bind a party by the result of a
suit or proceeding which was taken cognizance of in a
court which lacks jurisdiction over the same irrespective
of the attendant circumstances. The equitable defense of
estoppel requires knowledge or consciousness of the
facts upon which it is based . The same thing is true with
estoppel by conduct which may be asserted only when it
is shown, among others, that the representation must
have been made with knowledge of the facts and that the
party to whom it was made is ignorant of the truth of the
matter (De Castro vs. Gineta, 27 SCRA 623). The filing of
an action or suit in a court that does not possess
jurisdiction to entertain the same may not be presumed
to be deliberate and intended to secure a ruling which
could later be annulled if not favorable to the party who
filed such suit or proceeding in a court that lacks
jurisdiction to take cognizance of the same, such act may
not at once be deemed sufficient basis of estoppel. It
could have been the result of an honest mistake or of
divergent interpretation of doubtful legal provisions. If
any fault is to be imputed to a party taking such course of
action, part of the blame should be placed on the court
which shall entertain the suit, thereby lulling the parties
into believing that they pursued their remedies in the
correct forum. Under the rules, it is the duty of the court
to dismiss an action 'whenever it appears that court has
no jurisdiction over the subject matter.' (Section 2, Rule 9,
Rules of Court) Should the Court render a judgment
without jurisdiction, such judgment may be impeached or
annulled for lack of jurisdiction (Sec. 30, Rule 132, Ibid),
within ten (10) years from the finality of the same (Art.
1144, par. 3, Civil Code).

To be sure, petitioners failed to raise the issue of jurisdiction in their


petition before this Court. But this, too, is no hindrance to the Court's
considering said issue.
The failure of the appellees to invoke anew the aforementioned solid
ground of want of jurisdiction of the lower court in this appeal should not
prevent this Tribunal to take up that issue as the lack of jurisdiction of the
lower court is apparent upon the face of the record and it is fundamental
that a court of justice could only validly act upon a cause of action or
subject matter of a case over which it has jurisdiction and said
jurisdiction is one conferred only by law; and cannot be acquired through,
or waived by, any act or omission of the parties (Lagman vs. CA, 44 SCRA
234 [1972]); hence may be considered by this court motu proprio (Gov't.
vs. American Surety Co., 11 Phil. 203 [1908])... 14
These considerations make inevitable the conclusion that the judgment
of the Labor Arbiter and the resolution of the NLRC are void for lack of
cause of jurisdiction, and this Court must set matters aright in the
exercise of its judicial power. It is of no moment that Vailoces, in his
amended complaint, seeks other relief which would seemingly fan under
the jurisdiction of the Labor Arbiter, because a closer look at theseunderpayment of salary and non-payment of living allowance-shows that
they are actually part of the perquisites of his elective position, hence,
intimately linked with his relations with the corporation. The question of
remuneration, involving as it does, a person who is not a mere employee
but a stockholder and officer, an integral part, it might be said, of the
corporation, is not a simple labor problem but a matter that comes within
the area of corporate affairs and management, and is in fact a corporate
controversy in contemplation of the Corporation Code.
WHEREFORE, the questioned decision of the Labor Arbiter and the
Resolution of the NLRC dismissing petitioners' appeal from said decision
are hereby set aside because rendered without jurisdiction. The amended
complaint for illegal dismissal, etc., basis of said decision and Resolution,
is ordered dismissed, without prejudice to private respondent's seeking
recourse in the appropriate forum.

ARMANDO T. DE ROSSI, petitioner, vs. NATIONAL LABOR


RELATIONS
COMMISSION
(First
Division),
MATLING
INDUSTRIAL AND COMMERCIAL CORPORATION AND
RICHARD K. SPENCER, respondents.
RESOLUTION
QUISUMBING, J.:
This petition for certiorari, under Rule 65 of the Rules of Court,
assails the Decision [1] of the National Labor Relations Commission (NLRC)
which ruled that jurisdiction over a complaint by a corporate executive
and management officer for illegal dismissal rests with the Securities and
Exchange Commission, and not the Labor Arbiter and the NLRC. Said
Decision reversed and set aside the holding of the Labor Arbiter [2]who
sustained petitioners claim for reinstatement and damages.
The antecedent facts are as follows:
An Italian citizen, petitioner was the Executive Vice-President and
General Manager of private respondent, Matling Industrial and
Commercial Corporation (MICC). He started work on July 1, 1985. On
August 10, 1988, MICC terminated his employment.
Aggrieved, petitioner filed with the NLRC, National Capital Region on
September 21, 1989, a complaint[3] for illegal dismissal with
corresponding damages.
MICC based petitioners dismissal on the ground that the petitioner
failed to secure his employment permit, grossly mismanaged the
business affairs of the company, and misused corporate funds. However,
petitioner argued that it was the duty of the company to secure his work
permit during the term of his office, and that his termination was illegal
for lack of just cause.
On November 27 1991, Labor Arbiter Asuncion rendered a decision
in favor of petitioner, disposing as follows:
WHEREFORE, respondents, Matling Industrial and Commercial
Corporation and Richard K. Spencer, are jointly and severally ordered:

SO ORDERED.

[G.R. No. 108710. September 14, 1999]

1. To reinstate the complainant Armando T. de Rossi to his former


positions as Executive Vice-President and General Manager,
without loss of seniority rights, and other privileges and with full
backwages, from the date his salary was withheld until he is
actually reinstated. His reinstatement is immediately executory;

2. To pay the complainant the sum of P800,000 as moral damages,


and another P700,000.00 as exemplary damages.
3. To pay Attorneys fee equivalent to 10% of the total amount
awarded.
SO ORDERED.[4]
MICC appealed the decision of the labor arbiter to the NLRC (First
Division) on the ground that Asuncion committed grave abuse of
discretion amounting to lack of jurisdiction in reinstating the petitioner
and awarding him backwages and damages, because the termination of
petitioner was for a valid cause.
On January 6, 1992, petitioner filed a motion for issuance of writ of
execution,[5] stating that the reinstatement order is immediately
executory, even pending appeal pursuant to Article 223 of the Labor
Code.
On January 16, 1992, respondents opposed the said motion. On
February 6, 1992, petitioner filed a manifestation reiterating his request
for reinstatement.
On February 26, 1992, and March 12, 1992, respectively, private
respondents filed a counter manifestation and motion; they reiterated
their vehement objection thereto as already signified in their
opposition. Further, they contended that the position of executive vicepresident is an elective post, specifically provided by the corporates bylaws. Thus, the dismissal of the petitioner was an intra-corporate matter
within the jurisdiction of the Securities and Exchange Commission (SEC)
and not with the Labor Arbiter nor the NLRC. Therein, private
respondents cited several cases decided by the Court in support of their
contention,
among
them: Dy
vs.
National
Labor
Relations
Commission, 145 SCRA 211, Fortune Cement Corp. vs. National Labor
Relations Commission, 193 SCRA 258, PSBA vs. Leano, 127 SCRA 778.
On July 7, 1992, OIC and Executive Labor Arbiter Lita Aglibut issued
a writ of execution. Aglibut directed Sheriff Max Lago to collect the
backwages of petitioner de Rossi, in the amount of six hundred seventy
five thousand (P675,000.00) pesos from MICC. Further, she gave MICC
the option to reinstate de Rossi physically or constructively through
payroll reinstatement until the final resolution of the case by the NLRC.
On August 5, 1992, private respondents filed a motion for
reconsideration of the writ of execution, reiterating their argument that
the SEC and not the NLRC has original and exclusive jurisdiction over the
subject matter which involves the removal of a corporate officer.

On October 30, 1992, the NLRC rendered its decision dismissing the
case by virtue of Section 5, paragraph (c), of P.D. No. 902-A. However,
the Commission stated that, although in its view it has jurisdiction over
the case, it must yield to the Supreme Courts decisions recognizing
SECs jurisdiction over such a case, to wit:
It is our view that notwithstanding the provisions of Presidential Decree
No. 902-A, we in this Commission, have jurisdiction over this case. The
reason being, Article 217 of the Labor Code was amended on March 21,
1989 by Section 9, Republic Act 6715, viz.:
xxx
On the other hand, we are mindful of a rule in this jurisdiction (geared
towards stability of jurisprudence) that:
If a judge of a lower court feels, in the fulfillment of his mission of
deciding cases, that the application of a doctrine promulgated by his
superiority is against his way of reasoning, or against his conscience, he
may state his opinion on the matter, but rather than disposing of the
case in accordance with his personal views, he must first think that it is
his duty to apply the law as interpreted by the highest court of the land,
and that any deviation from a principle laid down by the latter would
unavoidably cause, as a sequel, unnecessary inconveniences, delay and
expenses to the litigants.(emphasis by NLRC, People vs. Santos, 56 O.G.
3546)
Guided by the above mandate, we thus have stated our opinion on the
matter, but rather than disposing of the case in accordance with our
views, we cannot but apply the law as interpreted by the highest court of
the land, and rule that jurisdiction here is not with us but with the
Securities and Exchange Commission.
WHEREFORE, the appealed decision is hereby set aside, and this case is
dismissed for want of jurisdiction.
SO ORDERED.[6]
In his petition for certiorari dated February 11, 1993, petitioner
contends that:
I. THE NATIONAL LABOR RELATIONS COMMISSION COMMITTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION OR ACTED IN EXCESS OF ITS JURISDICTION IN

HOLDING THAT THE SECURITIES AND EXCHANGE COMMISSION


HAS JURISDICTION OVER THE COMPLAINT FOR ILLEGAL
DISMISSAL FILED BY PETITIONER.

respondents aver that the officers and their terms of office are prescribed
by the corporations by-laws, which provide as follows:
BY-LAW NO. III Directors and Officers

II. THE ISSUES RAISED IN THE COMPLAINT FOR ILLEGAL DISMISSAL


ARE RIPE FOR ADJUDICATION BY THIS HONORABLE COURT. [7]
Petitioner asserts that even managerial employees are entitled to
the protection of labor laws. He states that his case is peculiar, and not
similar to those cited by private respondents. Petitioner claims that he
was neither elected to the post nor stockholder of MICC. Furthermore,
petitioner avers that during the proceedings before the Labor Arbiter,
private respondents never questioned the issue of jurisdiction; it would
be too late to raise it now.
Respondent NLRC argues that under the Corporation Code, there is
no requirement that an executive vice-president of a corporation should
be a stockholder or a member of the Board of Directors. Further, as
observed by the Solicitor General, Section 5 of P. D. 902-A did not limit
the jurisdiction of the SEC to controversies in the election or appointment
of directors and trustees, but also included officers or managers of such
corporations, partnerships or associations.
On this score, we are in agreement with the public respondents
submission through the Solicitor General. In a string of cases[8] this Court
has consistently held that the SEC, and not the NLRC, has original and
exclusive jurisdiction over cases involving the removal of corporate
officers. Section 5, paragraph (c) of P.D. 902-A unequivocally provides
that SEC has jurisdiction over intra-corporate affairs regarding the
election or appointment of officers of a corporation, to wit:
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
existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:
xxx
(c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporation, partnership or association.
We have earlier pronounced that an office is created by the charter
of the corporation under which a corporation is organized, and the officer
is elected by the directors or stockholders. [9] In the present case, private

xxx
The officers of the corporation shall be the President, Executive Vice
President, Secretary and Treasurer, each of whom may hold his office
until his successor is elected and qualified, unless sooner removed by the
Board of Directors; Provided, That for the convenience of the corporation
the office of the Secretary and Treasurer may be held by one and the
same person. Officers shall be designated by the stockholders meeting
at the time they elect the members of the Board of Directors. Any
vacancy occurring among the officers of the Corporation on account of
removal or resignation shall be filled by a stockholders
meeting. Stockholders holding one half, or more of the subscribed
capital stock of the corporation may demand and compel the resignation
of any officer at any time.[10]
The by-laws being in force, clearly petitioner is considered an officer of
MICC, elected and/or designated by its board of directors. Following
Section 5(c) of P.D. No. 902-A, the SEC exercises exclusive jurisdiction
over controversies regarding the election and/or designation of directors,
trustees, officers or managers of a corporation, partnership or
association. This provision is indubitably applicable to the petitioners
case. Jurisdiction here is not with the Labor Arbiter nor the NLRC, but
with the SEC.
Note that a corporate officers removal from his office is a corporate
act. If such removal occasions an intra-corporate controversy, its nature
is not altered by the reason or wisdom, or lack thereof, with which the
Board of Directors might have in taking such action. [11] When petitioner,
as Executive Vice-President allegedly diverted company funds for his
personal use resulting in heavy financial losses to the company, this
matter would amount to fraud. Such fraud would be detrimental to the
interest not only of the corporation but also of its members. [12] This type
of fraud encompasses controversies in a relationship within the
corporation covered by SEC jurisdiction. [13] Perforce, the matter would
come within the area of corporate affairs and management, and such a
corporate controversy would call for the adjudicative expertise of the
SEC, not the Labor Arbiter or the NLRC.
Petitioner maintains that MICC can not question now the issue of
jurisdiction of the NLRC, considering that MICC did not raise this matter
until after the case had been brought on appeal to the NLRC. However, it

has long been established as a rule, that jurisdiction of a tribunal,


agency, or office, is conferred by law, and its lack of jurisdiction may be
questioned at any time even on appeal.[14] In La Naval Drug Corporation
vs. Court of Appeals, 236 SCRA 78, 90,[15] this Court said:
Lack of jurisdiction over the subject matter of the suit is yet another
matter. Whenever it appears that the court has no jurisdiction over the
subject matter, the action shall be dismissed. This defense may be
interposed at any time, during appeal or even after final judgment. Such
is understandable, as this kind of jurisdiction is conferred by law and not
within the courts, let alone the parties, to themselves determine or
conveniently set aside.
Hence, lack of jurisdiction on the part of the Labor Arbiter first, and
of the NLRC on appeal, is fatal to petitioners cause.
WHEREFORE, the instant petition is hereby DENIED, and the
respondent NLRCs dismissal of the complaint for lack of jurisdiction, is
hereby AFFIRMED, with costs against petitioner.

The Case
This principle is stressed by the Court in rejecting the Petition for
Review of the February 28, 1994 Decision and the October 28, 1994
Resolution of the Court of Appeals in CA-GR CV No. 30670.
In a collection case[1] filed by Stefani Sao against Peoples Aircargo
and Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay City,
Branch 110, rendered a Decision [2] dated October 26, 1990, the
dispositive portion of which reads:[3]
WHEREFORE, in light of all the foregoing, judgment is hereby rendered,
ordering [petitioner] to pay [private respondent] the amount of sixty
thousand (P60,000.00) pesos representing payment of [private
respondents] services in preparing the manual of operations and in the
conduct of a seminar for [petitioner]. The Counterclaim is hereby
dismissed.
Aggrieved by what he considered a minuscule award of P60,000,
private respondent appealed to the Court of Appeals [4] (CA) which, in its
Decision promulgated February 28, 1994, granted his prayer
for P400,000, as follows:[5]

SO ORDERED.

[G.R. No. 117847. October 7, 1998]

PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs.


COURT OF APPEALS and STEFANI SAO, respondents.
DECISION

WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby


MODIFIED in that [petitioner] is ordered to pay [private respondent] the
amount of four hundred thousand pesos (P400,000.00) representing
payment of [private respondents] services in preparing the manual of
operations and in the conduct of a seminar for [petitioner].
As no new ground was raised by petitioner, reconsideration of the
above-mentioned Decision was denied in the Resolution promulgated on
October 28, 1994.

The Facts

PANGANIBAN, J.:
Contracts entered into by a corporate president without express
prior board approval bind the corporation, when such officers apparent
authority is established and when these contracts are ratified by the
corporation.

Petitioner is a domestic corporation, which was organized in the


middle of 1986 to operate a customs bonded warehouse at the old Manila
International Airport in Pasay City.[6]
To obtain a license for the corporation from the Bureau of Customs,
Antonio Punsalan Jr., the corporation president, solicited a proposal from
private respondent for the preparation of a feasibility study. [7] Private

respondent submitted a letter-proposal dated October 17, 1986 (First


Contract hereafter) to Punsalan, which is reproduced hereunder: [8]

The outputs will be completed and submitted within 30 days


upon confirmation of the agreement and receipt by us of the
first fifty percent payment.

Dear Mr. Punsalan:


--------------------------------------------------------------------------------------------With reference to your request for professional engineering
consultancy services for your proposed MIA Warehousing Project
may we offer the following outputs and the corresponding rate and
terms of agreement:
=========================== =====
====
Project Feasibility Study consisting of
Market Study
Technical Study
Financial Feasibility Study
Preparation of pertinent documentation
requirements for the application
======================================
===============
The above services will be provided for a fee of [p]esos
350,000.00 payable according to the following schedule:
======================================
===============
Fifty percent (50%) .upon confirmation of the agreement
Twenty-five percent (25%)..15 days after the
confirmation of the
agreement
Twenty-five percent (25%)..upon submission of the
specified outputs

Thank you.
Yours truly,

CONFORME:

(S)STEFANI C. SAO

(S)ANTONIO C. PUNSALAN, JR.

(T)STEFANI C. SAO

(T)ANTONIO C. PUNSALAN, JR.

Consultant for

President, PAIRCARGO

Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner, objected
to private respondents offer, as another company priced a similar
proposal at only P15,000.[9] However, Punsalan preferred private
respondents services because of the latters membership in the task
force, which was supervising the transition of the Bureau of Customs from
the Marcos government to the Aquino administration.[10]
On October 17, 1986, petitioner, through Punsalan, sent private
respondent a letter, confirming their agreement as follows:
Dear Mr. Sao:
With regard to the services offered by your company in your letter dated
13 October 1986, for the preparation of the necessary study and
documentations to support our Application for Authority to Operate a
public Customs Bonded Warehouse located at the old MIA Compound in
Pasay City, please be informed that our company is willing to hire your
services and will pay the amount of THREE HUNDRED FIFTY THOUSAND
PESOS (P350,000.00) as follows:
P100,000.00 -

upon signing of the agreement;


150,000.00 -

on or before October 31, 1986,


with the favorable

Recommendation of the CBW on


our application.

Attention: Mr. ANTONIO PUN[S]ALAN, JR.


President

100,000.00 -

upon receipt of the study in final form.


Dear Mr. Pun[s]alan:
Very truly

yours,
(S)ANTONIO C.

This is to formalize our proposal for consultancy services to your


company the scope of which is defined in the attached service
description.

PUNSALAN
(T)ANTONIO C.
PUNSALAN
President
CONFORME & RECEIVED from PAIRCARGO, the

The total service you have decided to avail xxx would be available
upon signing of the conforme below and would come [in] the
amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00)
payable at the schedule defined as follows (with the balance
covered by post-dated cheques):
Downpayment upon signing conforme . . . P80,000.00

amount of ONE HUNDRED THOUSAND PESOS

15 January 1987

.............

53,333.00

(P100,000.00), this 17th day of October,

30 January 1987

.............

53,333.00

1986 as 1st installment payment of the

15 February 1987 . . . . . . . . . . . . .

53,333.00

service agreement dated October 13, 1986.

28 February 1987 . . . . . . . . . . . . .

53,333.00

(S)STEFANI C. SAO

15 March1987

.............

53,333.00

(T)STEFANI C. SAO

30 March 1987

.............

53,333.00

Accordingly, private respondent prepared a feasibility study for


petitioner which eventually paid him the balance of the contract price,
although not according to the schedule agreed upon.[11]
On December 4, 1986, upon Punsalans request, private respondent
sent petitioner another letter-proposal (Second Contract hereafter),
which reads:

With this package, you are assured of the highest service quality as
our performance record shows we always deliver no less.
Thank you very much.
Yours truly,

Peoples Air Cargo & Warehousing Co., Inc.

(S)STEFANI C. SAO

Old MIA Compound, Metro Manila

(T)STEFANI C. SAO

Industrial Engineering Consultant


CONFORME:

On March 25, 1987, private respondent joined the Bureau of


Customs as special assistant to then Commissioner Alex Padilla, a
position he held until he became technical assistant to then
Commissioner Miriam Defensor-Santiago on March 7, 1988. [15] Meanwhile,
Punsalan sold his shares in petitioner-corporation and resigned as its
president in 1987.[16]

(S)ANTONIO C. PUNSALAN JR.


(T)PAIRCARGO CO. INC.
During the trial, the lower court observed that the Second Contract
bore, at the lower right portion of the letter, the following notations in
pencil:
1.

Operations Manual

2.

Seminar/workshop for your employees


P400,000 -

conducted, in the third week of January 1987 in the warehouse of


petitioner, a three-day training seminar for the latters employees. [14]

package deal

50% upon completion of seminar/workshop


50% upon approval by the Commissioner
The Manual has already been approved by the Commissioner but
payment has not yet been made."
The lower left corner of the letter also contained the following
notations:
1st letter

4 Dec. 1986

2nd letter

15 June 1987 with


Hinanakit.

On January 10, 1987, Andy Villaceren, vice president of petitioner,


received the operations manual prepared by private respondent.
[12]
Petitioner submitted said operations manual to the Bureau of Customs
in connection with the formers application to operate a bonded
warehouse; thereafter, in May 1987, the Bureau issued to it a license to
operate, enabling it to become one of the three public customs bonded
warehouses at the international airport. [13] Private respondent also

On February 9, 1988, private respondent filed a collection suit


against petitioner. He alleged that he had prepared an operations
manual for petitioner, conducted a seminar-workshop for its employees
and delivered to it a computer program; but that, despite demand,
petitioner refused to pay him for his services.
Petitioner, in its answer, denied that private respondent had
prepared an operations manual and a computer program or conducted a
seminar-workshop for its employees. It further alleged that the letteragreement was signed by Punsalan without authority, in collusion with
[private respondent] in order to unlawfully get some money from
[petitioner], and despite his knowledge that a group of employees of the
company had been commissioned by the board of directors to prepare an
operations manual.[17]
The trial court declared the Second Contract unenforceable or
simulated. However, since private respondent had actually prepared the
operations manual and conducted a training seminar for petitioner and
its employees, the trial court awarded P60,000 to the former, on the
ground that no one should be unjustly enriched at the expense of another
(Article 2142, Civil Code). The trial court determined the amount in
light of the evidence presented by defendant on the usual charges made
by a leading consultancy firm on similar services. [18]

The Ruling of the Court of Appeals


To Respondent Court, the pivotal issue of private respondents
appeal was the enforceability of the Second Contract. It noted that
petitioner did not appeal the Decision of the trial court, implying that it
had agreed to pay the P60,000 award. If the contract was valid and
enforceable, then petitioner should be held liable for the full amount
stated therein, not P60,000 as held by the lower court.
Rejecting the finding of the trial court that the December 4, 1986
contract was simulated or unenforceable, the CA ruled in favor of its
validity and enforceability. According to the Court of Appeals, the

evidence on record shows that the president of petitioner-corporation had


entered into the First Contract, which was similar to the Second
Contract. Thus, petitioner had clothed its president with apparent
authority to enter into the disputed agreement. As it had also become
the practice of the petitioner-corporation to allow its president to
negotiate and execute contracts necessary to secure its license as a
customs bonded warehouse without prior board approval, the board
itself, by its acts and through acquiescence, practically laid aside the
normal requirement of prior express approval. The Second Contract was
declared valid and binding on the petitioner, which was held liable to
private respondent in the full amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before us. [19]

The Issues
Instead of alleging reversible errors, petitioner imputes grave abuse
of discretion to the Court of Appeals, viz.:[20]
I.
xxx [I]n ruling that the subject letter-agreement for services was
binding on the corporation simply because it was entered into by its
president[;]
II.
xxx [I]n ruling that the subject letter-agreement for services was
binding on the corporation notwithstanding the lack of any board
authority since it was the purported practice to allow the president to
enter into contracts of said nature (citing one previous instance of a
similar contract)[;] and
III.
xxx [I]n ruling that the subject letter-agreement for services was a
valid contract and not merely simulated."
The Court will overlook the lapse of petitioner in alleging
grave abuse of discretion as its ground for seeking a reversal of the
assailed Decision. Although the Rules of Court specify reversible errors
as grounds for a petition for review under Rule 45, the Court will lay aside
for the nonce this procedural lapse and consider the allegations of grave
abuse as statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the
amount of such accountability. Hence, the resolution of this petition rests
on the sole issue of the enforceability and validity of the Second Contract,
more specifically: (1) whether the president of the petitioner-corporation

had apparent authority to bind petitioner to the Second Contract; and (2)
whether the said contract was valid and not merely simulated.

The Courts Ruling


The petition is not meritorious.

First Issue: Apparent Authority of a Corporate President


Petitioner argues that the disputed contract is unenforceable,
because Punsalan, its president, was not authorized by its board of
directors to enter into said contract.
The general rule is that, in the absence of authority from the board
of directors, no person, not even its officers, can validly bind a
corporation.[21] A corporation is a juridical person, separate and distinct
from its stockholders and members, having xxx powers, attributes and
properties expressly authorized by law or incident to its existence. [22]
Being a juridical entity, a corporation may act through its board of
directors, which exercises almost all corporate powers, lays down all
corporate business policies and is responsible for the efficiency of
management,[23] as provided in Section 23 of the Corporation Code of the
Philippines:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees x x x.
Under this provision, the power and the responsibility to decide
whether the corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles of incorporation,
bylaws, or relevant provisions of law. [24] However, just as a natural person
may authorize another to do certain acts for and on his behalf, the board
of directors may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals to bind
the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business, viz.: [25]

A corporate officer or agent may represent and bind the corporation in


transactions with third persons to the extent that [the] authority to do so
has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred.
Accordingly, the appellate court ruled in this case that the authority
to act for and to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power was in fact exercised
without any objection from its board or shareholders. Petitioner had
previously allowed its president to enter into the First Contract with
private respondent without a board resolution expressly authorizing him;
thus, it had clothed its president with apparent authority to execute the
subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to
the subject contract does not constitute corporate practice, which
Webster defines as frequent or customary action. It cites Board of
Liquidators v. Kalaw,[26] in which the practice of NACOCO allowing its
general manager to negotiate and execute contract in its copra trading
activities for and on its behalf, without prior board approval,
was inferred from sixty contracts not one, as in the present case
-- previously entered into by the corporation without such board
resolution.
Petitioners argument is not persuasive. Apparent authority is
derived not merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his ordinary
powers.[27] It requires presentation of evidence of similar act(s) executed
either in its favor or in favor of other parties. [28] It is not the quantity of
similar acts which establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation.
In the case at bar, petitioner, through its president Antonio Punsalan
Jr.,
entered
into
the
First
Contract
without
first
securing
board approval. Despite such lack of board approval, petitioner did not
object to or repudiate said contract, thus clothing its president with the
power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong -- senior vice president,

treasurer and major stockholder of petitioner. Testifying on the First


Contract, he said:[29]
A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr.
Sao is very influential with the Collector of Customs[s]. Because
the Collector of Custom[s] will be the one to approve our project
study and I objected to that, sir. And I said it [was an exorbitant]
price. And Mr. Punsalan he is the [p]resident, so he [gets] his
way.
Q: And so did the company eventually pay this P350,000.00 to Mr.
Sao?
A:

Yes, sir.

The First Contract was consummated, implemented and paid without a


hitch.
Hence, private respondent should not be faulted for believing that
Punsalans conformity to the contract in dispute was also binding on
petitioner. It is familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to act within the scope of an
apparent authority, it holds him out to the public as possessing
the power to do those acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be
estopped from denying the agents authority. [30]
Furthermore, private respondent prepared an operations manual and
conducted a seminar for the employees of petitioner in accordance with
their contract. Petitioner accepted the operations manual, submitted it to
the Bureau of Customs and allowed the seminar for its employees. As a
result of its aforementioned actions, petitioner was given by the Bureau
of
Customs
a
license
to
operate
a
bonded
warehouse. Granting arguendo then that the Second Contract was
outside the usual powers of the president, petitioners ratification of said
contract and acceptance of benefits have made it binding,
nonetheless. The enforceability of contracts under Article 1403(2) is
ratified by the acceptance of benefits under them under Article 1405.
Inasmuch as a corporate president is often given general supervision
and control over corporate operations, the strict rule that said officer has
no inherent power to act for the corporation is slowly giving way to the
realization that such officer has certain limited powers in the transaction
of the usual and ordinary business of the corporation. [31] In the absence of
a charter or bylaw provision to the contrary, the president is presumed to
have the authority to act within the domain of the general objectives of
its business and within the scope of his or her usual duties. [32]

Hence, it has been held in other jurisdictions that the president of a


corporation possesses the power to enter into a contract for the
corporation, when the conduct on the part of both the president and the
corporation [shows] that he had been in the habit of acting in similar
matters on behalf of the company and that the company had authorized
him so to act and had recognized, approved and ratified his former and
similar actions.[33] Furthermore, a party dealing with the president of a
corporation is entitled to assume that he has the authority to enter, on
behalf of the corporation, into contracts that are within the scope of the
powers of said corporation and that do not violate any statute or rule on
public policy.[34]

Second Issue: Alleged Simulation of the First Contract


As an alternative position, petitioner seeks to pare down its liabilities
by limiting its exposure from P400,000 to only P60,000, the amount
awarded by the RTC. Petitioner capitalizes on the badges of fraud cited
by the trial court in declaring said contract either simulated or
unenforceable, viz.:
xxx The October 1986 transaction with [private respondent]
involved P350,000. The same was embodied in a letter which bore
therein not only the conformity of [petitioners] then President
Punsalan but also drew a letter-confirmation from the latter for,
indeed, he was clothed with authority to enter into the contract after
the same was brought to the attention and consideration of
[petitioner]. Not only that, a [down payment] was made. In the
alleged agreement of December 4, 1986 subject of the present case,
the amount is even bigger-P400,000.00. Yet, the alleged letteragreement drew no letter of confirmation. And no [down payment]
and postdated checks were given. Until the filing of the present
case in February 1988, no written demand for payment was sent to
[petitioner]. [Private respondents] claim that he sent one in writing,
and one was sent by his counsel who manifested that [h]e was
looking for a copy in [his] files fails in light of his failure to present
any such copy. These and the following considerations, to wit:
1)
Despite the fact that no [down payment] and/or postdated
checks [partial payments] (as purportedly stipulated in the alleged
contract) [was given, private respondent] went ahead with the services[;]
2)
[There was a delay in the filing of the present suit, more than a
year after [private respondent] allegedly completed his services or eight

months after the alleged last verbal demand for payment made on
Punsalan in June 1987;
3)
Does not Punsalans writing allegedly in June 1987 on the
alleged letter-agreement of your employees[,] when it should have been
our employees, as he was then still connected with [petitioner], indicate
that the letter-agreement was signed by Punsalan when he was no longer
connected with [petitioner] or, as claimed by [petitioner], that Punsalan
signed it without [petitioners] authority and must have been done in
collusion with plaintiff in order to unlawfully get some money from
[petitioner]?
4)
If, as [private respondent] claims, the letter was returned by
Punsalan after affixing thereon his conformity, how come xxx when
Punsalan allegedly visited [private respondent] in his office at the Bureau
of Customs, in June 1987, Punsalan brought (again?) the letter (with the
pencil [notation] at the left bottom portion allegedly already written)?
5)
How come xxx [private respondent] did not even keep a copy of
the alleged service contract allegedly attached to the letter-agreement?
6)
Was not the letter-agreement a mere draft, it bearing the
corrections made by Punsalan of his name (the letter n is inserted
before the last letter o in Antonio) and of the spelling of his family name
(Punsalan, not Punzalan)?
7)

Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in


nature, and the Court eschews factual examination in a petition for
review under Rule 45 of the Rules of Court. [35] This rule, however, admits
of exceptions, one of which is a conflict between the factual findings of
the lower and of the appellate courts [36] as in the case at bar.
After judicious deliberation, the Court agrees with the appellate
court that the alleged badges of fraud mentioned earlier have not
affected in any manner the perfection of the Second Contract or proved
the alleged simulation thereof. First, the lack of payment (whether down,
partial or full payment), even after completion of private respondents
obligations, imports only a defect in the performance of the contract on
the part of petitioner. Second, the delay in the filing of action was not
fatal to private respondents cause. Despite the lapse of one year after
private respondent completed his services or eight months after the
alleged
last
demand
for payment in June 1987, the action was still filed
within
the

allowable period, considering that an action based on a written contract


prescribes only after ten years from the time the right of action accrues.
[37]
Third, a misspelling in the contract does not establish vitiation of
consent, cause or object of the contract. Fourth, a confirmation letter is
not an essential element of a contract; neither is it necessary to perfect
one. Fifth, private respondents failure to implead the corporate
president does not establish collusion between them. Petitioner could
have easily filed a third-party claim against Punsalan if it believed that it
had recourse against the latter. Lastly, the mere fact that the contract
price was six times the alleged going rate does not invalidate it. [38] In
short, these badges do not establish simulation of said contract.
A fictitious and simulated agreement lacks consent which is
essential to a valid and enforceable contract. [39] A contract is simulated if
the parties do not intend to be bound at all (absolutely simulated), [40] or if
the parties conceal their true agreement (relatively simulated). [41] In the
case at bar, petitioner received from private respondent a letter-offer
containing the terms of the former, including a stipulation of the
consideration for the latters services. Punsalans conformity, as well as
the receipt and use of the operations manual, shows petitioners consent
to or, at the very least, ratification of the contract. To repeat, petitioner
even submitted the manual to the Bureau of Customs and allowed
private respondent to conduct the seminar for its employees. Private
respondent heard no objection from the petitioner, until he claimed
payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in
the determination of the will of the contracting parties. [42] The
circumstances outlined above do not establish any intention to simulate
the contract in dispute. On the contrary, the legal presumption is always
on the validity of contracts. A corporation, by accepting benefits of a
transaction entered into without authority, has ratified the agreement
and is, therefore, bound by it.[43]
WHEREFORE, the petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. L-48930

February 23, 1944

ANTONIO VAZQUEZ, petitioner,


vs.
FRANCISCO DE BORJA, respondent.
x---------------------------------------------------------x
G.R. No. L-48931

February 23, 1944

FRANCISCO DE BORJA, petitioner,


vs.
ANTONIO VAZQUEZ, respondent.
OZAETA, J.:
This action was commenced in the Court of First Instance of Manila by
Francisco de Borja against Antonio Vazquez and Fernando Busuego to
recover from them jointly and severally the total sum of P4,702.70 upon
three alleged causes of action, to wit: First, that in or about the month of
January, 1932, the defendants jointly and severally obligated themselves
to sell to the plaintiff 4,000 cavans of palay at P2.10 per cavan, to be
delivered during the month of February, 1932, the said defendants
having subsequently received from the plaintiff in virtue of said
agreement the sum of P8,400; that the defendants delivered to the
plaintiff during the months of February, March, and April, 1932, only
2,488 cavans of palay of the value of P5,224.80 and refused to deliver
the balance of 1,512 cavans of the value of P3,175.20 notwithstanding
repeated demands. Second, that because of defendants' refusal to
deliver to the plaintiff the said 1,512 cavans of palay within the period
above mentioned, the plaintiff suffered damages in the sum of P1,000.
And, third, that on account of the agreement above mentioned the
plaintiff delivered to the defendants 4,000 empty sacks, of which they
returned to the plaintiff only 2,490 and refused to deliver to the plaintiff
the balance of 1,510 sacks or to pay their value amounting to P377.50;
and that on account of such refusal the plaintiff suffered damages in the
sum of P150.

The defendant Antonio Vazquez answered the complaint, denying having


entered into the contract mentioned in the first cause of action in his own
individual and personal capacity, either solely or together with his
codefendant Fernando Busuego, and alleging that the agreement for the
purchase of 4,000 cavans of palay and the payment of the price of
P8,400 were made by the plaintiff with and to the Natividad-Vasquez
Sabani Development Co., Inc., a corporation organized and existing under
the laws of the Philippines, of which the defendant Antonio Vazquez was
the acting manager at the time the transaction took place. By way of
counterclaim, the said defendant alleged that he suffered damages in the
sum of P1,000 on account of the filing of this action against him by the
plaintiff with full knowledge that the said defendant had nothing to do
whatever with any and all of the transactions mentioned in the complaint
in his own individual and personal capacity.
The trial court rendered judgment ordering the defendant Antonio
Vazquez to pay to the plaintiff the sum of P3,175.20 plus the sum of
P377.50, with legal interest on both sums, and absolving the defendant
Fernando Busuego (treasurer of the corporation) from the complaint and
the plaintiff from the defendant Antonio Vazquez' counterclaim. Upon
appeal to the Court of Appeals, the latter modified that judgment by
reducing it to the total sum of P3,314.78, with legal interest thereon and
the costs. But by a subsequent resolution upon the defendant's motion
for reconsideration, the Court of Appeals set aside its judgment and
ordered that the case be remanded to the court of origin for further
proceedings. The defendant Vazquez, not being agreeable to that result,
filed the present petition for certiorari (G.R. No. 48930) to review and
reverse the judgment of the Court of Appeals; and the plaintiff Francisco
de Borja, excepting to the resolution of the Court of Appeals whereby its
original judgment was set aside and the case was ordered remanded to
the court of origin for further proceedings, filed a cross-petition for
certiorari (G.R. No. 48931) to maintain the original judgment of the Court
of Appeals.
The original decision of the Court of Appeals and its subsequent
resolutions on reconsideration read as follows:
Es hecho no controvertido que el 25 de Febrero de 1932, el
demandado-apelante vendio al demandante 4,000 cavanes de
palay al precio de P2.10 el cavan, de los cuales, dicho
demandante solamente recibio 2,583 cavanes; y que asimismo
recibio para su envase 4,000 sacos vacios. Esta provbado que de
dichos 4,000 sacos vacios solamente se entregaron, 2,583
quedando en poder del demandado el resto, y cuyo valor es el de
P0.24 cada uno. Presentada la demanda contra los demandados
Antonio Vazquez y Fernando Busuego para el pago de la cantidad

de P4,702.70, con sus intereses legales desde el 1.o de marzo de


1932 hasta su completo pago y las costas, el Juzgado de Primera
Instancia de Manila el asunto condenando a Antonio Vazquez a
pagar al demandante la cantidad de P3,175.20, mas la cantidad
de P377.50, con sus intereses legales, absolviendo al demandado
Fernando Busuego de la demanda y al demandante de la
reconvencion de los demandados, sin especial pronunciamiento
en cuanto a las costas. De dicha decision apelo el demandado
Antonio Vazquez, apuntado como principal error el de que el
habia sido condenado personalmente, y no la corporacion por el
representada.
Segun la preponderancia de las pruebas, la venta hecha por
Antonio Vazquez a favor de Francisco de Borja de los 4,000
cavanes de palay fue en su capacidad de Presidente interino y
Manager de la corporacion Natividad-Vazquez Sabani
Development Co., Inc. Asi resulta del Exh. 1, que es la copia al
carbon del recibo otorgado por el demandado Vazquez, y cuyo
original lo habia perdido el demandante, segun el. Asi tambien
consta en los libros de la corporacion arriba mencionada, puesto
que en los mismos se ha asentado tanto la entrada de los P8,400,
precio del palay, como su envio al gobierno en pago de los
alquileres de la Hacienda Sabani. Asi mismo lo admitio Francisco
de Borja al abogado Sr. Jacinto Tomacruz, posterior presidente de
la corporacion sucesora en el arrendamiento de la Sabani Estate,
cuando el solicito sus buenos oficios para el cobro del precio del
palay no entregado. Asi igualmente lo declaro el que hizo entrega
de parte del palay a Borja, Felipe Veneracion, cuyo testimonio no
ha sido refutado. Y asi se deduce de la misma demanda, cuando
se incluyo en ella a Fernando Busuego, tesorero de la NatividadVazquez Sabani Development Co., Inc.
Siendo esto asi, la principal responsable debe ser la NatividadVazquez Sabani Development Co., Inc., que quedo insolvente y
dejo de existir. El Juez sentenciador declaro, sin embargo, al
demandado Vazquez responsable del pago de la cantidad
reclamada por su negligencia al vender los referidos 4,000
cavanes de palay sin averiguar antes si o no dicha cantidad
existia en las bodegas de la corporacion.
Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes
de palay a Francisco de Borja, el mismo demandado vendio a
Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el cavan, y
decimos 'despues' porque esta ultima venta aparece asentada
despues de la primera. Segun esto, el apelante no solamente
obro con negligencia, sino interviniendo culpa de su parte, por lo

que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil,
el debe ser responsable subsidiariamente del pago de la cantidad
objecto de la demanda.
En meritos de todo lo expuesto, se confirma la decision apelada
con la modificacion de que el apelante debe pagar al apelado la
suma de P2,295.70 como valor de los 1,417 cavanes de palay
que dejo de entregar al demandante, mas la suma de P339.08
como importe de los 1,417 sacos vacios, que dejo de devolver, a
razon de P0.24 el saco, total P3,314.78, con sus intereses legales
desde la interposicion de la demanda y las costas de ambas
instancias.
Vista la mocion de reconsideracion de nuestra decision de fecha
13 de Octubre de 1942, y alegandose en la misma que cuando el
apelante vendio los 1,500 cavanes de palay a Ah Phoy, la
corporacion todavia tenia bastante existencia de dicho grano, y
no estando dicho extremo suficientemente discutido y probado, y
pudiendo variar el resultado del asunto, dejamos sin efecto
nuestra citada decision, y ordenamos la devolucion de la causa al
Juzgado de origen para que reciba pruebas al efecto y dicte
despues la decision correspondiente.
Upon consideration of the motion of the attorney for the plaintiffappellee in case CA-G.R. No. 8676,Francisco de Borja vs. Antonio
Vasquez et al., praying, for the reasons therein given, that the
resolution of December 22, 1942, be reconsidered: Considering
that said resolution remanding the case to the lower court is for
the benefit of the plaintiff-appellee to afford him opportunity to
refute the contention of the defendant-appellant Antonio
Vazquez, motion denied.
The action is on a contract, and the only issue pleaded and tried is
whether the plaintiff entered into the contract with the defendant Antonio
Vazquez in his personal capacity or as manager of the Natividad-Vazquez
Sabani Development Co., Inc. The Court of Appeals found that according
to the preponderance of the evidence "the sale made by Antonio Vazquez
in favor of Francisco de Borja of 4,000 cavans of palay was in his capacity
as acting president and manager of the corporation Natividad-Vazquez
Sabani Development Co., Inc." That finding of fact is final and, it resolving
the only issue involved, should be determinative of the result.
The Court of Appeals doubly erred in ordering that the cause be
remanded to the court of origin for further trial to determine whether the
corporation had sufficient stock of palay at the time appellant sold, 1500

cavans of palay to Kwong Ah Phoy. First, if that point was material to the
issue, it should have been proven during the trial; and the statement of
the court that it had not been sufficiently discussed and proven was no
justification for ordering a new trial, which, by the way, neither party had
solicited but against which, on the contrary, both parties now vehemently
protest. Second, the point is, in any event, beside the issue, and this we
shall now discuss in connection with the original judgment of the Court of
Appeals which the plaintiff cross-petitioner seeks to maintain.
The action being on a contract, and it appearing from the preponderance
of the evidence that the party liable on the contract is the NatividadVazquez Sabani Development Co., Inc. which is not a party herein, the
complaint should have been dismissed. Counsel for the plaintiff, in his
brief as respondent, argues that altho by the preponderance of the
evidence the trial court and the Court of Appeals found that Vazquez
celebrated the contract in his capacity as acting president of the
corporation and altho it was the latter, thru Vazquez, with which the
plaintiff had contracted and which, thru Vazquez, had received the sum of
P8,400 from Borja, and altho that was true from the point of view of a
legal fiction, "ello no impede que tambien sea verdad lo alegado en la
demanda de que la misma persona de Vasquez fue la que contrato con
Borja y que la misma persona de Vasquez fue quien recibio la suma de
P8,400." But such argument is invalid and insufficient to show that the
president of the corporation is personally liable on the contract duly and
lawfully entered into by him in its behalf.
It is well known that a corporation is an artificial being invested by law
with a personality of its own, separate and distinct from that of its
stockholders and from that of its officers who manage and run its affairs.
The mere fact that its personality is owing to a legal fiction and that it
necessarily has to act thru its agents, does not make the latter personally
liable on a contract duly entered into, or for an act lawfully performed, by
them for an in its behalf. The legal fiction by which the personality of a
corporation is created is a practical reality and necessity. Without it no
corporate entities may exists and no corporate business may be
transacted. Such legal fiction may be disregarded only when an attempt
is made to use it as a cloak to hide an unlawful or fraudulent purpose. No
such thing has been alleged or proven in this case. It has not been
alleged nor even intimated that Vazquez personally benefited by the
contract of sale in question and that he is merely invoking the legal
fiction to avoid personal liability. Neither is it contended that he entered
into said contract for the corporation in bad faith and with intent to
defraud the plaintiff. We find no legal and factual basis upon which to
hold him liable on the contract either principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the
contract and held him personally liable on that account. On the other
hand, the Court of Appeals found that he "no solamente obro con
negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo
con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objeto de la demanda." We
think both the trial court and the Court of Appeals erred in law in so
holding. They have manifestly failed to distinguish a contractual from an
extracontractual obligation, or an obligation arising from contract from an
obligation arising from culpa aquiliana. The fault and negligence referred
to in articles 1101-1104 of the Civil Code are those incidental to the
fulfillment or nonfullfillment of a contractual obligation; while the fault or
negligence referred to in article 1902 is theculpa aquiliana of the civil
law, homologous but not identical to tort of the common law, which gives
rise to an obligation independently of any contract. (Cf. Manila R.R.
Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890; Cangco vs. Manila R.R.
Co., 38 Phil. 768.) The fact that the corporation, acting thru Vazquez as
its manager, was guilty of negligence in the fulfillment of the contract,
did not make Vazquez principally or even subsidiarily liable for such
negligence. Since it was the corporation's contract, its nonfulfillment,
whether due to negligence or fault or to any other cause, made the
corporation and not its agent liable.
On the other hand if independently of the contract Vazquez by his fault or
negligence cause damaged to the plaintiff, he would be liable to the
latter under article 1902 of the Civil Code. But then the plaintiff's cause of
action should be based on culpa aquiliana and not on the contract
alleged in his complaint herein; and Vazquez' liability would be principal
and not merely subsidiary, as the Court of Appeals has erroneously held.
No such cause of action was alleged in the complaint or tried by express
or implied consent of the parties by virtue of section 4 of Rule 17. Hence
the trial court had no jurisdiction over the issue and could not adjudicate
upon it (Reyes vs. Diaz, G.R. No. 48754.) Consequently it was error for the
Court of Appeals to remand the case to the trial court to try and decide
such issue.
It only remains for us to consider petitioner's second assignment of error
referring to the lower courts' refusal to entertain his counterclaim for
damages against the respondent Borja arising from the bringing of this
action. The lower courts having sustained plaintiff's action. The finding of
the Court of Appeals that according to the preponderance of the evidence
the defendant Vazquez celebrated the contract not in his personal
capacity but as acting president and manager of the corporation, does
not warrant his contention that the suit against him is malicious and
tortious; and since we have to decide defendant's counterclaim upon the
facts found by the Court of Appeals, we find no sufficient basis upon

which to sustain said counterclaim. Indeed, we feel that a a matter of


moral justice we ought to state here that the indignant attitude adopted
by the defendant towards the plaintiff for having brought this action
against him is in our estimation not wholly right. Altho from the legal
point of view he was not personally liable for the fulfillment of the
contract entered into by him on behalf of the corporation of which he was
the acting president and manager, we think it was his moral duty towards
the party with whom he contracted in said capacity to see to it that the
corporation represented by him fulfilled the contract by delivering the
palay it had sold, the price of which it had already received. Recreant to
such duty as a moral person, he has no legitimate cause for indignation.
We feel that under the circumstances he not only has no cause of action
against the plaintiff for damages but is not even entitled to costs.
The judgment of the Court of Appeals is reversed, and the complaint is
hereby dismissed, without any finding as to costs.

G.R. No. L-56076 September 21, 1983


PALAY, INC. and ALBERT ONSTOTT, petitioner,
vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL
HOUSING AUTHORITY and NAZARIO DUMPIT respondents.
MELENCIO-HERRERA, J.:
The Resolution, dated May 2, 1980, issued by Presidential Executive
Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay,
Inc. and Alberto Onstott jointly and severally, to refund to private
respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest
per annum, as resolved by the National Housing Authority in its
Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of
October 28, 1980 denying petitioners' Motion for Reconsideration of said
Resolution of May 2, 1980, are being assailed in this petition.
On March 28, 1965, petitioner Palay, Inc., through its President, Albert
Onstott executed in favor of private respondent, Nazario Dumpit, a
Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview
Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square
meters, - covered by TCT No. 90454, and owned by said corporation. The
sale price was P23,300.00 with 9% interest per annum, payable with a
downpayment of P4,660.00 and monthly installments of P246.42 until

fully paid. Paragraph 6 of the contract provided for automatic


extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the grace
period of one month, without need of notice and with forfeiture of all
installments paid.

Whether petitioners may be held liable for the refund of


the installment payments made by respondent Nazario M.
Dumpit.
III

Respondent Dumpit paid the downpayment and several installments


amounting to P13,722.50. The last payment was made on December 5,
1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent wrote
petitioner offering to update all his overdue accounts with interest, and
seeking its written consent to the assignment of his rights to a certain
Lourdes Dizon. He followed this up with another letter dated June 20,
1973 reiterating the same request. Replying petitioners informed
respondent that his Contract to Sell had long been rescinded pursuant to
paragraph 6 of the contract, and that the lot had already been resold.
Questioning the validity of the rescission of the contract, respondent filed
a letter complaint with the National Housing Authority (NHA) for
reconveyance with an altenative prayer for refund (Case No. 2167). In a
Resolution, dated July 10, 1979, the NHA, finding the rescission void in
the absence of either judicial or notarial demand, ordered Palay, Inc. and
Alberto Onstott in his capacity as President of the corporation, jointly and
severally, to refund immediately to Nazario Dumpit the amount of
P13,722.50 with 12% interest from the filing of the complaint on
November 8, 1974. Petitioners' Motion for Reconsideration of said
Resolution was denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA
Resolution was contrary to law (O.P. Case No. 1459), respondent
Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution
of the NHA. Reconsideration sought by petitioners was denied for lack of
merit. Thus, the present petition wherein the following issues are raised:
I
Whether notice or demand is not mandatory under the
circumstances and, therefore, may be dispensed with by
stipulation in a contract to sell.
II

Whether the doctrine of piercing the veil of corporate


fiction has application to the case at bar.
IV
Whether respondent Presidential Executive Assistant
committed grave abuse of discretion in upholding the
decision of respondent NHA holding petitioners solidarily
liable for the refund of the installment payments made by
respondent Nazario M. Dumpit thereby denying
substantial justice to the petitioners, particularly
petitioner Onstott
We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the
enforcement of the questioned Resolutions and of the Writ of Execution
that had been issued on December 2, 1980. On October 28, 1981, we
dismissed the petition but upon petitioners' motion, reconsidered the
dismissal and gave due course to the petition on March 15, 1982.
On the first issue, petitioners maintain that it was justified in cancelling
the contract to sell without prior notice or demand upon respondent in
view of paragraph 6 thereof which provides6. That in case the BUYER falls to satisfy any monthly
installment or any other payments herein agreed upon,
the BUYER shall be granted a month of grace within
which to make the payment of the t in arrears together
with the one corresponding to the said month of grace. -It
shall be understood, however, that should the month of
grace herein granted to the BUYER expire, without the
payment & corresponding to both months having been
satisfied, an interest of ten (10%) per cent per annum
shall be charged on the amounts the BUYER should have
paid; it is understood further, that should a period of
NINETY (90) DAYS elapse to begin from the expiration of
the month of grace hereinbefore mentioned, and the
BUYER shall not have paid all the amounts that the
BUYER should have paid with the corresponding interest

up to the date, the SELLER shall have the right to declare


this contract cancelled and of no effect without notice,
and as a consequence thereof, the SELLER may dispose
of the lot/lots covered by this Contract in favor of other
persons, as if this contract had never been entered into.
In case of such cancellation of this Contract, all the
amounts which may have been paid by the BUYER in
accordance with the agreement, together with all the
improvements made on the premises, shall be considered
as rents paid for the use and occupation of the above
mentioned premises and for liquidated damages suffered
by virtue of the failure of the BUYER to fulfill his part of
this agreement : and the BUYER hereby renounces his
right to demand or reclaim the return of the same and
further obligates peacefully to vacate the premises and
deliver the same to the SELLER.
Well settled is the rule, as held in previous jurisprudence, 2 that judicial
action for the rescission of a contract is not necessary where the contract
provides that it may be revoked and cancelled for violation of any of its
terms and conditions. However, even in the cited cases, there was at
least a written notice sent to the defaulter informing him of the
rescission. As stressed in University of the Philippines vs. Walfrido de los
Angeles 3 the act of a party in treating a contract as cancelled should be
made known to the other. We quote the pertinent excerpt:
Of course, it must be understood that the act of a party in
treating a contract as cancelled or resolved in account of
infractions by the other contracting party must be made
known to the other and is always provisional being ever
subject to scrutiny and review by the proper court. If the
other party denies that rescission is justified it is free to
resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract was
not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be
affirmed, and the consequent indemnity awarded to the
party prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final judgment
of the corresponding court that will conclusively and
finally settle whether the action taken was or was not

correct in law. But the law definitely does not require that
the contracting party who believes itself injured must first
file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise, the
party injured by the other's breach will have to passively
sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission
is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil
Code, Article 2203).
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent
declaring that judicial action is necessary for the
resolution of a reciprocal obligation (Ocejo Perez & Co.,
vs. International Banking Corp., 37 Phil. 631; Republic vs.
Hospital de San Juan De Dios, et al., 84 Phil 820) since in
every case where the extrajudicial resolution is contested
only the final award of the court of competent jurisdiction
can conclusively settle whether the resolution was proper
or not. It is in this sense that judicial action win be
necessary, as without it, the extrajudicial resolution will
remain contestable and subject to judicial invalidation
unless attack thereon should become barred by
acquiescense, estoppel or prescription.
Fears have been expressed that a stipulation providing
for a unilateral rescission in case of breach of contract
may render nugatory the general rule requiring judicial
action (v. Footnote, Padilla Civil Law, Civil Code Anno.,
1967 ed. Vol. IV, page 140) but, as already observed, in
case of abuse or error by the rescinder the other party is
not barred from questioning in court such abuse or error,
the practical effect of the stipulation being merely to
transfer to the defaulter the initiative of instituting suit,
instead of the rescinder (Emphasis supplied).
Of similar import is the ruling in Nera vs. Vacante 4, reading:
A stipulation entitling one party to take possession of the
land and building if the other party violates the contract
does not ex propio vigore confer upon the former the
right to take possession thereof if objected to without
judicial intervention and determination.

This was reiterated in Zulueta vs. Mariano 5 where we held that


extrajudicial rescission has legal effect where the other party does not
oppose it. 6 Where it is objected to, a judicial determination of the issue is
still necessary.
In other words, resolution of reciprocal contracts may be made
extrajudicially unless successfully impugned in Court. If the debtor
impugns the declaration, it shall be subject to judicial determination.

In this case, private respondent has denied that rescission is justified and
has resorted to judicial action. It is now for the Court to determine
whether resolution of the contract by petitioners was warranted.
We hold that resolution by petitioners of the contract was ineffective and
inoperative against private respondent for lack of notice of resolution, as
held in the U.P. vs. Angeles case, supra
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that
"there was no contract to rescind in court because from the moment the
petitioner defaulted in the timely payment of the installments, the
contract between the parties was deemed ipso facto rescinded."
However, it should be noted that even in that case notice in writing was
made to the vendee of the cancellation and annulment of the contract
although the contract entitled the seller to immediate repossessing of the
land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later
underscored in Republic Act No. 6551 entitled "An Act to Provide
Protection to Buyers of Real Estate on Installment Payments." which took
effect on September 14, 1972, when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall
take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of
the contract by a notarial act and upon full payment of
the cash surrender value to the buyer. (Emphasis
supplied).
The contention that private respondent had waived his right to be
notified under paragraph 6 of the contract is neither meritorious because
it was a contract of adhesion, a standard form of petitioner corporation,
and private respondent had no freedom to stipulate. A waiver must be
certain and unequivocal, and intelligently made; such waiver follows only
where liberty of choice has been fully accorded. 9 Moreover, it is a matter

of public policy to protect buyers of real estate on installment payments


against onerous and oppressive conditions. Waiver of notice is one such
onerous and oppressive condition to buyers of real estate on installment
payments.
Regarding the second issue on refund of the installment
payments made by private respondent. Article 1385 of
the Civil Code provides:
ART. 1385. Rescission creates the obligation to return the
things which were the object of the contract, together
with their fruits, and the price with its interest;
consequently, it can be carried out only when he who
demands rescission can return whatever he may be
obliged to restore.
Neither sham rescission take place when the things which
are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded
from the person causing the loss.
As a consequence of the resolution by petitioners, rights to the lot should
be restored to private respondent or the same should be replaced by
another acceptable lot. However, considering that the property had
already been sold to a third person and there is no evidence on record
that other lots are still available, private respondent is entitled to the
refund of installments paid plus interest at the legal rate of 12%
computed from the date of the institution of the action. 10 It would be
most inequitable if petitioners were to be allowed to retain private
respondent's payments and at the same time appropriate the proceeds of
the second sale to another.
We come now to the third and fourth issues regarding the personal
liability of petitioner Onstott who was made jointly and severally liable
with petitioner corporation for refund to private respondent of the total
amount the latter had paid to petitioner company. It is basic that a
corporation is invested by law with a personality separate and distinct
from those of the persons composing it as wen as from that of any other
legal entity to which it may be related. 11 As a general rule, a corporation
may not be made to answer for acts or liabilities of its stockholders or
those of the legal entities to which it may be connected and vice versa.
However, the veil of corporate fiction may be pierced when it is used as a
shield to further an end subversive of justice 12 ; or for purposes that

could not have been intended by the law that created it 13 ; or to defeat
public convenience, justify wrong, protect fraud, or defend crime. 14 ; or
to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the
law or perpetuate deception 16 ; or as an alter ego, adjunct or business
conduit for the sole benefit of the stockholders. 17
We find no badges of fraud on petitioners' part. They had literally relied,
albeit mistakenly, on paragraph 6 (supra) of its contract with private
respondent when it rescinded the contract to sell extrajudicially and had
sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the
President of the corporation and he a to be the controlling stockholder. No
sufficient proof exists on record that said petitioner used the corporation
to defraud private respondent. He cannot, therefore, be made personally
liable just because he "appears to be the controlling stockholder". Mere
ownership by a single stockholder or by another corporation is not of
itself sufficient ground for disregarding the separate corporate
personality. 18 In this respect then, a modification of the Resolution under
review is called for.
WHEREFORE, the questioned Resolution of respondent public official,
dated May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to
refund to respondent Nazario M. Dumpit the amount of P13,722.50, with
interest at twelve (12%) percent per annum from November 8, 1974, the
date of the filing of the Complaint. The temporary Restraining Order
heretofore issued is hereby lifted.

On 09 April 1984, Melchor de la Cuesta, doing business under the name


and style of "Farmers Machineries," sold to Tramat Mercantile, Inc.
("Tramat"), one (1) unit HINOMOTO TRACTOR Model MB 1100D powered
by a 13 H.P. diesel engine. In payment, David Ong, Tramat's president
and manager, issued a check for P33,500.00 (apparently replacing an
earlier postdated check for P33,080.00). Tramat, in turn, sold the tractor,
together with an attached lawn mower fabricated by it, to the
Metropolitan Waterworks and Sewerage System ("NAWASA") for
P67,000.00. David Ong caused a "stop payment" of the check when
NAWASA refused to pay the tractor and lawn mower after discovering
that, aside from some stated defects of the attached lawn mower, the
engine (sold by de la Cuesta) was a reconditioned unit.
On 28 May 1985, de la Cuesta filed an action for the recovery of
P33,500.00, as well as attorney's fees of P10,000.00, and the costs of
suit. Ong, in his answer, averred, among other things, that de la Cuesta
had no cause of action; that the questioned transaction was between
plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal
capacity; and that the payment of the check was stopped because the
subject tractor had been priced as a brand new, not as a reconditioned
unit.
On 02 November 1989, after the reception of evidence, the trial court
rendered a decision, the dispositive portions of which read:
WHEREFORE, in view of the foregoing consideration,
judgment is hereby rendered:

No costs.

1. Ordering the defendants, jointly and


severally, to pay the plaintiff the sum of
P33,500.00 with legal interest thereon at
the rate of 12% per annum from July 7,
1984 until fully paid; and

SO ORDERED.
G.R. No. 111008 November 7, 1994

2. Ordering the defendants, jointly and


severally, to pay the plaintiff the sum of
P10,000.00 as attorney's fees, and the
costs of this suit.

TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners,


vs.
HON. COURT OF APPEALS AND MELCHOR DE LA
CUESTA, respondents.
VITUG, J.:
This petition for review on certiorari challenges the 04th March 1993
decision of the Court of Appeals and its resolution of 01 July 1993 denying
the motion for reconsideration.

SO ORDERED.

An appeal was timely interposed by the defendants. On 04 March 1993,


the Court of Appeals affirmed in toto the decision of the trial court.
Defendant-appellants' motion for reconsideration was denied.

Hence, the instant petition.


We could find no reason to reverse the factual findings of both the trial
court and the appellate court, particularly in holding that the contract
between de la Cuesta and TRAMAT was one of absolute, not conditional,
sale of the tractor and that de la Cuesta did not violate any warranty on
the sale of the tractor to TRAMAT. The appellate court, in its decision,
adequately explained:
If the perfection of the sale was dependent upon
acceptance by the MWSS of the subject tractor why did
the appellants issue a check in payment of the item to
the appellee? And long after MWSS had complained about
the defective tractor engine, and after the appellee had
failed to remedy the defect, why did the appellants still
draw and deliver a replacement check to the appellee for
the increased amount of P33,500.00?
These payments argue against the claim now made by
the defendants that the sale was conditional.
According to the appellee, the additional amount covered
the cost of replacing the oil gasket of the tractor engine
when it was repaired in Soledad Cac's gasoline station in
Quezon City. The appellants, on the other hand, claims
the amount represented the freight charges for
transporting the tractor from Cauayan, Isabela to Metro
Manila.

unit to the MWSS, an entity admittedly not engaged in


farming, and that they ordered the tractor without the
power tiller, an indispensable accessory if the tractor
would be used in farming, these in themselves would not
constitute the required implied notice to the appellee as
seller.
xxx xxx xxx
In regard to the second assigned error, We do not agree
that the appellee should have been held liable for the
tractor's alleged hidden defects. . . .
It has to be noted in this regard that, to satisfy the
requirements of the MWSS, the appellants borrowed a
lawn mower from the MWSS so they could fabricate one
such mower. The appellants' witness stated that the kind
of mid-mounted lawn mower was being manufactured by
their competitor, Alpha Machinery, which had by then
stopped supplying the same (tsn,
Nov. 29, 1988, pp. 73-74). There is no showing that the
appellants had had any previous experience in the
fabrication of this lawn mower. In fact, as aforesaid, they
had to borrow one from the MWSS which they could copy.
But although they made a copy with the same
specifications and design, there was no assurance that
the copy would function as well as with the model.
xxx xxx xxx

The appellants should have explained why they failed to


include the freight charges in the first check. The tractor
was transported from Isabela to Metro Manila as early as
April 1984, and the first check was drawn at about the
same time. The freight charges cannot be said to have
been incurred when the tractor engine was delivered
back to the supplier for repairs. The appellants admitted
that the engine was not brought back to Isabela. The
repairs were done at Soledad Cac's gasoline station in
Quezon City.
Anent the first assigned error, We sustain the trial court's
finding that at the time of the purchase, the appellants
did not reveal to the appellee the true purpose for which
the tractor would be used. Granting that the appellants
informed the appellee that they would be reselling the

Although the trial court discussed it in a different light,


We view the matter in the same way the trial court did
that the lawn mower as fabricated by the appellants was
the root of the parties' problems.
Having had no previous experience in the manufacture of
lawn mowers of the same type as that in litigation, and in
a possibly patent-infringing effort to undercut their
competition, the appellants gathered enough daring to do
the fabrication themselves. But the product might have
proved too much for the subject tractor to power, and the
tractor's engine was strained beyond its limits, causing it
to overheat and damage its gaskets.

No wonder, then, it was a gasket Soledad Cac had to


replace, at a cost chargeable to the appellants. No
wonder, furthermore, the appellants' witness declared
that even after the replacement of that one gasket, the
engine still leaked oil after being torture-tested. The
integrity of the other engine gaskets might have been
impaired, too. Such was the burden placed on the engine.
The engine malfunctioned not necessarily because the
engine, as alleged by the appellants, had been a
reconditioned, and not a brand new, one. It
malfunctioned because it was made to do what it simply
could not. 2
It was, nevertheless, an error to hold David Ong jointly and severally
liable with TRAMAT to de la Cuesta under the questioned transaction. Ong
had there so acted, not in his personal capacity, but as an officer of a
corporation, TRAMAT, with a distinct and separate personality. As such, it
should only be the corporation, not the person acting for and on its
behalf, that properly could be made liable thereon. 3
Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only
when
1. He assents (a) to a patently unlawful act of the corporation, or
(b) for bad faith, or gross negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the corporation, its
stockholders or other persons; 4
2. He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto; 5
3. He agrees to hold himself personally and solidarily liable with the
corporation; 6 or
4. He is made, by a specific provision of law, to personally answer for his
corporate action. 7
In the case at bench, there is no indication that petitioner David Ong
could be held personally accountable under any of the abovementioned
cases.

WHEREFORE, the petition is given DUE COURSE and the decision of the
trial court, affirmed by the appellate court, is MODIFIED insofar as it holds
petitioner David Ong jointly and severally liable with Tramat Mercantile,
Inc., which portion of the questioned judgment is SET ASIDE. In all other
respects, the decision appealed from is AFFIRMED. No costs.
SO ORDERED.

G.R. No. 114787 June 2, 1995


MAM REALTY DEVELOPMENT CORPORATION and MANUEL
CENTENO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION and CELSO B.
BALBASTRO respondents.
VITUG, J.:
A prime focus in the instant petition is the question of when to hold a
director or officer of a corporation solidarily obligated with the latter for a
corporate liability.
The case originated from a complaint filed with the Labor Arbiter by
private respondent Celso B. Balbastro against herein petitioners, MAM
Realty Development Corporation ("MAM") and its Vice President Manuel P.
Centeno, for wage differentials, "ECOLA," overtime pay, incentive leave
pay, 13th month pay (for the years 1988 and 1989), holiday pay and rest
day pay. Balbastro alleged that he was employed by MAM as a pump
operator in 1982 and had since performed such work at its Rancho
Estate, Marikina, Metro Manila. He earned a basic monthly salary of
P1,590.00 for seven days of work a week that started from 6:00 a.m. to
up until 6:00 p.m. daily.
MAM countered that Balbastro had previously been employed by
Francisco Cacho and Co., Inc., the developer of Rancho Estates.
Sometime in May 1982, his services were contracted by MAM for the
operation of the Rancho Estates' water pump. He was engaged, however,
not as an employee, but as a service contractor, at an agreed fee of
P1,590.00 a month. Similar arrangements were likewise entered into by
MAM with one Rodolfo Mercado and with a security guard of Rancho
Estates III Homeowners' Association. Under the agreement, Balbastro was
merely made to open and close on a daily basis the water supply system

of the different phases of the subdivision in accordance with its water


rationing scheme. He worked for only a maximum period of three hours a
day, and he made use of his free time by offering plumbing services to
the residents of the subdivision. He was not at all subject to the control or
supervision of MAM for, in fact, his work could so also be done either by
Mercado or by the security guard. On 23 May 1990, prior to the filing of
the complaint, MAM executed a Deed of Transfer, 1effective 01 July 1990,
in favor of the Rancho Estates Phase III Homeowners Association, Inc.,
conveying to the latter all its rights and interests over the water system
in the subdivision.
In a decision, dated 23 December 1991, the Labor Arbiter dismissed the
complaint for lack of merit.
On appeal to it, respondent National Labor Relations Commission
("NLRC") rendered judgment (a) setting aside the questioned decision of
the Labor Arbiter and (b) referring the case, pursuant to Article 218(c) of
the Labor Code, to Arbiter Cristeta D. Tamayo for further hearing and
submission of a report within 20 days from receipt of the Order. 2 On 21
March 1994, respondent Commissioner, after considering the report of
Labor Arbiter Tamayo, ordered:
WHEREFORE, the respondents are hereby directed to pay
jointly and severally complainant the sum of P86,641.05
as above-computed. 3
The instant petition asseverates that respondent NLRC gravely
abused its discretion, amounting to lack or excess of jurisdiction,
(1) in finding that an employer-employee relationship existed
between petitioners and private respondent and (2) in holding
petitioners jointly and severally liable for the money claims
awarded to private respondent.
Once again, the matter of ascertaining the existence of an employeremployee relationship is raised. Repeatedly, we have said that this
factual issue is determined by:
(a) the selection and engagement of the employee;
(b) the payment of wages;
(c) the power of dismissal; and

(d) the employer's power to control the employee with


respect to the result of the work to be done and to the
means and methods by which the work is to be
accomplished.
We see no grave abuse of discretion on the part of NLRC in
finding a full satisfaction, in the case at bench, of the criteria to
establish that employer-employee relationship. The power of
control, the most important feature of that relationship and, here,
a point of controversy, refers merely to the existence of the
power and not to the actual exercise thereof. It is not essential for
the employer to actually supervise the performance of duties of
the employee; it is enough that the former has a right to wield
the power. 4 It is hard to accede to the contention of petitioners
that private respondent should be considered totally free from
such control merely because the work could equally and easily be
done either by Mercado or by the subdivision's security guard.
Not without any significance is that private respondent's
employment with MAM has been registered by petitioners with
the Social Security System. 5
It would seem that the money claims awarded to private respondent were
computed from 06 March 1988 to 06 March 1991, 6 the latter being the
date of the filing of the complaint. The NLRC might have missed the
transfer by MAM of the water system to the Homeowners Association on
01 July 1990, a matter that would appear not to be in dispute.
Accordingly, the period for the computation of the money claims should
only be for the period from 06 March 1988 to 01 July 1990 (when
petitioner corporation could be deemed to have ceased from the activity
for which private respondent was employed), and petitioner corporation
should, instead, be made liable for the employee's separation pay
equivalent to one-half (1/2) month pay for every year of
service. 7 While the transfer was allegedly due to MAM's financial
constraints, unfortunately for petitioner corporation, however, it failed to
sufficiently establish that its business losses or financial reverses were
serious enough that possibly can warrant an exemption under the law. 8
We agree with petitioners, however, that the NLRC erred in holding
Centeno jointly and severally liable with MAM. A corporation, being a
juridical entity, may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate
agents, are not theirs but the direct accountabilities of the corporation
they represent. True, solidary liabilities may at times be incurred but only
when exceptional circumstances warrant such as, generally, in the
following cases: 9

1. When directors and trustees or, in appropriate cases,


the officers of a corporation
(a) vote for or assent to patently unlawful
acts of the corporation;

WHEREFORE, the order of 21 March 1994 is MODIFIED. The case is


REMANDED to the NLRC for a re-computation of private respondent's
monetary awards, which, conformably with this opinion, shall be paid
solely by petitioner MAM Realty Development Corporation. No special
pronouncement on costs.

(b) act in bad faith or with gross


negligence in directing the corporate
affairs;

SO ORDERED.

(c) are guilty of conflict of interest to the


prejudice of the corporation, its
stockholders or members, and other
persons. 10

G.R. No. L-69494 May 29, 1987

2. When a director or officer has consented to the


issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary
his written objection thereto. 11
3. When a director, trustee or officer has contractually
agreed or stipulated to hold himself personally and
solidarily liable with the Corporation. 12
4 When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate
action. 13
In labor cases, for instance, the Court has held corporate
directors and officers solidarily liable with the corporation for the
termination of employment of employees done with malice or in
bad faith. 14
In the case at Bench, there is nothing substantial on record that can
justify, prescinding from the foregoing, petitioner Centeno's solidary
liability with the corporation.
An extra note. Private respondent avers that the questioned decision,
having already become final and executory, could no longer be reviewed
by this Court. The petition before us has been filed under Rule 65 of the
Rules of Court, there being no appeal, or any other plain, speedy and
adequate remedy in the ordinary course of law from decisions of the
National Labor Relations Commission; it is a relief that is open so long as
it is availed of within a reasonable time.

A.C. RANSOM LABOR UNION-CCLU, petitioner,


vs.
NATIONAL LABOR RELATIONS COMMISSION, First Division A.C.
RANSOM (PHIIS.) CORPORATION RUBEN HERNANDEZ, MAXIMO C.
HERNANDEZ, SR., PORFIRIO R. VALENCIA, LAURA H. CORNEJO,
FRANCISCO HERNANDEZ, CELESTINO C. HERNANDEZ and MA.
ROSARIO HERNANDEZ, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
In a joint Decision in two earlier cases rendered by the then Court of
Industrial Relations (CIR) on August 19, 1972, it declared in the
dispositive portion thereof:
IN VIEW OF ALL THE FOREGOING, ... the A.C. Ransom
Philippine Corporation is guilty of unfair labor practice of
interference and discrimination herein above held and
specified; ordering said corporation, its officers and
agents to cease and desist from committing the same:
finding the strike legal and justified; and toreinstate
immediately ... , to their respective positions with
backwages from July 25, 1969 until actually reinstated,
without loss of seniority rights and other privileges
appurtenant to their employment. (Emphasis supplied). 1
This Court affirmed that Decision when it denied the Petition for Review
filed by RANSOM on February 26, 1973 in G.R. Nos. L-36226-68.

The backwages due the 22 employees having been computed at P


199,276.00 by the (CIR) Examiner, successive Motions for Execution were
filed by the UNION on January 27, 1973 and March 1, 1973, all of which
RANSOM opposed stressing its "precarious financial position if immediate
execution of the backwages would be ordered." Upon the UNION's Motion
of April 22, 1973 asking the CIR that RANSOM be ordered to deposit with
the Court the backwages due them. RANSOM manifested that it did not
have the necessary funds to deposit and asked that the employees'
earnings elsewhere during this suspension be deducted. After several
hearings, a recomputation was made and the award of P199,276.00 was
reduced to P 164,984.00. 2
The records show that, upon application filed by RANSOM on April 2,
1973, it was granted clearance by the Secretary of Labor on June 7, 1973
to cease operation and terminate employment effective May 1, 1973,
without prejudice to the right of subject employees to seek redress of
grievances under existing laws and decrees. 3 The reasons given by
RANSOM for the clearance application were financial difficulties on
account of obligations incurred prior to 1966.

1972, could no longer be enforced by mere Motion because more than


five (5) years had already lapsed.
Acting on the Motion, Labor Arbiter Tito F. Genilo issued, on March 11,
1980, an Order, the pertinent part of which reads:
Under the circumstances and pursuant to the decision
aforementioned, especially that portion holding the
respondent corporation's officers and agents liable, the
following officers of the respondent corporation as
appears in the record-are hereby deemed included
parties respondents in their official capacity:
a) Ruben Hernandez (President, per his testimony on
August 21, 1974);
b) Maximo C. Hernandez, Jr. (Director);
c) Porfirio N. Valencia (Director);

On January 21, 1974, the UNION filed another Motion for Execution
alleging that although RANSOM had assumed a posture of suffering from
business reverse, its officers and principal stockholders had organized a
new corporation, the Rosario Industrial Corporation (thereinafter called
ROSARIO), using the same equipment, personnel, business stocks and
the same place of business. For its part, RANSOM declared that ROSARIO
is a distinct and separate corporation, which was organized long before
these instant cases were decided adversely against RANSOM.

d) Laura H. Cornejo (Director);


e) Francisco Hernandez (Chairman of the Board);
f) Celestino C. Hernandez (Director); and
g) Ma. Rosario Hernandez (Director).

It appears that sometime in 1969, ROSARIO, a closed corporation, was, in


fact, established. It was engaged in the same line of business as RANSOM
with the same Hernandez family as the owners, the same officers, the
same President, the same counsel and the same address at 555 Quirino
Avenue, Paranaque, Rizal. The compound, building, plant, equipment,
machinery, laboratory and bodega were the same as those occupied and
used by RANSOM. The UNION claims that ROSARIO thrives to this day.
Writs of execution were issued successively against RANSOM on June 23,
1976, and February 17, 1977, to no avail.
On December 18, 1978, the UNION again filed an ex-parte Motion for Writ
of Execution and Garnishment praying that the Writ issue against the
Officers/Agents of RANSOM personally and or their estates, as the case
may be, considering their success in hiding or shielding the assets of said
company. RANSOM countered that the CIR Decision, dated August 19,

Consequently, let a writ of execution be issued for P


164,984.00 against respondent corporation and its
officers/agents enumerated above.
SO ORDERED. (Emphasis supplied)

It appears that among the persons named in the aforequoted Order, Ma.
Rosario Hernandez died in 1971; Francisco Hernandez died in 1977: and
Celestino C. Hernandez passed away in 1979. And Maximo Hernandez
who was named in the CIR Decision, died in 1966. 5
The NLRC, on appeal, modified the Decision by relieving the officers and
agents of liability as follows:

As to the liability of the respondent's officers and agents,


we agree with the contention of the respondent-appellant
that there is nothing in the order dated March 11, 1980
that would justify the holding of the individual officers
and agents of respondent in their personal capacity. As a
general rule, officers of the corporation are not liable
personally for the official acts unless they have exceeded
the scope of their authority. In the absence of evidence
showing that the officers mentioned in the Order of the
Labor Arbiter dated March 11, 1980 have exceeded their
authority, the writ of execution can not be enforced
against them, especially' so since they were not given a
chance to be heard.

be modified, in that all the individual private respondents and not only
the President, should be held jointly and severally liable with RANSOM.
On November 4, 1986, it further filed an Urgent Motion for Preliminary
Mandatory Injunction "directing private respondents to deposit the
amount of P 199,276.00 or to put up a supersedeas bond of the same
sum."

WHEREFORE, the Order appealed from is hereby affirmed,


except as modified above.

The CIR Decision became final, conclusive, and executory after this Court
denied the RANSOM petition for review in 1973. In other words, this Court
upheld that portion of the judgment ordering the officers and agents of
RANSOM to reinstate the laborers concerned, with backwages. The
inclusion of the officers and agents was but proper since a corporation, as
an artificial being, can act only through them. It was also pursuant to the
CIR Act (CA No. 103 ), 7 the Industrial Peace Act (R.A. 875) 8 the Minimum
Wage Law (R.A. 602). 9 Consequently, when, in resolving the UNION's
Motion for Writ of Execution and Garnishment in the Order of March 11,
1980, Labor Arbiter Genilo named the seven (17) private respondents
herein as the RANSOM officers and agents, who should be held liable
(supra), he merely implemented the already final and executory CIR
decision of August 19, 1972. The NLRC, on appeal to it by RANSOM, could
not have modified the CIR Decision, as affirmed by this Court, by relieving
RANSOM's officers and agents of liability. It is also for that reason that in
our Decision of June 10, 1986 we set aside said NLRC Decision and
reinstated the Order of Labor Arbiter Genilo, with modification, in that we
limited liability for backwages due the 22 UNION members to the
President of RANSOM in 1974 jointly and severally with other Presidents
of the same corporation who had been elected as such after 1972 or up
to the time the corporation life was terminated, since the President
should also be deemed included in the term "employer. "

SO ORDERED.

Reconsideration sought by the UNION from the NLRC was denied, hence
this special civil action of Certiorari.
On June 10, 1986, this Court promulgated its Decision, the dispositive
portion of which decrees:
WHEREFORE, the questioned Decision of the National
Labor Relations Commission is SET ASIDE, and the Order
of the Labor Arbiter Tito F. Genilo of March 11, 1980 is
reinstated with the modification that personal liability for
the backwages due the 22 strikers shall be limited to
Ruben Hernandez, who was President of RANSOM in
1974, jointly and severally with other Presidents of the
same corporation who had been elected as such after
1972 or up to the time the corporate life was terminated.
Both parties have moved for reconsideration. Private respondents point
out that they were never impleaded as parties in the Trial Court, and that
their personal liabilities were never at issue; that judgment holding Ruben
Hernandez personally liable is tantamount to deprivation of property
without due process of law; and that he was not an officer of the
corporation at the time the unfair labor practices were committed.
The UNION on the other hand, in its own Motion for Reconsideration,
prays that the veil of corporate fiction be pierced and that the Decision

Incontrovertible is the fact that RANSOM was found guilty by the CIR, in
its Decision of August 19, 1972, of unfair labor practice; that its officers
and agents were ordered to cease and desist from further committing
acts constitutive of the same, and to reinstate immediately the 22 union
members to their respective positions with backwages from July 25, 1969
until actually reinstated.

The foregoing, however, limits the scope of liability and deviates from the
CIR Decision, affirmed by this Court in 1973, holding the officers and
agents of RANSOM liable. In other words, the officers and agents listed in
the Genilo Order except for those who have since passed away, should,
as affirmed by this Court, be held jointly and severally liable for the
payment of backwages to the 22 strikers.

This finding does not ignore the legal fiction that a corporation has a
personality separate and distinct from its stockholders and members, for,
as this Court had held "where the incorporators and directors belong to a
single family, the corporation and its members can be considered as one
in order to avoid its being used as an instrument to commit
injustice," 10 or to further an end subversive of justice. 11 In the case
of Claparols vs. CIR 12involving almost similar facts as in this case, it was
also held that the shield of corporate fiction should be pierced when it is
deliberately and maliciously designed to evade financial obligations to
employees. To the same effect was this Court's rulings in still other cases:
When the notion of legal entity is used as a means to
perpetrate fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of
statutes, and or confuse legitimate issues the veil which
protects the corporation will be lifted (Villa Rey Transit,
Inc. vs. Ferrer, 25 SCRA 846 [1968]; Republic vs. Razon,
20 SCRA 234 [1967]; A.D. Santos, Inc. vs. Vasquez, 22
SCRA 1156 [1968]; Telephone Eng'g. & Service Company,
Inc. vs. WCC, 104 SCRA 354 [1981]).
The alleged bankruptcy of RANSOM furnishes no justification for nonpayment of backwages to the employees concerned taking into
consideration Article 110 of the Labor Code, which provides:
ART. 110. Worker preference in case of bankruptcy. - In
the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as
regards wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Unpaid
wages shag be paid in full before other creditors may
establish any claim to a share in the assets of the
employer.
The term "wages" refers to all remunerations, earnings and other benefits
in terms of money accruing to the employees or workers for services
rendered. They are to be paid in full before other creditors may establish
any claim to a share in the assets of the employer.
Section 10. Payment of wages in case of bankruptcy.Unpaid wages earned by the employees before the
declaration of bankruptcy or judicial liquidation of the
employer's business shall be given first preference and

shall be paid in full before other creditors may establish


any claim to a share in the assets of the employer. 13
The foregoing provisions are but in consonance with the principles of
social justice and protection to labor guaranteed by past and present
Constitutions and are not really being given any retroactive effect when
applied herein.
The Decision of the CIR was rendered on August 19, 1972. Clearance to
RANSOM to cease operations and terminate employment granted by the
Secretary of Labor was made effective on May 1, 1973. The right of the
employees concerned to backwages awarded them, therefore, had
already vested at the time and even before clearance was granted. Note
should also be taken of the fact that the clearance was without prejudice
to the right of subject employees to seek redress of grievances under
existing laws and decrees.
The worker preference applies even if the employer's properties are
encumbered by means of a mortgage contract, as in this case. So that,
when machinery and equipment of RANSOM were sold to Revelations
Manufacturing Corporation for P 2M in 1975, the right of the 22 laborers
to be paid from the proceeds should have been recognized, even though
it is claimed that those proceeds were turned over to the Commercial
Bank and Trust Company (Comtrust) in payment of RANSOM obligations,
since the workers' preference is over and above the claim of other
creditors.
The contention, therefore, of the heirs of the late Maximo C. Hernandez,
Sr. that since they paid from their own personal funds the balance of the
amount owing by RANSOM to Comtrust they are the "preferential
creditors" of RANSOM, is clearly without merit. Workers are to be paid in
full before other creditors may establish any claim to a share in the
assets of the employer.
... even if the employer's properties are encumbered by
means of a mortgage contract, still the workers' wages
which enjoy first preference in case of bankruptcy or
liquidation are duly protected by an automatic first lien
over and above all other earlier encumbrances on the
said properties. Otherwise, workers' wages may be
imperilled by foreclosure of mortgages, and as a
consequence, the aforecited provision of the New Labor
Code would be rendered meaningless. 14

Aggravating RANSOM's clear evasion of payment of its financial


obligations is the organization of a "run-away corporation," ROSARIO, in
1969 at the time the unfair labor practice case was pending before the
CIR by the same persons who were the officers and stockholders of
RANSOM, engaged in the same line of business as RANSOM, producing
the same line of products, occupying the same compound, using the
same machineries, buildings, laboratory, bodega and sales and accounts
departments used by RANSOM, and which is still in existence. Both
corporations were closed corporations owned and managed by members
of the same family. Its organization proved to be a convenient instrument
to avoid payment of backwages and the reinstatement of the 22 workers.
This is another instance where the fiction of separate and distinct
corporate entities should be disregarded.
It is very obvious that the second corporation seeks the
protective shield of a corporate fiction whose veil in the
present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its
financial obligation to its employees.

the amount due as backwages in the meantime, need no longer be acted


on.
A final and executory Decision in favor of the UNION obtained in 1972
and affirmed by this Court in 1973 has remained unsatisfied to this date
despite no less than ten (10) Motions for Execution over a period of
fourteen (14) years, not to mention the fact that this is the second time
that this case is before this Court. The detriment and prejudice caused
the employees concerned is subversive of the ends of justice. This
protracted litigation must end and labor should now enjoy the just
deserts of its legal victory.
ACCORDINGLY, private respondents' Motion for Reconsideration is hereby
denied with FINALITY; the Motion for Reconsideration filed by petitioner is
granted in part; and the dispositive portion of the Decision, dated June
10, 1986, is hereby amended to read as follows:
WHEREFORE, the questioned Decision of the National
Labor Relations Commission is SET ASIDE, and the Order
of Labor Arbiter Tito F. Genilo of March 11, 1980 is
reinstated with the modification that Rosario Industrial
Corporation and its officers and agents are hereby held
jointly and severally liable with the surviving private
respondents for the payment of the backwages due the
22 union members.

... When a notion of legal entity is used to. defeat public


convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an
association or persons, or, in the case of two
corporations, will merge them into one. 15
The corporation will be treated merely as an aggregation
of individuals or, where there are two corporations, they
will be merged as one, the one being merely regarded as
part of the instrumentality of the other. 16
The UNION's plea, therefore, for the reinstatement of the 22 strikers in
ROSARIO should be favorably heard. However, ROSARIO shall have the
option to award them separation pay equivalent to one-half month for
every year of service actually rendered by the 22 strikers.
The plea of the UNION for the restoration of the original computation of
P199,276.00 or to grant the 22 Union members three (3) years
backwages is rejected. It is the amount of P164,984.00 as backwages,
which was the subject of the Writ of Execution issued by the Labor Arbiter
pursuant to the CIR Decision of 1972.
With the conclusions arrived at, the UNION's Urgent Motion for a Writ of
Preliminary Mandatory Injunction directing private respondents to deposit

Rosario Industrial Corporation is hereby ordered to


reinstate the 22 union members or, if this is not possible,
to award them separation pay equivalent at least to one
(1) month pay or to one (1) month salary for every year
of service actually rendered by them with A.C. Ransom
(Phils). Corporation, whichever is higher.
This decision is immediately executory.
SO ORDERED.

G.R. No. L-64204 May 31, 1985


DEL ROSARIO & SONS LOGGING ENTERPRISES, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, PAULINO

MABUTI, NAPOLEO BORATA, SILVINO TUDIO and CALMAR


SECURITY AGENCY, respondents.

required appeal fee was not paid; in holding it jointly and severally liable
with the Security Agency; and in refusing to give due course to its Motion
for Reconsideration.

MELENCIO-HERRERA, J.:
A petition for certiorari seeking the annulment of the National Labor
Relations Commission (NLRC) Resolution in ROX Arbitration Case No. 44579 entitled Paulino Mabuti, et al. versus Calinar Security Agency, et al.,
and the affirmance instead, of the Decision of the Labor Arbiter.
On February 1, 1978, petitioner Del Rosario & Sons Logging Enterprises,
Inc. entered into a "Contract of Services" with private respondent Calinar
Security Agency (Security Agency, for short) whereby the latter
undertook to supply the former with security guards at the rate of
P300.00 per month for each guard.
On October 4, 1979, Paulino Mabuti, Napoleo Borata and Silvino Tudio
filed a Complaint against the Security Agency and petitioner, for
underpayment of salary, non-payment of living allowance, and 13th
month pay. Thereafter, five other guards filed their complaint for the
same causes of action.
In its Answer, petitioner contended that complainants have no cause of
action against it due to absence of employer-employee relationship
between them. The Security Agency also denied liability alleging that due
to the inadequacy of the amounts paid to it under the Contract of
Services, it could not possibly comply with the payments required by
labor laws.
Assigned for compulsory arbitration, on December 21, 1979, the Labor
Arbiter rendered a Decision dismissing the complaint against petitioner
for want of employer-employee relationship but ordering the Security
Agency to pay complainants the amounts sought by them totalling
P2,923.17.

The formal defects in the appeal of the Security Agency were not fatal
defects. The lack of verification could have been easily corrected by
requiring an oath. 1 The appeal fee had been paid although it was
delayed. 2 In the case of Panes vs. Court of Appeals, et al., 3 we held:
Clearly, failure to pay the docketing fees does not
automatically result in the dismissal of the appeal,
Dismissal is discretionary with the Appellate Court
(Nawasa vs. Secretary of Public Works and
Communications, 16 SCRA 536, 539 [1966]), and
discretion must be exercised wisely and prudently, never
capriciously, with a view to substantial justice (Cucio vs.
Court of Appeals, 57 SCRA 401 [1974]). Failure to pay the
appeal docketing fee confers a directory and not a
mandatory power to dismiss an appeal and such power
must be exercised with sound discretion and with a great
deal of circumspection, considering all attendant
circumstances. 4
It may be that, as held in Acda vs. MOLE, 119 SCRA 306 [1982], payment
of the appeal fee is "by no means a mere technicality but is an essential
requirement in the perfection of an appeal." However, where as in this
case, the fee had been paid, unlike in the Acda case, although payment
was delayed, the broader interests of justice and the desired objective of
resolving controversies on the merits demanded that the appeal be given
course as, in fact, it was so given by the NLRC. Besides, it was within the
inherent power of the NLRC to have allowed the late payment of the
appeal fee.

The Security Agency appealed to the NLRC, which modified the Decision
of the Labor Arbiter by holding that petitioner is liable to pay
complainants, jointly and severally, with the Security Agency on the
ground that petitioner is an indirect employer pursuant to Articles 106
and 107 of the Labor Code, as amended.

Moreover, as provided for by Article 221 of the Labor Code "in any
proceeding before the Commission or any of the Labor Arbiters, the rules
of evidence prevailing in Courts of law or equity shall not be controlling
and it is the spirit and intention of this Code that the Commission and its
members and the Labor Arbiters shall use every and an reasonable
means to ascertain the facts in each case speedily and objectively and
without regard to technicalities of law or procedure, all in the interest of
due process."

Reconsideration sought by petitioner having been denied, this certiorari


petition was instituted contending that the NLRC erred in giving due
course to the appeal despite the fact that it was not under oath and the

Petitioner's joint and several liability with the Security Agency was
correctly adjudged. When petitioner entered into a Contract of Services
with the Security Agency and the latter hired complainants to work as

guards for the former, petitioner became an indirect employer of


respondents-complainants pursuant to the unequivocal terms of Articles
106 and 107 of the Labor Code, as amended:

NATIONAL LABOR RELATIONS COMMISSION, COMMART (PHIL.),


INC. AND JESUS T. MAGLUTAC,respondents.
G.R. No. 78637 September 21, 1990

Art. 106. Contractor or subcontractor . ...


In the event that the contractor or subcontractor fails to
pay the wages of his employees in accordance with this
Code, the employer shag be jointly and severally liable
with his contractor or subcontractor to such employees to
the extent of the work performed under the contract, in
the same manner and extent that he is liable to
employees directly employed by him.
Art. 107. Indirect employer. The provisions of the
immediately preceding Article shall likewise apply to any
person, partnership, association or corporation which, not
being an employer, contracts with an independent
contractor for the performance of any work, task, job or
project.
The joint and several liability imposed on petitioner and affirmed herein,
however, is without prejudice to a claim for reimbursement by petitioner
against the Security Agency for such amounts as petitioner may have to
pay to complainants. The Security Agency may not seek exculpation by
claiming that petitioner's payments to it were inadequate. As an
employer, it is charged with knowledge of labor laws and the adequacy of
the compensation that it demands for contractual services is its principal
concern and not any other's.
WHEREFORE, the judgment under review is hereby affirmed, without
prejudice to petitioner's right to seek reimbursement from Calinar
Security Agency for such amounts as petitioner may have to pay to
complainants. Costs against the private respondent.
SO ORDERED.

G.R. No. 78345 September 21, 1990


JOSE M. MAGLUTAC, petitioner,
vs.

COMMART (PHIL.), INC., petitioner,


vs.
NATIONAL LABOR RELATIONS COMMISSION AND JOSE M.
MAGLUTAC, respondents.
MEDIALDEA, J.:
These petitions for certiorari seek the review of the decision of
respondent National Labor Relations Commission promulgated on April
30, 1987 in NLRC Case No. NCR-11-3887-84. Both parties filed their
petitions with this Court which were consolidated on motion of Jesus T.
Maglutac and Commart (Phils.), Inc. and by resolution of this Court dated
August 12, 1987 (p. 74, Rollo of G.R. No. 78345).
Jose M. Maglutac, petitioner in G.R. No. 78345 (hereinafter referred to as
complainant) was employed by Commart (Phils.), Inc. (hereinafter
referred to as Commart) sometime in February, 1980 and rose to become
the Manager of its Energy Equipment Sales. On October 3, 1984, he
received a notice of termination signed by Joaquin S. Cenzon, VicePresident-General Manager and Corporate Secretary of CMS International,
a corporation controlled by Commart. The notice of termination reads:
You are hereby notified and advised that the Board of
Directors of this Corporation, acting on the unanimous
resolution, have decided that your continued employment
in this company, will not be in the best interest of the
corporation.
You are therefore discharged of all your duties and
responsibilities as Manager, Energy Equipment Sales
effective immediately.
The termination of your services is without prejudice to
any future action, private or legal, that the Company may
take to demand restitution, enforce collection or require
repayment of whatever financial obligations you now
have incurred, to the company. (p. 50, Rollo)

Thereafter, Jose Maglutac filed a complaint for illegal dismissal against


Commart and Jesus T. Maglutac, President and Chairman of the Board of
Directors of Commart. The complainant alleged that his dismissal was
part of a vendetta drive against his parents who dared to expose the
massive and fraudulent diversion of company funds to the company
president's private accounts, stressing that complainant's efficiency and
effectiveness were never put to question when very suddenly he received
his notice of termination (p. 51, Rollo).

a separate and distinct personality from that of its


stockholders and its officers, and respondent Jesus T.
Maglutac simply cannot be held personally liable for his
corporate acts.

Commart and Jesus T. Maglutac, on the other hand, justified the dismissal
for lack of trust and confidence brought about by complainant and his
family's establishment of a company, MM International, in direct
competition with Commart. After the parties submitted their respective
position papers, the Labor Arbiter assigned to the case, Jose Collado, Jr.,
rendered a decision on January 11, 1986 finding that complainant was
illegally dismissed. The dispositive portion of the decision reads:

WHEREFORE, as above modified, the appealed decision is


hereby Affirmed and the appeal dismissed for lack of
merit.

WHEREFORE, respondents are hereby ordered to


reinstate complainant to his former position with full
backwages without loss of seniority rights and other
personnel (sic) privileges, to pay complainant jointly and
severally P 200,000.00 in moral damages, P20,000.00 in
exemplary damages and to pay ten per cent (10%)
attorney's fees.
SO ORDERED. (p. 57, Rollo)
Commart and Jesus T. Maglutac filed a motion for reconsideration of the
decision of the Labor Arbiter which was treated as an appeal to the
National Labor Relations Commission (NLRC). On April 30, 1987, a
decision was rendered by the NLRC modifying the decision of the Labor
Arbiter, The NLRC affirmed the finding of the Labor Arbiter that
complainant was illegally dismissed by Commart but it deleted the award
for moral and exemplary damages in favor of complainant and absolved
Jesus T. Maglutac from any personal liability to the complainant. The
pertinent portion of the decision reads:
xxx xxx xxx
We agree however, to the contention of individual
respondent that he should not have been held liable in
solidum with the corporation. He is merely a nominal
party to the case and made so only in his capacity as
President and Chairman of the Board of Directors of the
respondent corporation. The respondent corporation has

Finally, we delete the award of moral and exemplary


damages to complainant for lack of factual and legal
basis.

SO ORDERED. (pp. 44-45, Rollo)


Both parties filed their respective motions for reconsideration of the
decision of the NLRC. Commart and Jesus T. Maglutac questioned the
NLRC's finding that the complainant was dismissed without just cause.
For his part, complainant questioned the decision insofar as it deleted the
award of moral and exemplary damages and the non- holding of a joint
and several liability of Jesus T. Maglutac and Commart. Complainant's
motion was denied on June 5, 1987 (p. 46, Rollo in G.R. No. 78345).
Commart and Jesus T. Maglutac's motion for reconsideration was also
denied on May 29,1987 (p. 25, Rollo in G.R. No. 78637). Hence, the
instant petitions both alleging grave abuse of discretion on the part of
respondent NLRC.
In G.R. No. 78345, complainant Jose M. Maglutac raised the following
grounds:
(1) RESPONDENT NATIONAL LABOR RELATIONS
COMMISSION GRAVELY ABUSED ITS DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION AND
EVEN CONTRAVENED EXISTING LAWS AND
JURISPRUDENCE IN HOLDING THAT THERE IS NO FACTUAL
OR LEGAL BASIS FOR THE AWARD OF MORAL AND
EXEMPLARY DAMAGES.
(2) RESPONDENT NATIONAL LABOR RELATIONS
COMMISSION COMMITTED GRAVE ABUSE OF DISCRETION
AND CONTRAVENED EXISTING LAWS AND
JURISPRUDENCE IN HOLDING THAT RESPONDENT JESUS T.
MAGLUTAC SHOULD NOT HAVE BEEN HELD LIABLE IN
SOLIDUM WITH THE RESPONDENT CORPORATION FOR HE

IS MERELY A NOMINAL PARTY TO THE CASE AND MADE SO


ONLY IN HIS CAPACITY AS PRESIDENT AND CHAIRMAN OF
THE BOARD OF DIRECTORS OF RESPONDENT
CORPORATION, AND SIMPLY CANNOT BE HELD LIABLE
FOR HIS CORPORATE ACT (p. 30, Rollo)
In G.R. No. 78637, Commart and Jesus Maglutac raised the following
grounds:
(I) RESPONDENT NLRC COMMITTED GRAVE ABUSE OF
DISCRETION IN ORDERING THE REINSTATEMENT OF
PRIVATE RESPONDENT PLUS PAYMENT OF BACKWAGES
DESPITE CLEAR PROOF THAT SAID RESPONDENT
COMMITTED AN ACT INIMICAL TO PETITIONER'S INTEREST.
(II) RESPONDENT NLRC COMMITTED GRAVE ABUSE OF
DISCRETION IN SUSTAINING THE ARBITER'S DECISION
WHICH WAS ISSUED IN VIOLATION OF DUE PROCESS OF
LAW. (p. 8, Rollo)
On August 29, 1988, Commart filed a manifestation stating that it had
become insolvent and that it had suspended operations since January,
1986 (p. 172-A:, Rollo).
In G.R. No. 78345, complainant argued that because of the Labor Arbiter
and the NLRC's findings that his dismissal was not merely without just
cause but was also an act of vendetta, malice attended the act.
Consequently, he is entitled to moral and exemplary damages under the
Civil Code.
We agree. In the case of Primero v. Intermediate Appellate Court, G.R. No.
72644, December 14,1987,156 SCRA 435, We held that in cases of illegal
dismissal, in addition to the reliefs granted under the Labor Code, other
forms of damages under the Civil Code may be granted. Thus,
The legislative intent appears clear to allow recovery in
proceedings before Labor Arbiters of moral and other
forms of damages, in all cases or matters arising from
employer-employee relations. This would no doubt
include, particularly, instances where an employee has
been unlawfully dismissed. In such a case, the Labor
Arbiter has jurisdiction to award to the dismissed
employee not only the reliefs specifically provided by
labor laws, but also moral and other forms of damages

governed by the Civil Code. Moral damages would be


recoverable, for example, where the dismissal of
the employee was not only effected without authorized
cause and /or due process for which relief is granted by
the Labor Code but was attended by bad faith or fraud, or
constituted an act oppressive to labor, or was done in a
manner contrary to morals good customs or public
policy for which the obtainable relief is determined by the
Civil Code (not the Labor Code). Stated otherwise, if the
evidence adduced by the employee before the Labor
Arbiter should establish that the employer did indeed
terminate the employee's services without just cause or
without according him due process, the Labor Arbiter's
judgment shall be for the employer to reinstate the
employee and pay him his backwages or, exceptionally,
for the employee simply to receive separation pay. These
are reliefs explicitly prescribed by the Labor Code. But
any award of moral damages by the Labor Arbiter
obviously cannot be based on the Labor Code but should
be grounded on the Civil Code.
Moral damages may be awarded to compensate one for
diverse injuries such as mental anguish, besmirched
reputation, wounded feelings and social humiliation. It is
however not enough that such injuries have arisen; it is
essential that they have sprung from a wrongful act or
omission of the defendant which was the proximate
cause thereof (Guita v. Court of Appeals, 139 SCRA 576)
From the findings of the Labor Arbiter as affirmed by the NLRC, there is
sufficient basis for an award of moral and exemplary damages in the
instant case. The alleged loss of trust and confidence on complainant
because of his family's establishment of MM International, a company
allegedly in direct competition with Commart, was belied by the findings
of the Labor Arbiter:
The formation of another corporation by complainant's
parents including the complainant himself cannot be used
to justify the termination of complainant. The formation
came about before complainant's parents brought a
minority stockholders' derivative suit and in fact, this was
with the sanction of respondent company's president. The
following handwritten communications by respondent
Jesus Maglutac show that he even encouraged the
organization of MM International Inc. which Articles of

Incorporation show complainant among the incorporating


directors. (p. 32, Rollo)
Moreover, the complainant was dismissed without due process. His
dismissal was made effective immediately and he was not given an
opportunity to present his side. As found by the Labor Arbiter:
After studying in depth the facts and the evidence it is
difficult to divert from the fact that the dismissal of
complainant was triggered by his parent's filing a
derivative suit against respondents with the Securities
and Exchange Commission where it is alleged that the
company's president and his wife siphoned company
funds to their private bank accounts. Complainant's
cause of termination cannot easily and simply be
detached from the filing of the minority stockholders'
derivative suit as this dismissal came abruptly shortly
after the derivative suit was filed. Complainant's brother
who was likewise employed by respondents was likewise
dismissed and this came on the heels of the suit filed with
the Securities and Exchange Commission.
The sequence of events should not be overlooked. It
provides the link for the dismissal of complainant and his
brother. Worse, the requirement of due process was
blatantly violated. Ms notice of termination dated October
3, 1984 ipso facto states that his dismissal is
effective immediately. It should have dawned upon the
senses of respondents that BP 130 strictly enjoins an
employer to terminate an employee provided the latter is
given the opportunity to answer charges imputed against
him as basis for disciplinary action. The case at bar
prominently reveals respondent's oversight of the
requirements of the law. On this score alone, the illegality
of complainant's dismissal is bared eloquently more than
ever.
It appears very clearly that the feud between
complainant's parents and respondent's president, the
brother of complainant's father, seethed to an intolerable
point not sparing innocent people among whom is the
complainant. Like a wild fire spreading its path,
complainant's close kins were sacked from their employ
with respondent corporation in what is termed by
complainant as a 'vendetta drive.' But blood spawned as

a result of the derivative suit filed by complainant's


parents, although the suit is, legally speaking, intended
to 'protect and safeguard the company's interest from
further depredation.' (pp. 31-32, Rollo)
Where the employee's dismissal was effected without procedural
fairness, an award of exemplary damages in her favor can only be
justified if her dismissal was affected in a wanton, oppressive or
malevolent manner (National Service Corp., et al. v. NLRC, G.R. No.
69870, Nov. 29, 1988). The Labor Arbiter justified the award of moral
damages from its finding of the oppressive and malevolent manner the
complainant and his relatives were treated after Jesus T. Maglutac found
out that a derivative suit was filed by complainant's family with the
Securities and Exchange Commission accusing him and his wife of
diverting corporation assets to their personal accounts. The Labor Arbiter
justified the award of damages, thus:
Complainant undoubtedly was exposed to undue
humiliation as a result of his dismissal. From the taunts
and sleepless nights he suffered, the pain cannot be more
than imagined. The oppressive and malevolent treatment
which respondents subjected him to, including the illconcealed attempt to deprive him of his rights to the car
that he had acquired through the company's car plan, not
to mention the vindictive manner in which his mother
was removed as a director and his brother dismissed from
CMS International, furnishes adequate basis for the claim
for moral and exemplary damages. (pp. 35-36, Rollo)
We agree however, with the contention of the Solicitor General that the
award by the Labor Arbiter of P 200,000.00 moral damages and
P20,000.00 exemplary damages is excessive, In the exercise of our
discretion, We reduce the award of damages to P40,000.00 as moral
damages and P10,000.00 as exemplary damages (See General Bank v.
C.A., G.R. No. L-42724, April 9, 1985).
The second ground raised by complainant, that is, that individual
respondent Jesus T. Maglutac should be held jointly and severally liable
with Commart is also meritorious. In the case of Chua v. NLRC, G.R.
81450, Feb. 15, 1990, citing the case of A.C. Ransom Labor Union-CCLU v.
NLRC, 142 SCRA 269, We affirmed the finding of the Labor Arbiter and the
NLRC that the vice-president of a corporation who was the most ranking
officer of the corporation can be held jointly and severally liable with the
corporation for the payment of the unpaid wages of its president. It was
held:

We resolve the issue in the light of the precedent set in


the case of A.C. Ransom Labor Union-CCLU v. National
Labor Relations Commission (142 SCRA 269 [1986]). In
this case, the Court set aside the decision of the NLRC
upholding the personal non-liability of the individual
officers and agents of the corporation unless they have
acted beyond the scope of their authority. In thus
reversing the NLRC decision, the Court ruled that the
president or presidents of the corporation may be held
liable for the corporations's obligations to its workers.

such.' In RANSOM, the President appears to be the


Manager. (At p. 274)
In the instant case, it was correct for the private
respondent to have impleaded the petitioner in the
complaint considering that the latter was the highest and
most ranking official of the corporation after the private
respondent had resigned. Certainly, there should be an
officer directly responsible for the failure to pay the
wages of the corporation's president. In this case, such
officer happened to be the vice-president.

The Court explained:


(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.
...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 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 nonpayment of backwages. ...(At pp. 273-274-1 Emphasis
supplied)
xxx xxx xxx
This court continued:
xxx xxx xxx
(d) The record does not clearly Identify the 'officer or
officers of RANSOM directly responsible for failure to pay
backwages of the 22 strikers. In the absence of definite
proof in that regard, we believe it should be presumed
that the responsible officer is the President of the
corporation who can be deemed the chief operation
officer thereof. Thus, in RA 602, criminal responsibility is
with the 'manager or in his default, the person acting as

And, in the later case of Gudez, et al., v. NLRC, et al., G.R. No. 83023,
March 23, 1990, We held the president and treasurer, Herminia Crisologo,
jointly and severally liable with the corporation. In the said case, the
employer corporation, Retired Army Protective Security Agency, Inc.
(RAPSA), was ordered to cease operations and the corporation, on the
same day when the Labor Arbiter promulgated its decision, filed a
petition for voluntary insolvency, We held:
... The foregoing circumstances make it more necessary
to hold respondent Crisologo liable for the claims due to
petitioners; otherwise, any decision that would be
rendered in favor of the latter would be useless and
ineffective for there would no one against whom it can be
enforced.
The same circumstances obtain in the instant case in the light of the
manifestation of Commart that it had become insolvent and that it had
suspended operations.
Moreover, not only was Jesus T. Maglutac the most ranking officer of
Commart at the time of the termination of the complainant, it was
likewise found that he had a direct hand in the latter's dismissal. The
Labor Arbiter therefore, correctly ruled that Jesus T. Maglutac was jointly
and severally liable with Commart.
In G.R. No. 78637, Jesus T. Maglutac would want Us to reverse the
findings of the Labor Arbiter and the NLRC that complainant Jose M.
Maglutac was dismissed without just cause. The matter, being factual, is
beyond the authority of this court to review. Factual findings of
administrative agencies are generally final and binding upon this Court
when supported by substantial evidence as in the instant case.

Likewise, respondents' claim that they were denied due process because
the Labor Arbiter rendered judgment on the basis of complainant's replyposition paper without furnishing them a copy thereof, is not meritorious.
Where the records show that in response to the complaint before the
Labor Arbiter rendered his decision, Commart and Jesus T. Maglutac
submitted a position paper, complete with annexes where they set out
and argued the factual as well as the legal basis of their positions, their
due process argument must fail. (see Llora Motors, Inc. v. Franklin Drilon,
G.R. 82895, 7 Nov, 1989) The procedure by which issues are resolved
based on position papers, affidavits and other documentary evidence is
recognized as not violative of due process (AMS Farming Corp. v. Pura
Ferrer-Calleja, G.R. No. 80557, Feb. 1988). The failure of complainant to
serve a copy of his Reply-Position Paper is therefore, not fatal, it having
been established that Commart and Jesus T. Maglutac were afforded a
reasonable opportunity to present their sides. Moreover, the existence of
the letters written by individual respondent Jesus T. Maglutac
encouraging the formation of MM International was never denied by him
before the NLRC nor before this Court.
While an employer has its own interests to protect, and
pursuant thereto, it may terminate a managerial
employee for a just cause, such prerogative to dismiss or
lay-off an employee must be exercised without abuse of
discretion. Its implementation should be tempered with
compassion and understanding. The employer should
bear in mind that in the execution of said prerogative,
what is at stake is not only the employees position but his
livelihood. The fact that one is a managerial employee
does not by itself exclude him from the protection of the
constitutional guarantee of security of tenure (Santo v.
NLRC, G.R. 76991, Oct. 28, 1988).
One final point. It cannot now be expected that the harmonious and
pleasant working relationship between the parties in this case prior to the
bringing of the derivative suit with the Securities and Exchange
Commission and the filing of complaint for illegal dismissal with the labor
Arbiter, can be revived. The relationship had been so strained ' that to
order the reinstatement of the complainant would not be wise. Where the
relationship of employer to employee is so strained and ruptured as to
preclude a harmonious working relationship should reinstatement of the
employee be decreed, the latter should be afforded the right to
separation pay where the employer does not have to endure the
continued services of the employee in whom it has lost confidence
(Esmalin v. NLRC, G.R. 67880, 15 September 1989, Bautista v. Enciong,
G.R. No. L-52824, 16 March 1988, Asiaworld Publishing House Inc. v. Hon.
Ople, et al., G.R. No. 56398, July 23, 1987).

ACCORDINGLY, a decision is hereby rendered as follows:


1. In G.R. No. 78345, the petition is GRANTED. The decision of the Labor
Arbiter is REINSTATED but the award of damages is reduced to P
40,000.00 as moral damages and P 10,000.00 as exemplary damages. In
lieu of reinstatement, private respondents are ordered to pay
complainant separation pay of one month salary for every year of service
in addition to his backwages equivalent to three years.
2. In G.R. No. 78637, the petition is DISMISSED.
SO ORDERED.