G.R. No.
168301 March 5, 2007 accountant, Litonjua, Desabelle and Associates (LDA), was responsible for the preparation of
ANTONIO B. MONFORT III and ILDEFONSO B. MONFORT, Petitioners,
vs.
MA. ANTONIA M. SALVATIERRA, PAUL MONFORT, RAMON H. MONFORT,
JACQUELINE M. YUSAY, YVETTE M. BENEDICTO, ESTER S. MONFORT, SECRETARY
OF JUSTICE and CITY PROSECUTOR OF CADIZ CITY,Respondents.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review1 on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
petitioners Antonio B. Monfort III and Ildefonso B. Monfort seek to set aside the Decision
dated 28 January 20052 and Resolution dated 26 May 20053 of the Court of Appeals in CA-
G.R. SP No. 67109. In its Decision and Resolution, the Court of Appeals affirmed the
Resolutions dated 11 October 20004 and 15 August 2001,5 of the Secretary of Justice which
dismissed the petitioners’ criminal complaint for perjury against private respondents Ma.
Antonia M. Salvatierra, Paul Monfort, Ramon H. Monfort, Jacqueline M. Yusay, Yvette M.
Benedicto and Ester S. Monfort.
The factual antecedents are as follows:
Petitioners are children of the late Antonio H. Monfort, Jr., one of the original
stockholders/incorporators of the Monfort Hermanos Agricultural Development Corporation
(MHADC).6 On 28 October 1998, petitioners filed a letter-complaint for perjury under Article
183 of the Revised Penal Code before the City Prosecutor of Cadiz against private
respondents. The case was docketed as I.S. No. 8009. In the said complaint, petitioners
claimed that the private respondents made false statements in their respective counter-
affidavits dated 11 June 1998 which the latter had executed and submitted to the City
Prosecutor of Cadiz in connection with another complaint for perjury, docketed as I.S. No.
7883, earlier filed by the petitioners against the private respondents. The alleged false
statements referred to the declarations of the private respondents that the 1996 annual
stockholders’ meeting of the MHADC was held on 16 October 1996, and that they were
elected as board directors of the MHADC during the same meeting. Petitioners insisted that
the 1996 annual stockholders’ meeting of the MHADC was held, not on 16 October 1996, but
on 27 November 1996 as stated in the 1996 General Information Sheet (GIS) accomplished
by the MHADC and submitted to the Securities and Exchange Commission (SEC), Iloilo
Extension Office. Further, there is nothing in the 1996 GIS of the MHADC which states that
an election of the board of directors of the MHADC took place on 16 October 1996. 7
Subsequently, private respondents filed their joint counter-affidavits dated 9 December 1998
in I.S. No. 8009 before the City Prosecutor of Cadiz. They alleged that they are stockholders
of record of the MHADC; that a stockholders’ meeting of the MHADC was held on 16 October
1996 where they were elected as board directors of MHADC; that the MHADC’s corporate
the MHADC’s GIS; that the LDA made erroneous statements in the 1996 GIS of MHADC; that
the erroneous statements refer to the date of the MHADC’s annual stockholders’ meeting and
the persons composing the MHADC’s board of directors; that the LDA had admitted having
committed such honest error; that the LDA had rectified the same by submitting a letter to the
SEC informing the latter that the annual stockholders’ meeting of the MHADC for the year
1996 was held on 16 October 1996 and not on 27 November 1996; that what transpired on
27 November 1996 was not the annual stockholders’ meeting of the MHADC but merely a
special meeting of the board of directors thereof; and, that, the private respondents were
elected as board directors of the MHADC during the annual stockholders’ meeting on 16
October 1996.8
Private respondents thus argue that they cannot be held liable for perjury since one of the
elements of perjury under Article 183 of the Revised Penal Code is that the assertion of
falsehood must be willful and deliberate; that the terms willful and deliberate imply malice and
evil intent in asserting falsehood; and that this element is lacking in the case at bar.9
Thereafter, Investigating Prosecutor Abraham E. Tionko (Investigator Tionko) issued a
Resolution dated 14 April 1999 in I.S. No. 8009 dismissing the letter-complaint for perjury of
the petitioners for lack of probable cause.10Investigator Tionko noted that the statements in
the 1996 GIS of the MHADC are indeed erroneous. The 1996 GIS stated that the
stockholders’ meeting and election of the board of directors took place on 27 November
1996. If such information were true and correct, then according to Investigator Tionko, it
would have been impossible for some of the board directors to be elected as such on 27
November 1996 since they were already deceased at that time.11Moreover, if the 1996
annual stockholders’ meeting of MHADC was indeed held on 27 November 1996 which fell
on a Wednesday, it would have been inconsistent with the by-laws of the MHADC which
states that the annual stockholders’ meeting of the MHADC shall be held on the last
Thursday of November, which, according to the 1996 calendar, fell on 28 November 1996.
As to the matter of whether or not the stockholders may hold their annual meeting on a date
other than that specified in its by-laws, Investigator Tionko opined that such is not within the
province of his office to rule.12
He, thereafter, made the following findings: that it was not impossible for the MHADC
stockholders to have conducted their annual meeting on 16 October 1996; that there would
have been willful and deliberate assertion of falsehood on the part of the private respondents
only if no error was committed in the preparation of the 1996 GIS of MHADC; that private
respondent Ramon H. Monfort was not aware of the said errors at the time he subscribed and
swore to the correctness of the 1996 GIS of MHADC as Vice-President thereof; that upon the
discovery of the errors, the LDA sent a letter to the SEC providing the latter with the correct
information; that such should be considered as mere negligence and imprudence on the part
of private respondent Ramon H. Monfort; and that the crime of perjury cannot be committed
by negligence or imprudence. The dispositive portion of Investigator Tionko’s Resolution
states:
Page 1 of 45
WHEREFORE, the undersigned believes there is no probable cause to support a finding of
perjury against all of the respondents and this complaint is hereby dismissed. 13
Petitioners appealed the aforementioned Resolution to the Office of the Regional State
Prosecutor for Region VI. In his Resolution dated 19 November 1999, Regional State
Prosecutor Vicente E. Aragona (Prosecutor Aragona) denied due course to petitioners’
appeal as the same was filed out of time.14 Petitioners filed a motion for reconsideration but
the same was dismissed by Prosecutor Aragona in his Resolution dated 22 December
1999.15Prosecutor Aragona sustained the claim of the private respondents that the annual
stockholders meeting of the MHADC was held on 16 October 1996 at Agmac Building,
Bacolod City, where they were elected as board directors since this is supported by evidence
on record consisting of the notices of stockholders’ meeting and registry return receipt. 16 He
also affirmed that patent errors were committed in the preparation of the 1996 GIS of the
MHADC. Pertinent portions of the 22 December 1999 Resolution of Prosecutor Aragona
reads:
We then ruled and so rules here, that an erroneous document is incorrect and therefore not
the truth. It cannot be used as basis to charge the respondents for Perjury, for the simple
reason that it is not an evidence that they lied under oath. In fact, it is an evidence not only of
it being an incorrect document but also of the fact that the November 27, 1996 meeting
written in it was a mistake and that the dead persons listed as elected officers in that meeting
is likewise a mistake. This evidence has no probative value to establish prima facie case for
perjury because of its nature as being worthless due to its inherent incredibility to establish
that November 27, 1996 is the true date of the Annual Stockholders’ Meeting of the Monfort
Hermanos Agricultural Development Corporation.
In view of the foregoing, the appeal should be, as it is hereby dismissed. 17
Petitioners, then, appealed to the Secretary of Justice. Finding no reversible error in
Prosecutor Aragona’s Resolution dated 22 December 1999, Undersecretary of Justice Regis
V. Puno dismissed petitioners’ appeal in his Resolution dated 11 October 2000, 18 to wit:
This resolves the appeal from the resolution of the Regional State Prosecutor, Region VI,
Iloilo City in the above-entitled case dismissing the complaint against Ma. Antonia M.
Salvatierra, et. al. for perjury.1avvphil.net
Section 9 of Department Order No. 223 dated June 30 1993, as amended, (now Section 12 in
relation to Section 7 of Department Circular No. 70 dated 3 July 2000), prescribing rules on
appeals from resolution in preliminary investigations provides that the Secretary of Justice
may, motu proprio, dismiss outright an appeal if there is showing of any reversible error in the
questioned resolution. We have carefully examined the record of the case and we found no
such error committed by the prosecutor that would justify a reversal of his resolution, which is
in accord with the law and evidence on the matter.
WHEREFORE, premises considered, the appeal is hereby DISMISSED. 19
Petitioners filed a motion for reconsideration of Undersecretary Puno’s Resolution dated 11
October 2000 but this was denied in the Resolution dated 15 August 2001 of Undersecretary
of Justice Manuel A.J. Teehankee since no new matter was raised to warrant the review of
the same,20 viz:
A perusal of the motion shows no new matter which was not taken into consideration in our
review of the case. Hence, we find no compelling reason to alter or modify our resolution.
WHEREFORE, the motion for reconsideration is hereby DENIED with finality. 21
Petitioners appealed the resolutions of the Secretary of Justice dated 11 October 2000 and
15 August 2001, respectively, to the Court of Appeals. On 28 January 2005, the Court of
Appeals rendered its Decision affirming the said resolutions. 22 It ruled that the Secretary of
Justice did not commit grave abuse of discretion since its non-finding of probable cause for
perjury against private respondents is based on law, jurisprudence and evidence on records.
It also held that the private respondents had sufficiently established the fact that a
stockholders’ meeting of the MHADC actually took place on 16 October 1996, and that they
were elected during the said meeting as board directors. It further stated that willful and
deliberate assertion of falsehood, as one of the elements of perjury, is not present in the
instant case.23 The fallo of the assailed Decision reads:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us
DISMISSING the petition filed in this case and AFFIRMING the Resolutions dated October
11, 2000 and August 15, 2001 respectively, issued by the public respondent Secretary of
Justice.24
Petitioners filed a Motion for Reconsideration but the same was denied by the Court of
Appeals in its Resolution dated 26 May 2005.25
Petitioners filed the present petition raising the sole issue of whether or not the Court of
Appeals erred in affirming the findings of the Secretary of Justice that there is no probable
cause to indict the private respondents for the crime of perjury.26
According to the petitioners, the insistence of the private respondents that the annual
stockholders’ meeting of MHADC took place on 16 October 1996, and that they were elected
during the said meeting as board directors constitute willful and deliberate assertion of a
falsehood because it is not in harmony with the constitution and by-laws of MHADC which
provides that the annual stockholders’ meeting and the election of board directors shall be
held every last Thursday of November for each year. They stressed the fact that the date 16
October 1996 is not the last Thursday of November in the year 1996. They also claimed that
the notices of meeting dated 1 October 1996 received by the private respondents are
"incompetent" to prove that the annual stockholders’ meeting and the election of directors of
the MHADC took place on 16 October 1996. Further, the intent of the private respondents to
commit a willful and deliberate assertion of falsehood is evident in the 1996 GIS of the
Page 2 of 45
MHADC which does not specify that an election of board directors took place on 16 October
1996.27
Petitioners also averred that the correction of the alleged erroneous entries in the 1996 GIS
of MHADC was made by the LDA, MHADC’s corporate accountant, only after the lapse of two
years from the execution of the said document. They argued that the same was a futile
attempt on the part of the private respondents to escape criminal liability since: a) at the time
the corrections were made, they had already charged private respondent Ramon H. Monfort
with perjury and falsification of private document for including in the 1996 GIS of the MHADC
the names of stockholders who were already deceased as elected board directors of
MHADC;28 b) the alleged errors in the 1996 GIS of the MHADC, particularly in the
composition of the alleged elected board of directors, is belied by the 1997 GIS of MHADC
filed by private respondent Ramon H. Monfort which reiterated the names of the deceased
stockholders as elected directors of MHADC; this is not just one mistake but two mistakes
already; c) there was ill-motive on the part of the private respondents when it sent, through
LDA, a letter to the SEC to correct the alleged errors because at the time such letter was
received by the SEC, the City Prosecutor of Cadiz had already issued a resolution in I.S. No.
7883 finding probable cause for perjury against private respondents; and d) at the time of the
correction of errors, a total of six or more criminal cases for perjury were already filed by the
petitioners against private respondents and some are still pending resolution. 29
Petitioners further asseverated that the private respondents’ statements in their respective
counter-affidavits dated 11 June 1998 in I.S. No. 7883 that they were elected board directors
during the 16 October 1996 annual stockholders’ meeting show willful and deliberate
assertion of falsehood since the private respondents had made these same statements as
their bases in filing civil cases for forcible entry and delivery of personal property against
petitioners which cases, however, were eventually dismissed by this Court in G.R. No.
152542 and No. 155472.30They posited that this Court had dismissed the civil cases as the
private respondents failed to establish the fact that they were duly elected as board directors
of MHADC and, as such, were not authorized to file the said cases. Based on these
premises, petitioners concluded that there is more than enough evidence to support the
finding of probable cause for perjury against private respondents.31
These contentions are devoid of merit.
It should be emphasized at the outset that the function of a preliminary investigation is to
determine whether there is sufficient ground to engender a well-founded belief that a crime
has been committed and the respondent is probably guilty thereof, and should be held for
trial.32 It is through the conduct of a preliminary investigation that the prosecutor determines
the existence of a probable cause that would warrant the prosecution of a case. 33 Probable
cause, for purposes of filing a criminal information, has been defined as such facts as are
sufficient to engender a well-founded belief that a crime has been committed and that the
private respondent is probably guilty thereof. It is such a state of facts in the mind of the
prosecutor as would lead a person of ordinary caution and prudence to believe or entertain
an honest or strong suspicion that a thing is so. The term does not mean "actual or positive
cause;" nor does it import absolute certainty. It is merely based on opinion and reasonable
belief.34
In this proceeding, the prosecutor is vested with authority and discretion to determine whether
there is sufficient evidence to justify the filing of corresponding information. 35 If the prosecutor
found probable cause to indict the respondent for a criminal offense, it is his duty to file the
corresponding information in court.36 However, it is equally his duty not to prosecute when
after an investigation, the evidence adduced is not sufficient to establish a prima facie
case.37 We explained the rationale in the case of People v. Pineda,38 thus:
A prosecuting attorney, by the nature of his office, is under no compulsion to file a particular
criminal information where he is not convinced that he has evidence to prop up the averments
thereof, or that the evidence at hand points to a different conclusion. This is not to discount
the possibility of the commission of abuses on the part of the prosecutor. But we must have to
recognize that a prosecuting attorney should not be unduly compelled to work against his
conviction. In case of doubt, we should give him the benefit thereof. A contrary rule may
result in our courts being unnecessarily swamped with unmeritorious cases. Worse still, a
criminal suspect’s right to due process - the sporting idea of fair play - may be transgressed. x
x x.
Perjury is the willful and corrupt assertion of a falsehood under oath or affirmation
administered by authority of law on a material matter.39 Article 183 of the Revised Penal Code
states the definition of and penalty for perjury, thus:
Art. 183. False testimony in other cases and perjury in solemn affirmation. The penalty of
arresto mayor in its maximum period to prision correccional in its minimum period shall be
imposed upon any person who, knowingly make untruthful statements and not being included
in the provisions of the next preceding articles, shall testify under oath or make an affidavit,
upon any material matter before a competent person authorized to administer an oath in
cases in which the law so requires.
Any person who, in case of a solemn affirmation made in lieu of an oath, shall commit any of
the falsehoods mentioned made in this and the three preceding articles of this section shall
suffer the respective penalties provided therein.
As can be gleaned from the foregoing, the elements of perjury are as follows:
(a) That the accused made a statement under oath or executed an affidavit upon a
material matter.
(b) That the statement or affidavit was made before a competent officer, authorized to
receive and administer oath.
(c) That in the statement or affidavit, the accused made a willful and deliberate
assertion of a falsehood.
Page 3 of 45
 (d) That the sworn statement or affidavit containing the falsity is required by law or
made for a legal purpose.40
The third element of perjury requires that the accused had willfully and deliberately asserted a
falsehood. A mere assertion of a false objective fact is not sufficient. The assertion must be
deliberate and willful.41
In the instant case, the petitioners failed to establish the fact that the private respondents
made a willful and deliberate assertion of falsehood in their counter-affidavits dated 11 June
1998.
Private respondent Ramon H. Monfort had sufficiently and reasonably explained the
circumstances surrounding the preparation and his signing of the erroneous statements in the
1996 GIS of the MHADC. He narrated that as Vice-President of the MHADC, he signed and
certified the same under oath; that he was not, however, aware of the erroneous statements
therein at the time when he signed it; that it was LDA as MHADC’s corporate accountant
which had solely prepared the 1996 GIS of the MHADC; that he always relied on the
accuracy of LDA; that he hastily signed it since, at that time, the LDA representative was in a
hurry to beat the deadline in submitting the same to the SEC; that after being informed of the
erroneous statements, the LDA sent a letter to the SEC informing the latter of the mistakes
and supplying the correct informations therein; that the erroneous statements were due to the
oversight of the LDA; and, that he admitted that he was negligent in not carefully reading and
analyzing the statements therein.42
The naïve reliance of the private respondents on the foregoing circumstances in executing
their respective counter-affidavits dated 11 June 1998 negates willful and deliberate assertion
of falsehood. Perjury being a felony by dolo, there must be malice on the part of the
accused.43 Willfully means intentionally, with evil intent and legal malice, with consciousness
that the alleged perjurious statement is false with the intent that it should be received as a
statement of what was true in fact. It is equivalent to "knowingly." "Deliberately" implies
"meditated" as distinguished from "inadvertent acts." It must appear that the accused knows
his statement to be false or is consciously ignorant of its truth.44
In this case, the private respondents believed in good faith that, based on the above-
explained events, their statements in their respective counter- affidavits dated 11 June 1998
are true and correct. Good faith or lack of malice is a valid defense vis-a-vis the allegation of
deliberate assertion of falsehood in perjury cases.45
It should also be borne in mind that perjury cannot be willful where the oath is according to
belief or conviction as to its truth. Bona fide belief in the truth of a statement is an adequate
defense.46 The private respondents had consistently claimed that the 1996 GIS of the
MHADC is erroneous on its face. They have maintained all along their stand that the annual
stockholders meeting of the MHADC was held on 16 October 1996 and not on 27 November
1996. They also submitted documentary evidence to prove that the annual stockholders’
meeting took place on 16 October 1996, and that the LDA had already communicated to the
SEC the mistakes and corrections in the 1996 GIS of the MHADC.47 In addition thereto, they
also submitted a letter coming from the SEC which acknowledged the corrections therein and
had noted that the same now form part of the records of the MHADC.48
Further, the Secretary of Justice had found that the 1996 GIS of the MHADC is patently
erroneous. It concluded that the same is worthless and has no probative value in evidence
because it does not establish the fact that the true date of the annual stockholders’ meeting
for the year 1996 took place on 27 November 1996. This finding was sustained by the Court
of Appeals in its Decision dated 28 January 2005.
As a general rule, this Court will not interfere in the conduct of preliminary investigations and
leave to the investigating prosecutor sufficient latitude of discretion in the exercise of
determination of what constitutes sufficient evidence as will establish probable cause for the
filing of an information against an offender.49 As an exception, however, this Court may
inquire into the determination of probable cause during the preliminary investigation if, based
on the records, the prosecutor committed grave abuse of discretion. 50 In the case at bar, the
City Prosecutor of Cadiz, the Regional State Prosecutor for Region VI, and the Secretary of
Justice had consistently ruled that there is no probable cause to indict the private
respondents for the crime of perjury. We find no grave abuse of discretion or manifest error
on their part considering the fact that their non-finding of probable cause is supported by the
evidence on record. It is well to state, too, that the resolution of the Secretary of Justice
declaring the absence or existence of a probable cause and affirmed by the Court of Appeals
is accorded high respect and generally conclusive on this Court. 51 We find no exceptional
reasons to deviate from this principle.
The pronouncements of this Court in G.R. No. 152542 and No. 15547252 do not automatically
imply that there is sufficient evidence or probable cause to indict the private respondents for
the crime of perjury. It should be underscored that in G.R. No. 152542 and No. 155472, there
is no finding with regard to the correct date of the 1996 annual stockholders’ meeting and the
election of the board of directors as to bind this Court in the Petition at bar.
WHEREFORE, the instant petition is hereby DENIED. The Decision and Resolution of the
Court of Appeals in CA-G.R. SP No. 67109 dated 28 January 2005 and 26 May 2005,
respectively, are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Page 4 of 45
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.
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 of 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 on 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 PALI's 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 PALI's application,
recommended to the PSE's Board of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of
the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late
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 PALI's application to be
deferred. PALI was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and
Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is
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 letters 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 PALI's application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman,
Perfecto R. Yasay, Jr., bringing to the SEC's 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 PSE's action on PALI's listing application and institute such
measures as are just and proper 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 PSE's decision. The dispositive
portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and
jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j)
and 6(m) of Presidential Decree No. 902-A, the decision of the Board of Governors of the
Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby
Page 5 of 45
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 investigating 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
reconsider 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 PALI'S 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 fled its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's
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 respondent's
jurisdiction, regulation and control. Accepting the argument that the public respondent has the
authority merely to supervise or regulate, would amount to serious consequences,
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 SEC's ruling to the effect that:
. . . 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 situated that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's 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 PALI's
ownership over the disputed properties, neither has the government instituted recovery
proceedings against these properties. Yet the import of PSE's decision in denying PALI's
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.
Page 6 of 45
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 PALI's 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, 19961 the PSE, after it was granted an extension, filed the instant Petition for
Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals.
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 PCGG's 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
PCGG's motion for leave to file petition for intervention, PALI filed its Comment thereto on
January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
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 country's 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 PALI's listing application,
absent a showing of bad faith on the part of the PSE. Under the listing rules 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 issuer's 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. Sadiganbayan, 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 subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the
"law of the case" between the Republic and 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, intimated that the Court of Appeals' sanction that PALI's 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 SEC's and the Court of Appeals reliance on the alleged policy of
"full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear
mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI
did not comply with the listing rules and disclosure requirements. In fact, PALI's documents
supporting its application contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALI's properties and the fact
that the same form part of military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is
clothed with the markings of a corporate entity, it functions as the primary channel through
which the vessels of capital trade ply. The PSE's relevance to the continued operation and
filtration of the securities transactions in the country gives it a distinct color of importance
such that government intervention in its affairs becomes justified, if not necessarily. 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 country's
economy.
Due to this special nature of stock exchanges, the country's 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 safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the
SEC's 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
Page 7 of 45
permit issued by the government to operate in the Philippines. . ." The SEC's regulatory
authority over private corporations encompasses a wide margin of areas, touching nearly all
of a corporation's concerns. This authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from the state.
The SEC's 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 SEC's 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 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 SEC's 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 SEC's 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 petitioner's
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 PSE's management prerogatives are under the absolute
control of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the PSE's 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 a 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 PSE's decision in matters of application for listing in the market, the
SEC may exercise such power only if the PSE's 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 from crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p. 14).
Page 8 of 45
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 their 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, . . . 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 the 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 is 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 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 the 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 map 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 PALI's 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 corporation 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 the 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 fact required to
be stated therein or necessary to make the statements therein not misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in 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) has been engaged or is engaged or is about to engage in fraudulent transaction;
(v) is in any way dishonest or 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 to government rules and regulations.
Page 9 of 45
(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 be 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 of the public interest or as a fraud upon the
purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is, therefore, untenable. As it is, the Court
finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to
support the propriety of the issue of its shares with unfailing clarity, thereby lending support to
the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the SEC, in the exercise
of its vested authority, chooses in setting the standard for public offerings of corporations
wishing to do so. However, the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified circumspection, discounting,
therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in
refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review on Certiorari. The Decisions of the Court of Appeals and the Securities
and Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the
decision of the Philippine Stock Exchange to deny the application for listing of the private
respondent Puerto Azul Land, Inc.
SO ORDERED.
[G.R. No. L-32409. February 27, 1971.]
BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON.
JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of
Internal Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ,
MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN
DOE, Respondents.
San Juan, Africa, Gonzales & San Agustin, for Petitioners.
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista,
Solicitor Pedro A. Ramirez and Special Attorney Jaime M. Maza for Respondents.
DECISION
VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of
preliminary mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a
corporation duly organized and existing under the laws of the Philippines, and its President,
Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70
issued by respondent Judge on February 25, 1970; to order respondents to desist from
enforcing the same and/or keeping the documents, papers and effects seized by virtue
thereof, as well as from enforcing the tax assessments on petitioner corporation alleged by
petitioners to have been made on the basis of the said documents, papers and effects, and to
order the return of the latter to petitioners. We gave due course to the petition but did not
issue the writ of preliminary injunction prayed for therein.
The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual
1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote
a letter addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search
warrant against petitioners for violation of Section 46(a) of the National Internal Revenue
Code, in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208
and 209, and authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to
make and file the application for search warrant which was attached to the letter.
In the afternoon of the following day, February 25, 1970, respondent De Leon and his
witness, respondent Arturo Logronio, went to the Court of First Instance of Rizal. They
brought with them the following papers: respondent Vera’s aforesaid letter-request; an
application for search warrant already filled up but still unsigned by respondent De Leon; an
affidavit of respondent Logronio subscribed before respondent De Leon; a deposition in
printed form of respondent Logronio already accomplished and signed by him but not yet
subscribed; and a search warrant already accomplished but still unsigned by respondent
Judge.
Page 10 of 45

At that time respondent Judge was hearing a certain case; so, by means of a note, he
instructed his Deputy Clerk of Court to take the depositions of respondents De Leon and
Logronio. After the session had adjourned, respondent Judge was informed that the
depositions had already been taken. The stenographer, upon request of respondent Judge,
read to him her stenographic notes; and thereafter, respondent Judge asked respondent
Logronio to take the oath and warned him that if his deposition was found to be false and
without legal basis, he could be charged for perjury. Respondent Judge signed respondent de
Leon’s application for search warrant and respondent Logronio’s deposition, Search Warrant
No. 2-M-70 was then sign by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the
search warrant petitioners at the offices of petitioner corporation on Ayala Avenue, Makati,
Rizal. Petitioners’ lawyers protested the search on the ground that no formal complaint or
transcript of testimony was attached to the warrant. The agents nevertheless proceeded with
their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying
that the search warrant be quashed, dissolved or recalled, that preliminary prohibitory and
mandatory writs of injunction be issued, that the search warrant be declared null and void,
and that the respondents be ordered to pay petitioners, jointly and severally, damages and
attorney’s fees. On March 18, 1970, the respondents, thru the Solicitor General, filed an
answer to the petition. After hearing, the court, presided over by respondent Judge, issued on
July 29, 1970, an order dismissing the petition for dissolution of the search warrant. In the
meantime, or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on
petitioner corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the
documents thus seized. Petitioners came to this Court.
The petition should be granted for the following reasons:chanrob1es virtual 1aw library
1. Respondent Judge failed to personally examine the complainant and his witness.
The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of
Court are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses, papers and effects against
unreasonable searches and seizures shall not be violated, and no warrants shall issue but
upon probable cause, to be determined by the judge after examination under oath or
affirmation of the complainant and the witnesses he may produce, and particularly describing
the place to be searched, and the persons or things to be seized." (Art. III, Sec. 1,
Constitution.)
"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon
probable cause in connection with one specific offense to be determined by the judge or
justice of the peace after examination under oath or affirmation of the complainant and the
witnesses he may produce, and particularly describing the place to be searched and the
persons or things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before
issuing the warrant, personally examine on oath or affirmation the complainant and any
witnesses he may produce and take their depositions in writing, and attach them to the
record, in addition to any affidavits presented to him." (Rule 126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce, required by Art. III,
Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of
Court, should be conducted by the judge himself and not by others. The phrase "which shall
be determined by the judge after examination under oath or affirmation of the complainant
and the witnesses he may produce," appearing in the said constitutional provision, was
introduced by Delegate Francisco as an amendment to the draft submitted by the Sub-
Committee of Seven. The following discussion in the Constitutional Convention (Laurel,
Proceedings of the Philippine Constitutional Convention, Vol. III, pp. 755-757) is
enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de
la justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su
Señoria que causaria cierta demora el procedimiento apuntado en su enmienda en tal forma
que podria frustrar los fines de la justicia o si Su Señoria encuentra un remedio para esto
casos con el fin de compaginar los fines de la justicia con los derechos del individuo en su
persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta
por la siguiente razon: el que solicita un mandamiento de registro tiene que hacerlo por
escrito y ese escrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a
presentar ese escrito o peticion de sucuestro. Esa persona que presenta el registro puede
ser el mismo denunciante o alguna persona que solicita dicho mandamiento de registro.
Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no
se atendra solamente a sea peticion sino que el juez examiner a ese denunciante y si tiene
testigos tambin examiner a los testigos.
"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por
escrito siempre requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo
lo posible las vejaciones injustas con la expedicion arbitraria de los mandamientos de
registro. Creo que entre dos males debemos escoger. el menor.
x x x
Page 11 of 45

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are
incorporating in our constitution something of a fundamental character. Now, before a judge
could issue a search warrant, he must be under the obligation to examine personally under
oath the complainant and if he has any witness, the witnesses that he may produce . .
."cralaw virtua1aw library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and
candid, for it requires the judge, before issuing a search warrant, to "personally examine on
oath or affirmation the complainant and any witnesses he may produce . . ."cralaw virtua1aw
library
Personal examination by the judge of the complainant and his witnesses is necessary to
enable him to determine the existence or non-existence of a probable cause, pursuant to Art.
III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court,
both of which prohibit the issuance of warrants except "upon probable cause." The
determination of whether or not a probable cause exists calls for the exercise of judgment
after a judicial appraisal of facts and should not be allowed to be delegated in the absence of
any rule to the contrary.
In the case at bar, no personal examination at all was conducted by respondent Judge of the
complainant (respondent De Leon) and his witness (respondent Logronio). While it is true that
the complainant’s application for search warrant and the witness’ printed-form deposition
were subscribed and sworn to before respondent Judge, the latter did not ask either of the
two any question the answer to which could possibly be the basis for determining whether or
not there was probable cause against herein petitioners. Indeed, the participants seem to
have attached so little significance to the matter that notes of the proceedings before
respondent Judge were not even taken. At this juncture it may be well to recall the salient
facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition)
taken at the hearing of this case in the court below shows that per instruction of respondent
Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took the depositions of the
complainant and his witness, and that stenographic notes thereof were taken by Mrs. Gaspar.
At that time respondent Judge was at the sala hearing a case. After respondent Judge was
through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant De
Leon and witness Logronio went to respondent Judge’s chamber and informed the Judge that
they had finished the depositions. Respondent Judge then requested the stenographer to
read to him her stenographic notes. Special Deputy Clerk Gonzales testified as
follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the Honorable Judge requested or
instructed them, requested Mr. Logronio to raise his hand and warned him if his deposition
will be found to be false and without legal basis, he can be charged criminally for perjury. The
Honorable Court told Mr. Logronio whether he affirms the facts contained in his deposition
and the affidavit executed before Mr. Rodolfo de Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?
"A The Honorable Judge.
"Q The deposition or the affidavit?
"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search warrant.
The participation of respondent Judge in the proceedings which led to the issuance of Search
Warrant No. 2-M-70 was thus limited to listening to the stenographer’s readings of her notes,
to a few words of warning against the commission of perjury, and to administering the oath to
the complainant and his witness. This cannot be consider a personal examination. If there
was an examination at all of the complainant and his witness, it was the one conducted by the
Deputy Clerk of Court. But, as stated, the Constitution and the rules require a personal
examination by the judge. It was precisely on account of the intention of the delegates to the
Constitutional Convention to make it a duty of the issuing judge to personally examine the
complainant and his witnesses that the question of how much time would be consumed by
the judge in examining them came up before the Convention, as can be seen from the record
of the proceedings quoted above. The reading of the stenographic notes to respondent Judge
did not constitute sufficient compliance with the constitutional mandate and the rule; for by
that manner respondent Judge did not have the opportunity to observe the demeanor of the
complainant and his witness, and to propound initial and follow-up questions which the
judicial mind, on account of its training, was in the best position to conceive. These were
important in arriving at a sound inference on the all-important question of whether or not there
was probable cause.
2. The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal
Revenue Code in relation to all other pertinent provisions thereof particularly Secs. 53, 72,
73, 208 and 209." The question is: Was the said search warrant issued "in connection with
one specific offense," as required by Sec. 3, Rule 126?
To arrive at the correct answer it is essential to examine closely the provisions of the Tax
Code referred to above. Thus we find the following:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Page 12 of 45
Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false
and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply
the information required under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures
any article subject to a specific tax, without having paid the privilege tax therefore, or who
aids or abets in the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of
any article subject to specific tax . . .," and provides that in the case of a corporation,
partnership, or association, the official and/or employee who caused the violation shall be
responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of
output removed, or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses under the Tax
Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax
returns), which are interrelated. The second is the violation of Sec. 53 (withholding of income
taxes at source). The third is the violation of Sec. 208 (unlawful pursuit of business or
occupation); and the fourth is the violation of Sec. 209 (failure to make a return of receipts,
sales, business or gross value of output actually removed or to pay the tax due thereon).
Even in their classification the six above-mentioned provisions are embraced in two different
titles: Secs. 46(a), 53, 72 and 73 are under Title II (Income Tax); while Secs. 208 and 209 are
under Title V (Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA
383), is not applicable, because there the search warrants were issued for "violation of
Central Bank Laws, Internal Revenue (Code) and Revised Penal Code;" whereas, here
Search Warrant No 2-M-70 was issued for violation of only one code, i.e., the National
Internal Revenue Code. The distinction more apparent than real, because it was precisely on
account of the Stonehill incident, which occurred sometime before the present Rules of Court
took effect on January 1, 1964, that this Court amended the former rule by inserting therein
the phrase "in connection with one specific offense," and adding the sentence "No search
warrant shall issue for more than one specific offense," in what is now Sec. 3, Rule 126. Thus
we said in Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the disputed
search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former
Rules of Court that ‘a search warrant shall not issue but upon probable cause in connection
with one specific offense.’ Not satisfied with this qualification, the Court added thereto a
paragraph, directing that ‘no search warrant shall issue for more than one specific offense.’"
3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in Search Warrant No.
2-M-70 in this manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and
disbursements books, customers ledgers); receipts for payments received; certificates of
stocks and securities; contracts, promissory notes and deeds of sale; telex and coded
messages; business communications, accounting and business records; checks and check
stubs; records of bank deposits and withdrawals; and records of foreign remittances, covering
the years 1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of
Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should particularly describe
the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion,
said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for the contested search
warrants was compounded by the description therein made of the effects to be searched for
and seized, to wit:chanrob1es virtual 1aw library
‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,
portfolios, credit journals, typewriters, and other documents and/or paper showing all
business transactions including disbursement receipts, balance sheets and related profit and
loss statements.’
"Thus, the warrants authorized the search for and seizure of records pertaining to all
business transactions of petitioners herein, regardless of whether the transactions were legal
or illegal. The warrants sanctioned the seizure of all records of the petitioners and the
aforementioned corporations, whatever their nature, thus openly contravening the explicit
command of our Bill of Rights — that the things to be seized be particularly described — as
well as tending to defeat its major objective: the elimination of general warrants."cralaw
virtua1aw library
While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the
said warrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the
elimination of general warrants, for the language used therein is so all-embracing as to
include all conceivable records of petitioner corporation, which, if seized, could possibly
render its business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to
explain the purpose of the requirement that the warrant should particularly describe the place
to be searched and the things to be seized, to wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that
a search warrant should particularly describe the place to be searched and the things to be
seized. The evident purpose and intent of this requirement is to limit the things to be seized to
Page 13 of 45
those, and only those, particularly described in the search warrant — to leave the officers of
the law with no discretion regarding what articles they shall seize, to the end that
‘unreasonable searches and seizures’ may not be made, — that abuses may not be
committed. That this is the correct interpretation of this constitutional provision is borne out by
American authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be defeated under the search
warrant issued in this case.
A search warrant may be said to particularly describe the things to be seized when the
description therein is as specific as the circumstances will ordinarily allow (People v. Rubio;
57 Phil. 384); or when the description expresses a conclusion of fact — not of law — by
which the warrant officer may be guided in making the search and seizure (idem., dissent of
Abad Santos, J.,); or when the things described are limited to those which bear direct relation
to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of
Court). The herein search warrant does not conform to any of the foregoing tests. If the
articles desired to be seized have any direct relation to an offense committed, the applicant
must necessarily have some evidence, other than those articles, to prove the said offense;
and the articles subject of search and seizure should come in handy merely to strengthen
such evidence. In this event, the description contained in the herein disputed warrant should
have mentioned, at least, the dates, amounts, persons, and other pertinent data regarding the
receipts of payments, certificates of stocks and securities, contracts, promissory notes, deeds
of sale, messages and communications, checks, bank deposits and withdrawals, records of
foreign remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a motion for
reconsideration of respondent Judge’s order of July 29, 1970. The contention is without merit.
In the first place, when the questions raised before this Court are the same as those which
were squarely raised in and passed upon by the court below, the filing of a motion for
reconsideration in said court before certiorari can be instituted in this Court is no longer a
prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule
requiring the filing of a motion for reconsideration before an application for a writ
of certiorari can be entertained was never intended to be applied without considering the
circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at bar time is of the
essence in view of the tax assessments sought to be enforced by respondent officers of the
Bureau of Internal Revenue against petitioner corporation, On account of which immediate
and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26 SCRA
768.) Lastly, the rule does not apply where, as in this case, the deprivation of petitioners’
fundamental right to due process taints the proceeding against them in the court below not
only with irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to protection against
unreasonable search and seizures. Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer of a corporation
which is charged with a violation of a statute of the state of its creation, or of an act of
Congress passed in the exercise of its constitutional powers, cannot refuse to produce the
books and papers of such corporation, we do not wish to be understood as holding that a
corporation is not entitled to immunity, under the 4th Amendment, against unreasonable
searches and seizures. A corporation is, after all, but an association of individuals under an
assumed name and with a distinct legal entity. In organizing itself as a collective body it
waives no constitutional immunities appropriate to such body. Its property cannot be taken
without compensation. It can only be proceeded against by due process of law, and is
protected, under the 14th Amendment, against unlawful discrimination . . ." (Hale v. Henkel,
201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different
rule applied to a corporation, the ground that it was not privileged from producing its books
and papers. But the rights of a corporation against unlawful search and seizure are to be
protected even if the same result might have been achieved in a lawful way." (Silverthorne
Lumber Company, Et. Al. v. United States of America, 251 U.S. 385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a
corporation to object against unreasonable searches and seizures,
thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of action to assail
the legality of the contested warrants and of the seizures made in pursuance thereof, for the
simple reason that said corporations have their respective personalities, separate and distinct
from the personality of herein petitioners, regardless of the amount of shares of stock or the
interest of each of them in said corporations, whatever, the offices they hold therein may be.
Indeed, it is well settled that the legality of a seizure can be contested only by the party
whose rights have been impaired thereby, and that the objection to an unlawful search and
seizure is purely personal and cannot be availed of by third parties. Consequently, petitioners
herein may not validly object to the use in evidence against them of the documents, papers
and things seized from the offices and premises of the corporations adverted to above, since
the right to object to the admission of said papers in evidence belongs exclusively to the
corporations, to whom the seized effects belong, and may not be invoked by the corporate
officers in proceedings against them in their individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose offices documents,
papers and effects were searched and seized were the petitioners. In the case at bar, the
corporation to whom the seized documents belong, and whose rights have thereby been
impaired, is itself a petitioner. On that score, petitioner corporation here stands on a different
footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by
petitioners — at least partly — as in effect admitted by respondents — based on the
documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the
assessments were made some one and one-half months after the search and seizure on
February 25, 1970, is a strong indication that the documents thus seized served as basis for
the assessments. Those assessments should therefore not be enforced.
Page 14 of 45

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70
issued by respondent Judge is declared null and void; respondents are permanently enjoined
from enforcing the said search warrant; the documents, papers and effects seized thereunder
are ordered to be returned to petitioners; and respondent officials the Bureau of Internal
Revenue and their representatives are permanently enjoined from enforcing the assessments
mentioned in Annex "G" of the present petition, as well as other assessments based on the
documents, papers and effects seized under the search warrant herein nullified, and from
using the same against petitioners in any criminal or other proceeding. No pronouncement as
to costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ.,
concur.
Reyes, J.B.L., J., concurs with Mr. Justice Barredo.
Castro, J., concurs in the result.
G.R. No. 183804 September 11, 2013
S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT CORPORATION, Petitioner,
vs.
ENGR. LUIS U. PARADA, represented by ENGR. LEONARDO A. PARADA of GENLITE
INDUSTRIES,Respondent.
DECISION
REYES, J.:
Before us on appeal by certiorari1 is the Decision2 dated April 30, 2008 of the Court of
Appeals (CA) in CA-G.R. CV No. 83811 which upheld the Decision3 dated May 8, 2004 of the
Regional Trial Court (RTC) of Quezon City, Branch 100, in Civil Case No. Q-01-45212.
Factual Antecedents
S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical
lighting materials from Gentile Industries, a sole proprietorship owned by Engineer Luis U.
Parada (respondent), for its Read-Rite project in Canlubang, Laguna. The petitioner was
unable to pay for the above purchase on due date, but blamed it on its failure to collect under
its sub-contract with the Enviro KleenTechnologies, Inc. (Enviro Kleen). It was however able
to persuade Enviro Kleen to agree to settle its above purchase, but after paying the
respondent ₱250,000.00 on June 2, 1999,4 Enviro Kleen stopped making further payments,
leaving an outstanding balance of ₱816,627.00. It also ignored the various demands of the
respondent, who then filed a suit in the RTC, docketed as Civil Case No.Q-01-45212, to
collect from the petitioner the said balance, plus damages, costs and expenses, as
summarized in the RTC’s decision, as follows:
The petitioner in its answer denied liability, claiming that it was released from its indebtedness
to the respondent by reason of the novation of their contract, which, it reasoned, took place
when the latter accepted the partial payment of Enviro Kleen in its behalf, and thereby
acquiesced to the substitution of Enviro Kleen as the new debtor in the petitioner’s place.
After trial, the RTC rendered judgment6 on May 28, 2004 in favor of the respondent, the fallo
of which reads, as follows:
WHEREFORE, judgment is hereby rendered for the respondent. The petitioner is hereby
ordered to pay the respondent the following:
A. the sum of ₱816,627.00 representing the principal obligation due;
B. the sum equivalent to twenty percent (20%)per month of the principal obligation due from
date of judicial demand until fully paid as and for interest; and
C. the sum equivalent to twenty-five percent (25%) of the principal sum due as and for
attorney’s fees and other costs of suits. The compulsory counterclaim interposed by the
petitioner is hereby ordered dismissed for lack of merit.
SO ORDERED.7 (Emphasis supplied)
On appeal to the CA, the petitioner maintained that the trial court erred in ruling that no
novation of the contract took place through the substitution of Enviro Kleen as the new
debtor. But for the first time, it further argued that the trial court should have dismissed the
complaint for failure of the respondent to implead Genlite Industries as "a proper party in
interest", as provided in Section 2 of Rule 3 of the 1997 Rules of Civil Procedure. The said
section provides:
SEC. 2. Parties in interest. — A real party in interest is the party who stands to be benefited
or injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless
otherwise authorized by law or these Rules, every action must be prosecuted or defended in
the name of the real party in interest.
In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the defendant may
move to dismiss the suit on the ground that it was not brought in the name of or against the
real party in interest, with the effect that the complaint is then deemed to state no cause of
action.
In dismissing the appeal, the CA noted that the petitioner in its answer below raised only the
defense of novation, and that at no stage in the proceedings did it raise the question of
whether the suit was brought in the name of the real party in interest. Moreover, the appellate
Page 15 of 45
court found from the sales invoices and receipts that the respondent is the sole proprietor of
Genlite Industries, and therefore the real party-plaintiff. Said the CA:
Settled is the rule that litigants cannot raise an issue for the first time on appeal as this would
contravene the basic rules of fair play and justice.
In any event, there is no question that respondent Engr.Luis U. Parada is the proprietor of
Genlite Industries, as shown on the sales invoice and delivery receipts. There is also no
question that a special power of attorney was executed by respondent Engr.Luis U. Parada in
favor of Engr. Leonardo A. Parada authorizingthe latter to file a complaint against the
petitioner.8 (Citations omitted)
The petitioner also contended that a binding novation of the purchase contract between the
parties took place when the respondent accepted the partial payment of Enviro Kleen of
₱250,000.00 in its behalf, and thus acquiesced to the substitution by Enviro Kleen of the
petitioner as the new debtor. But the CA noted that there is nothing in the two (2) letters of the
respondent to Enviro Kleen, dated April 14, 1999 and June 16, 1999, which would imply that
he consented to the alleged novation, and, particularly, that he intended to release the
petitioner from its primary obligation to pay him for its purchase of lighting materials. The
appellate court cited the RTC’s finding9 that the respondent informed Enviro Kleen in his first
letter that he had served notice to the petitioner that he would take legal action against it for
its overdue account, and that he retained his option to pull out the lighting materials and
charge the petitioner for any damage they might sustain during the pull-out:
Respondent x x x has served notice to the petitioner that unless the overdue account is paid,
the matter will be referred to its lawyers and there may be a pull-out of the delivered lighting
fixtures. It was likewise stated therein that incidental damages that may result to the structure
in the course of the pull-out will be to the account of the petitioner.10
The CA concurred with the RTC that by retaining his option to seek satisfaction from the
petitioner, any acquiescence which the respondent had made was limited to merely accepting
Enviro Kleen as an additional debtor from whom he could demand payment, but without
releasing the petitioner as the principal debtor from its debt to him.
On motion for reconsideration,11 the petitioner raised for the first time the issue of the validity
of the verification and certification of non-forum shopping attached to the complaint. On July
18, 2008, the CA denied the said motion for lack of merit.12
Petition for Review in the Supreme Court
In this petition, the petitioner insists, firstly, that the complaint should have been dismissed
outright by the trial court for an invalid non-forum shopping certification; and, secondly, that
the appellate court erred in not declaring that there was a novation of the contract between
the parties through substitution of the debtor, which resulted in the release of the petitioner
from its obligation to pay the respondent the amount of its purchase. 13
Our Ruling
The petition is devoid of merit.
The verification and certification of
non-forum shopping in the
complaint is not a jurisdictional but
a formal requirement, and any
objection as to non-compliance
therewith should be raised in the
proceedings below and not for the
first time on appeal.
"It is well-settled that no question will be entertained on appeal unless it has been raised in
the proceedings below. Points of law, theories, issues and arguments not brought to the
attention of the lower court, administrative agency or quasi-judicial body, need not be
considered by are viewing court, as they cannot be raised for the first time at that late stage.
Basic considerations of fairness and due process impel this rule. Any issue raised for the first
time on appeal is barred by estoppel."14
Through a Special Power of Attorney (SPA), the respondent authorized Engr. Leonardo A.
Parada (Leonardo), the eldest of his three children, to perform the following acts in his behalf:
a) to file a complaint against the petitioner for sum of money with damages; and b) to testify in
the trial thereof and sign all papers and documents related thereto, with full powers to enter
into stipulation and compromise.15 Incidentally, the respondent, a widower, died of cardio-
pulmonary arrest on January 21,2009,16 survived by his legitimate children, namely,
Leonardo, Luis, Jr., and Lalaine, all surnamed Parada. They have since substituted him in
this petition, per the Resolution of the Supreme Court dated September 2, 2009.17 Also, on
July 23, 2009, Luis, Jr. and Lalaine Parada executed an SPA authorizing their brother
Leonardo to represent them in the instant petition.18
In the verification and certification of non-forum shopping attached to the complaint in Civil
Case No. Q01-45212, Leonardo as attorney-in-fact of his father acknowledged as follows:
xxxx
That I/we am/are the Plaintiff in the above-captioned case;
That I/we have caused the preparation of this Complaint;
That I/we have read the same and that all the allegations therein are true and correct to the
best of my/our knowledge;
x x x x.19
Page 16 of 45
In this petition, the petitioner reiterates its argument before the CA that the above verification
is invalid, since the SPA executed by the respondent did not specifically include an authority
for Leonardo to sign the verification and certification of non-forum shopping, thus rendering
the complaint defective for violation of Sections 4 and 5 of Rule 7. The said sections provide,
as follows:
Sec. 4. Verification. — A pleading is verified by an affidavit that the affiant has read the
pleading and that the allegations therein are true and correct of his personal knowledge or
based on authentic records.
Sec. 5. Certification against forum shopping. –– The plaintiff or principal party shall certify
under oath in the complaint or other initiatory pleading asserting a claim for relief, or in a
sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not
thereto fore commenced any action or filed any claim involving the same issues in any court,
or tribunal x x x and, to the best of his knowledge, no such other action or claim is pending
therein; (b) if there is such other pending action or claim, a complete statement of the present
status thereof; and (c) if he should thereafter learn that the same or similar action or claim
has been filed or is pending, he shall report that fact x x x to the court wherein his aforesaid
complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere amendment of
the complaint or other initiatory pleading but shall be cause for the dismissal of the case
without prejudice, unless otherwise provided, upon motion and after hearing.
The petitioner’s argument is untenable. The petitioner failed to reckon that any objection as to
compliance with the requirement of verification in the complaint should have been raised in
the proceedings below, and not in the appellate court for the first time.20 In KILUSAN-OLALIA
v. CA,21 it was held that verification is a formal, not a jurisdictional requisite:
We have emphasized, time and again, that verification is a formal, not a jurisdictional
requisite, as it is mainly intended to secure an assurance that the allegations therein made
are done in good faith or are true and correct and not mere speculation. The Court may order
the correction of the pleading, if not verified, or act on the unverified pleading if the attending
circumstances are such that a strict compliance with the rule may be dispensed with in order
that the ends of justice may be served.
Further, in rendering justice, courts have always been, as they ought to be, conscientiously
guided by the norm that on the balance, technicalities take a backseat vis-à-vis substantive
rights, and not the other way around. x x x.22(Citations omitted)
In Young v. John Keng Seng,23 it was also held that the question of forum shopping cannot
be raised in the CA and in the Supreme Court, since such an issue must be raised at the
earliest opportunity in a motion to dismiss or a similar pleading. The high court even warned
that "invoking it in the later stages of the proceedings or on appeal may result in the dismissal
of the action x x x."24
Moreover, granting that Leonardo has no personal knowledge of the transaction subject of
the complaint below, Section 4 of Rule 7 provides that the verification need not be based on
the verifier’s personal knowledge but even only on authentic records. Sales invoices,
statements of accounts, receipts and collection letters for the balance of the amount still due
to the respondent from the petitioner are such records. There is clearly substantial
compliance by the respondent’s attorney-in-fact with the requirement of verification.
Lastly, it is well-settled that a strict compliance with the rules may be dispensed with in order
that the ends of substantial justice may be served.25 It is clear that the present controversy
must be resolved on its merits, lest for a technical oversight the respondent should be
deprived of what is justly due him.
A sole proprietorship has no
juridical personality separate and
distinct from that of its owner, and
need not be impleaded as a party-
plaintiff in a civil case.
On the question of whether Genlite Industries should have been impleaded as a party-
plaintiff, Section 1 of Rule 3 of the Rules of Court provides that only natural or juridical
persons or entities authorized by law may be parties in a civil case. Article 44 of the New Civil
Code enumerates who are juridical persons:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose, created by law;
their personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the
law grants a juridical personality, separate and distinct from that of each shareholder, partner
or member.
Genlite Industries is merely the DTI-registered trade name or style of the respondent by
which he conducted his business. As such, it does not exist as a separate entity apart from its
owner, and therefore it has no separate juridical personality to sue or be sued.26 As the sole
proprietor of Genlite Industries, there is no question that the respondent is the real party in
interest who stood to be directly benefited or injured by the judgment in the complaint below.
There is then no necessity for Genlite Industries to be impleaded as a party-plaintiff, since the
complaint was already filed in the name of its proprietor, Engr. Luis U. Parada. To heed the
petitioner’s sophistic reasoning is to permit a dubious technicality to frustrate the ends of
substantial justice.
Page 17 of 45
Novation is never presumed but
must be clearly and unequivocally
shown.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. 27 It is "the substitution of a new contract, debt, or
obligation for an existing one between the same or different parties."28 Article 1293 of the Civil
Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter, but not without
the consent of the creditor. Payment by the new debtor gives him rights mentioned in Articles
1236and 1237.
Thus, in order to change the person of the debtor, the former debtor must be expressly
released from the obligation, and the third person or new debtor must assume the former’s
place in the contractual relation.29 Article 1293 speaks of substitution of the debtor, which
may either be in the form of expromision or delegacion, as seems to be the case here. In both
cases, the old debtor must be released from the obligation, otherwise, there is no valid
novation. As explained in Garcia30:
In general, there are two modes of substituting the person of the debtor: (1) expromision and
(2) delegacion. In expromision, the initiative for the change does not come from—and may
even be made without the knowledge of—the debtor, since it consists of a third person’s
assumption of the obligation. As such, it logically requires the consent of the third person and
the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three
persons are necessary. Both modes of substitution by the debtor require the consent of the
creditor.31 (Citations omitted)
From the circumstances obtaining below, we can infer no clear and unequivocal consent by
the respondent to the release of the petitioner from the obligation to pay the cost of the
lighting materials. In fact, from the letters of the respondent to Enviro Kleen, it can be said
that he retained his option to go after the petitioner if Enviro Kleen failed to settle the
petitioner’s debt. As the trial court held:
The fact that Enviro Kleen Technologies, Inc. made payments to the respondent and the
latter accepted it does not ipso facto result innovation. Novation to be given its legal effect
requires that the creditor should consent to the substitution of a new debtor and the old
debtor be released from its obligation (Art. 1293, New Civil Code). A reading of the letters
dated 14 April 1999 (Exh. 1) and dated 16 June 1999 (Exhs. 4 &4-a) sent by the respondent
to Enviro Kleen Technologies, Inc. clearly shows that there was nothing therein that would
evince that the[respondent] has consented to the exchange of the person of the debtor from
the petitioner to Enviro Kleen Technologies, Inc.
xxxx
Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc., the respondent
expressly stated that it has served notice to the petitioner that unless the overdue account is
paid, the matter will be referred to its lawyers and there may be a pull-out of the delivered
lighting fixtures. It was likewise stated therein that incident damages that may result to the
structure in the course of the pull-out will be to the account of the petitioner.
It is evident from the two (2) aforesaid letters that there is no indication of the respondent’s
intention to release the petitioner from its obligation to pay and to transfer it to Enviro Kleen
Technologies, Inc. The acquiescence of Enviro Kleen Technologies, Inc. to assume the
obligation of the petitioner to pay the unpaid balance of [P]816,627.00 to the respondent
when there is clearly no agreement to release the petitioner will result merely to the addition
of debtors and not novation. Hence, the creditor can still enforce the obligation against the
original debtor x x x. A fact which points strongly to the conclusion that the respondent did not
assent to the substitution of Enviro Kleen Technologies, Inc. as the new debtor is the present
action instituted by the respondent against the petitioner for the fulfillment of its obligation. A
mere recital that the respondent has agreed or consented to the substitution of the debtor is
not sufficient to establish the fact that there was a novation. x x x.32
The settled rule is that novation is never presumed,33 but must be clearly and unequivocally
shown.34 In order for a new agreement to supersede the old one, the parties to a contract
must expressly agree that they are abrogating their old contract in favor of a new one.35 Thus,
the mere substitution of debtors will not result innovation,36 and the fact that the creditor
accepts payments from a third person, who has assumed the obligation, will result merely in
the addition of debtors and not novation, and the creditor may enforce the obligation against
both debtors.37 If there is no agreement as to solidarity, the first and new debtors are
considered obligated jointly.38 As explained in Reyes v. CA39:
The consent of the creditor to a novation by change of debtor is as indispensable as the
creditor’s consent in conventional subrogation in order that a novation shall legally take place.
The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who
acquiesced to assume the obligation of petitioner under the contract of sale of securities,
when there is clearly no agreement to release petitioner from her responsibility, does not
constitute novation. At most, it only creates a juridical relation of co-debtorship or surety ship
on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and
the latter can still enforce the obligation against the petitioner. In Ajax Marketing and
Development Corporation vs. Court of Appeals which is relevant in the instant case, we
stated that —
"In the same vein, to effect a subjective novation by a change in the person of the debtor, it is
necessary that the old debtor be released expressly from the obligation, and the third person
or new debtor assumes his place in the relation. There is no novation without such release as
the third person who has assumed the debtor’s obligation becomes merely a co-debtor or
Page 18 of 45
surety. xxx. Novation arising from a purported change in the person of the debtor must be
clear and express xxx."
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in
the Roman Law jurisprudence, the principle – novatio non praesumitur — that novation is
never presumed. At bottom, for novation to be a jural reality, its animus must be ever present,
debitum pro debito — basically extinguishing the old obligation for the new one.40 (Citation
omitted)
The trial court found that the respondent never agreed to release the petitioner from its
obligation, and this conclusion was upheld by the CA. We generally accord utmost respect
and great weight to factual findings of the trial court and the CA, unless there appears in the
record some fact or circumstance of weight and influence which has been overlooked, or the
significance of which has been misinterpreted, that if considered would have affected the
result of the case.41 We find no such oversight in the appreciation of the facts below, nor such
a misinterpretation thereof, as would otherwise provide a clear and unequivocal showing that
a novation has occurred in the contract between the parties resulting in the release of the
petitioner.
Pursuant to Article 2209 of the
Civil Code, except as provided
under Central Bank Circular
No. 905, and now under Bangko
Sentral ng Pilipinas Circular
No. 799, which took effect on
July 1, 2013, the respondent may
be awarded interest of six percent
(6%) of the judgment amount by
way of actual and compensatory
damages.
It appears from the recital of facts in the trial court’s decision that the respondent demanded
interest of two percent (2%) per month upon the balance of the purchase price of
₱816,627.00, from judicial demand until full payment. There is then an obvious clerical error
committed in the fallo of the trial court’s decision, for it incorrectly ordered the defendant there
into pay "the sum equivalent to twenty percent (20%) per month of the principal obligation
due from date of judicial demand until fully paid as and for interest."42
A clerical mistake is one which is visible to the eyes or obvious to the understanding; an error
made by a clerk or a transcriber; a mistake in copying or writing.43 The Latin maxims Error
placitandi aequitatem non tollit ("A clerical error does not take away equity"), and Error
scribentis nocere non debit ("An error made by a clerk ought not to injure; a clerical error may
be corrected") are apt in this case.44 Viewed against the landmark case of Medel v. CA45, an
award of interest of 20% per month on the amount due is clearly excessive and iniquitous. It
could not have been the intention of the trial court, not to mention that it is way beyond what
the plaintiff had prayed for below.
It is settled that other than in the case of judgments which are void ab initio for lack of
jurisdiction, or which are null and void per se, and thus may be questioned at any time, when
a decision is final, even the court which issued it can no longer alter or modify it, except to
correct clerical errors or mistakes.46
The foregoing notwithstanding, of more important consideration in the case before us is the
fact that it is nowhere stated in the trial court’s decision that the parties had in fact stipulated
an interest on the amount due to the respondent. Even granting that there was such an
agreement, there is no finding by the trial court that the parties stipulated that the outstanding
debt of the petitioner would be subject to two percent (2%) monthly interest. The most that
the decision discloses is that the respondent demanded a monthly interest of 2% on the
amount outstanding.
Article 2209 of the Civil Code provides that "if the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six percent per annum." Pursuant to the
said provision, then, since there is no finding of a stipulation by the parties as to the
imposition of interest, only the amount of 12% per annum 47 may be awarded by the court by
way of damages in its discretion, not two percent(2%) per month, following the guidelines laid
down in the landmark case of Eastern Shipping Lines v. Court of Appeals, 48 to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
Page 19 of 45
ascertained).The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.49 (Citations omitted)
As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of money, goods
or credit describes a contractual obligation whereby a lender or creditor has refrained during
a given period from requiring the borrower or debtor to repay the loan or debt then due and
payable.51 Thus:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under
Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving the loan or
forbearance of money. And for transactions involving payment of indemnities in the concept
of damages arising from default in the performance of obligations in general and/or for money
judgment not involving a loan or forbearance of money, goods, or credit, the governing
provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently
provides:
"Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum."
The term "forbearance," within the context of usury law, has been described as a contractual
obligation of a lender or creditor to refrain, during a given period of time, from requiring the
borrower or debtor to repay the loan or debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and
the applicable rate, as follows: The12% per annum rate under CB Circular No. 416 shall
apply only to loans or forbearance of money, goods, or credits, as well as to judgments
involving such loan or forbearance of money, goods, or credit, while the 6% per annum under
Art. 2209 of the Civil Code applies "when the transaction involves the payment of indemnities
in the concept of damage arising from the breach or a delay in the performance of obligations
in general," with the application of both rates reckoned "from the time the complaint was filed
until the adjudged amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of each case, on the award of
interest."52 (Citations omitted and emphasis ours)
Pursuant, then, to Central Bank Circular No. 416, issued on July 29,1974,53 in the absence of
a written stipulation, the interest rate to be imposed in judgments involving a forbearance of
credit shall be 12% per annum, up from 6% under Article 2209 of the Civil Code. This was
reiterated in Central Bank Circular No. 905, which suspended the effectivity of the Usury Law
from January 1, 1983.54 But if the judgment refers to payment of interest as damages arising
from a breach or delay in general, the applicable interest rate is 6% per annum, following
Article 2209 of the Civil Code.55 Both interest rates apply from judicial or extrajudicial demand
until finality of the judgment. But from the finality of the judgment awarding a sum of money
until it is satisfied, the award shall be considered a forbearance of credit, regardless of
whether the award in fact pertained to one, and therefore during this period, the interest rate
of 12% per annum for forbearance of money shall apply. 56
But notice must be taken that in Resolution No. 796 dated May 16,2013, the Monetary Board
of the Bangko Sentral ng Pilipinas approved the revision of the interest rate to be imposed for
the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in
the absence of an express contract as to such rate of interest. Thus, under BSP Circular
No.799, issued on June 21, 2013 and effective on July 1, 2013, the said rate of interest is
now back at six percent (6%), viz:
BANGKO SENTRAL NG PILIPINAS
OFFICE OF THE GOVERNOR
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of stipulation
The monetary Board, in its Resolution No. 796 dated 16 May 2013,approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
FOR THE MONETARY BOARD:
DIWA C. GUINIGUNDO
Officer-In-Charge
The award of attorney’s fees is not proper.
Page 20 of 45
Other than to say that the petitioner "unjustifiably failed and refused to pay the respondent,"
the trial court did not state in the body of its decision the factual or legal basis for its award of
attorney’s fees to the respondent, as required under Article 2208 of the New Civil Code, for
which reason we have resolved to delete the same. The rule is settled that the trial court must
state the factual, legal or equitable justification for its award of attorney’s fees. 57Indeed, the
matter of attorney’s fees cannot be stated only in the dispositive portion, but the reasons must
be stated in the body of the court’s decision.58 This failure or oversight of the trial court cannot
even be supplied by the CA. As concisely explained in Frias v. San Diego-Sison59:
Article 2208 of the New Civil Code enumerates the instances where such may be awarded
and, in all cases, it must be reasonable, just and equitable if the same were to be granted.
Attorney’s fees as part of damages are not meant to enrich the winning party at the expense
of the losing litigant. They are not awarded every time a party prevails in a suit because of the
policy that no premium should be placed on the right to litigate. The award of attorney’s fees
is the exception rather than the general rule. As such, it is necessary for the trial court to
make findings of facts and law that would bring the case within the exception and justify the
grant of such award. The matter of attorney’s fees cannot be mentioned only in the
dispositive portion of the decision. They must be clearly explained and justified by the trial
court in the body of its decision. On appeal, the CA is precluded from supplementing the
bases for awarding attorney’s fees when the trial court failed to discuss in its Decision the
reasons for awarding the same.1âwphi1Consequently, the award of attorney’s fees should be
deleted.60 (Citations omitted)
WHEREFORE, premises considered, the Decision dated April 30, 2008 of the Court of
Appeals in CA-G.R. CV No. 83811 is AFFIRMED with MODIFICATION. Petitioner S.C.
Megaworld Construction and Development Corporation is ordered to pay respondent Engr.
Luis A. Parada, represented by Engr. Leonardo A. Parada, the principal amount due of
₱816,627.00, plus interest at twelve percent (12%) per annum, reckoned from judicial
demand until June 30, 2013, and six percent (6%) per an own from July 1, 2013 until finality
hereof, by way of actual and compensatory damages. Thereafter, the principal amount due
as adjusted by interest shall likewise earn interest at six percent (6%) per annum until fully
paid. The award of attorney's fees is DELETED.
SO ORDERED.
FIRST DIVISION G.R. No. 193138, August 20, 2018
ANICETO G. SALUDO, JR., Petitioner, v. PHILIPPINE NATIONAL BANK, Respondent.
DECISION
JARDELEZA, J.:
In this petition, we emphasize that a partnership for the practice of law, constituted in
accordance with the Civil Code provisions on partnership, acquires juridical personality by
operation of law. Having a juridical personality distinct and separate from its partners, such
partnership is the real party-in-interest in a suit brought in connection with a contract entered
into in its name and by a person authorized to act on its behalf.
Petitioner Aniceto G. Saludo, Jr. (Saludo) filed this petition for review on certiorari1 assailing
the February 8, 2010 Decision2 and August 2, 2010 Resolution3 issued by the Court of
Appeals (CA) in CA-G.R. SP No. 98898. The CA affirmed with modification the January 11,
2007 Omnibus Order4 issued by Branch 58 of the Regional Trial Court (RTC) of Makati City in
Civil Case No. 06-678, and ruled that respondent Philippine National Bank's (PNB)
counterclaims against Saludo and the Saludo Agpalo Fernandez and Aquino Law Office
(SAFA Law Office) should be reinstated in its answer.
Records show that on June 11, 1998, SAFA Law Office entered into a Contract of
Lease5 with PNB, whereby the latter agreed to lease 632 square meters of the second floor of
the PNB Financial Center Building in Quezon City for a period of three years and for a
monthly rental fee of P189,600.00. The rental fee is subject to a yearly escalation rate of
10%.6 SAFA Law Office then occupied the leased premises and paid advance rental fees and
security deposit in the total amount of P1,137,600.00.7
On August 1, 2001, the Contract of Lease expired.8 According to PNB, SAFA Law Office
continued to occupy the leased premises until February 2005, but discontinued paying its
monthly rental obligations after December 2002.9 Consequently, PNB sent a demand
letter10 dated July 17, 2003 for SAFA Law Office to pay its outstanding unpaid rents in the
amount of P4,648,086.34. PNB sent another letter11demanding the payment of unpaid rents
in the amount of P5,856,803.53 which was received by SAFA Law Office on November 10,
2003.
In a letter12 to PNB dated June 9, 2004, SAFA Law Office expressed its intention to negotiate.
It claimed that it was enticed by the former management of PNB into renting the leased
premises by promising to: (1) give it a special rate due to the large area of the place; (2)
endorse PNB's cases to the firm with rents to be paid out of attorney's fees; and (3) retain the
firm as one of PNB's external counsels. When new management took over, it allegedly
agreed to uphold this agreement to facilitate rental payments. However, not a single case of
significance was referred to the firm. SAFA Law Office then asked PNB to review and discuss
its billings, evaluate the improvements in the area and agree on a compensatory sum to be
applied to the unpaid rents, make good its commitment to endorse or refer cases to SAFA
Page 21 of 45
Law Office under the intended terms and conditions, and book the rental payments due as
receivables payable every time attorney's fees are due from the bank on the cases it referred.
The firm also asked PNB to give a 50% discount on its unpaid rents, noting that while it was
waiting for case referrals, it had paid a total amount of P13,457,622.56 from January 1999 to
December 2002, which included the accelerated rates of 10% per annum beginning August
1999 until July 2003.
In February 2005, SAFA Law Office vacated the leased premises. 13 PNB sent a demand
letter14 dated July 7, 2005 requiring the firm to pay its rental arrears in the total amount of
P10,951,948.32. In response, SAFA Law Office sent a letter dated June 8, 2006, proposing a
settlement by providing a range of suggested computations of its outstanding rental
obligations, with deductions for the value of improvements it introduced in the premises,
professional fees due from Macroasia Corporation, and the 50% discount allegedly promised
by Dr. Lucio Tan.15 PNB, however, declined the settlement proposal in a letter16 dated July
17, 2006, stating that it was not amenable to the settlement's terms. Besides, PNB also
claimed that it cannot assume the liabilities of Macroasia Corporation to SAFA Law Office as
Macroasia Corporation has a personality distinct and separate from the bank. PNB then
made a final demand for SAFA Law Office to pay its outstanding rental obligations in the
amount of P25,587,838.09.
On September 1, 2006, Saludo, in his capacity as managing partner of SAFA Law Office,
filed an amended complaint17 for accounting and/or recomputation of unpaid rentals and
damages against PNB in relation to the Contract of Lease.
On October 4, 2006, PNB filed a motion to include an indispensable party as
plaintiff,18 praying that Saludo be ordered to amend anew his complaint to include SAFA Law
Office as principal plaintiff. PNB argued that the lessee in the Contract of Lease is not Saludo
but SAFA Law Office, and that Saludo merely signed the Contract of Lease as the managing
partner of the law firm. Thus, SAFA Law Office must be joined as a plaintiff in the complaint
because it is considered an indispensable party under Section 7, Rule 3 of the Rules of
Court.19
On October 13, 2006, PNB filed its answer.20By way of compulsory counterclaim, it sought
payment from SAFA Law Office in the sum of P25,587,838.09, representing overdue
rentals.21 PNB argued that as a matter of right and equity, it can claim that amount from
SAFA Law Office in solidum with Saludo.22
On October 23, 2006, Saludo filed his motion to dismiss counterclaims, 23 mainly arguing that
SAFA Law Office is neither a legal entity nor party litigant. As it is only a relationship or
association of lawyers in the practice of law and a single proprietorship which may only be
sued through its owner or proprietor, no valid counterclaims may be asserted against it.24
On January 11, 2007, the RTC issued an Omnibus Order denying PNB's motion to include an
indispensable party as plaintiff and granting Saludo's motion to dismiss counterclaims in this
wise:
The Court DENIES the motion of PNB to include the SAFA Law Offices. Plaintiff has
shown by documents attached to his pleadings that indeed SAFA Law Offices is a mere
single proprietorship and not a commercial and business partnership. More importantly,
plaintiff has admitted and shown sole responsibility in the affairs entered into by the SAFA
Law Office. PNB has even admitted that the SAFA Law Office, being a partnership in the
practice of law, is a non-legal entity. Being a non-legal entity, it cannot be a proper party, and
therefore, it cannot sue or be sued.
Consequently, plaintiff's Motion to Dismiss Counterclaims (claimed by defendant PNB)
should be GRANTED. The counterclaims prayed for to the effect that the SAFA Law Offices
be made to pay in solidum with plaintiff the amounts stated in defendant's Answer is
disallowed since no counterclaims can be raised against a non-legal entity.25
PNB filed its motion for reconsideration26 dated February 5, 2007, alleging that SAFA Law
Office should be included as a co-plaintiff because it is the principal party to the contract of
lease, the one that occupied the leased premises, and paid the monthly rentals and security
deposit. In other words, it was the main actor and direct beneficiary of the contract. Hence, it
is the real party-in-interest.27 The RTC, however, denied the motion for reconsideration in an
Order28 dated March 8, 2007.
Consequently, PNB filed a petition for certiorari29 with the CA. On February 8, 2010, the CA
rendered its assailed Decision,30 the dispositive portion of which reads:
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Omnibus Order dated
11 January 2007 and Order dated 8 March 2007, issued by respondent Court in Civil Case
No. 06-678, respectively, are AFFIRMED with MODIFICATION in that petitioner's
counterclaims should be reinstated in its Answer.
SO ORDERED.31
The CA ruled that an order granting Saludo's motion to dismiss counterclaim, being
interlocutory in nature, is not appealable until after judgment shall have been rendered on
Saludo's complaint. Since the Omnibus Order is interlocutory, and there was an allegation of
grave abuse of discretion, a petition for certiorari is the proper remedy.32
On the merits, the CA held that Saludo is estopped from claiming that SAFA Law Office is his
single proprietorship. Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. Here, SAFA Law Office was the one that entered into the
lease contract and not Saludo. In fact, the latter signed the contract as the firm's managing
partner. The alleged Memorandum of Understanding33 (MOU) executed by the partners of
SAFA Law Office, .which states, among others, that Saludo alone would be liable for the
firm's losses and liabilities, and the letter of Saludo to PNB confirming that SAFA Law Office
is his single proprietorship did not convert the firm to a single proprietorship. Moreover, SAFA
Law Office sent a letter to PNB regarding its unpaid rentals which Saludo signed as a
managing partner. The firm is also registered as a partnership with the Securities and
Page 22 of 45
Exchange Commission (SEC).34
On the question of whether SAFA Law Office is an indispensable party, the CA held that it is
not. As a partnership, it may sue or be sued in its name or by its duly authorized
representative. Saludo, as managing partner, may execute all acts of administration,
including the right to sue. Furthermore, the CA found that SAFA Law Office is not a legal
entity. A partnership for the practice of law is not a legal entity but a mere relationship or
association for a particular purpose. Thus, SAFA Law Office cannot file an action in court.
Based on these premises, the CA held that the RTC did not gravely abuse its discretion in
denying PNB's motion to include an indispensable party as plaintiff.35
Nonetheless, the CA ruled that PNB's counterclaims against SAFA Law Office should not be
dismissed. While SAFA Law Office is not a legal entity, it can still be sued under Section
15,36 Rule 3 of the Rules of Court considering that it entered into the Contract of Lease with
PNB.37
The CA further ruled that while it is true that SAFA Law Office's liability is not in solidum with
Saludo as PNB asserts, it does not necessarily follow that both of them cannot be made
parties to PNB's counterclaims. Neither should the counterclaims be dismissed on the ground
that the nature of the alleged liability is solidary. According to the CA, the presence ofSAFA
Law Office is required for the granting of complete relief in the determination of PNB's
counterclaim. The court must, therefore, order it to be brought in as defendant since
jurisdiction over it can be obtained pursuant to Section 12,38 Rule 6 of the Rules of Court.39
Finally, the CA emphasized that PNB's counterclaims are compulsory, as they arose from the
filing of Saludo's complaint. It cannot be made subject of a separate action but should be
asserted in the same suit involving the same transaction. Thus, the Presiding Judge of the
RTC gravely abused his discretion in dismissing PNB's counterclaims as the latter may
forever be barred from collecting overdue rental fees if its counterclaims were not allowed. 40
Saludo and PNB filed their respective motions for partial reconsideration dated February 25,
201041 and February 26, 2010.42 In a Resolution dated August 2, 2010, the CA denied both
motions on the ground that no new or substantial matters had been raised therein.
Nonetheless, the CA addressed the issue on the joining of SAFA Law Office as a defendant
in PNB's compulsory counterclaim. Pertinent portions of the CA Resolution read:
The Private Respondent claims that a compulsory counterclaim is one directed against an
opposing party. The SAFA Law Office is not a party to the case below and to require it to be
brought in as a defendant to the compulsory counterclaim would entail making it a co-plaintiff.
Otherwise, the compulsory counterclaim would be changed into a third-party complaint. The
Private Respondent also argues that Section 15, Rule 3 of the Rules of Court (on entities
without juridical personality) is only applicable to initiatory pleadings and not to compulsory
counterclaims. Lastly, it is claimed that since the alleged obligations of the SAFA Law Office
is solidary with the Private Respondent, there is no need to make the former a defendant to
the counterclaim.
We disagree with the reasoning of the Private Respondent. That a compulsory counterclaim
can only be brought against an opposing party is belied by considering one of the requisites
of a compulsory counterclaim it does not require for its adjudication the presence of third
parties of whom the court cannot acquire jurisdiction. This shows that non-parties to a suit
may be brought in as defendants to such a counterclaim. x x x
xxxx
In the case at bench, the trial court below can acquire jurisdiction over the SAFA Law Office
considering the amount and the nature of the counterclaim. Furthermore, the inclusion of the
SAFA Law Office as a defendant to the counterclaim will enable the granting of complete
relief in view [of] the liability of a partner to the partnership's creditors under the law. 43
Hence, this petition, where Saludo raises the following issues for our resolution:
(1)
Whether the CA erred in including SAFA Law Office as defendant to PNB's counterclaim
despite its holding that SAFA Law Office is neither an indispensable party nor a legal entity;
(2)
Whether the CA went beyond the issues in the petition for certiorari and prematurely dealt
with the merits of PNB's counterclaim; and
(3)
Whether the CA erred when it gave due course to PNB's petition for certiorari to annul and
set aside the RTC's Omnibus Order dated January 11, 2007.44
The petition is bereft of merit.
We hold that SAFA Law Office is a juridical entity and the real party-in-interest in the suit filed
with the RTC by Saludo against PNB. Hence, it should be joined as plaintiff in that case.
I.
Contrary to Saludo's submission, SAFA Law Office is a partnership and not a single
proprietorship.
Article 1767 of the Civil Code provides that by a contract of partnership, two or more persons
bind themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves. Two or more persons may also form a
partnership for the exercise of a profession. Under Article 1771, a partnership may be
Page 23 of 45
constituted in any form, except where immovable property or real rights are contributed
thereto, in which case a public instrument shall be necessary. Article 1784, on the other hand,
provides that a partnership begins from the moment of the execution of the contract, unless it
is otherwise stipulated.
Here, absent evidence of an earlier agreement, SAFA Law Office was constituted as a
partnership at the time its partners signed the Articles of Partnership45 wherein they bound
themselves to establish a partnership for the practice of law, contribute capital and industry
for the purpose, and receive compensation and benefits in the course of its operation. The
opening paragraph of the Articles of Partnership reveals the unequivocal intention of its
signatories to form a partnership, to wit:
WE, the undersigned ANICETO G. SALUDO, JR., RUBEN E. AGPALO, FILEMON L.
FERNANDEZ, AND AMADO D. AQUINO, all of legal age, Filipino citizens and members of
the Philippine Bar, have this day voluntarily associated ourselves for the purpose of forming a
partnership engaged in the practice of law, effective this date, under the terms and conditions
hereafter set forth, and subject to the provisions of existing laws[.]46
The subsequent registration of the Articles of Partnership with the SEC, on the other hand,
was made in compliance with Article 1772 of the Civil Code, since the initial capital of the
partnership was P500,000.00.47 Said provision states:
Art. 1772. Every contract of partnership having a capital ofThree thousand pesos or more, in
money or property, shall appear in a public instrument, which must be recorded in the Office
of the Securities and Exchange Commission.
xxxx
The other provisions of the Articles of Partnership also positively identify SAFA Law Office as
a partnership. It constantly used the words "partners" and "partnership." It designated
petitioner Saludo as managing partner,48 and Attys. Ruben E. Agpalo, Filemon L. Fernandez,
and Amado D. Aquino as industrial partners.49 It also provided for the term of the
partnership,50 distribution of net profits and losses, and management of the firm in which "the
partners shall have equal interest in the conduct of [its] affairs."51 Moreover, it provided for the
cause and manner of dissolution of the partnership.52 These provisions would not have been
necessary if what had been established was a sole proprietorship. Indeed, it may only be
concluded from the circumstances that, for all intents and purposes, SAFA Law Office is a
partnership created and organized in accordance with the Civil Code provisions on
partnership.
Saludo asserts that SAFA Law Office is a sole proprietorship on the basis of the MOU
executed by the partners of the firm. The MOU states in full:53
MEMORANDUM OF UNDERSTANDING
WHEREAS, the undersigned executed and filed with the SEC the Articles of Incorporation of
SALUDO, AGPALO, FERNANDEZ and AQUINO on March 13, 1997;
WHEREAS, among the provisions of said Articles of Incorporation are the following:
1. That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino shall be industrial partners,
and they shall not contribute capital to the partnership and shall not in any way be liable for
any loss or liability that may be incurred by the law firm in the course of its operation.
2. That the partnership shall be dissolved by agreement of the partners or for any cause as
and in accordance with the manner provided by law, in which event the Articles of Dissolution
of said partnership shall be filed with the Securities and Exchange Commission. All remaining
assets upon dissolution shall accrue exclusively to A. G. Saludo, Jr. and all liabilities shall be
solely for his account.
WHEREAS, the SEC has not approved the registration of the Articles of Incorporation and its
Examiner required that the phrase "shall not in any way be liable for any loss or liability that
may be incurred by the law firm in the course of its operation" in Article VII be deleted;
WHEREAS, the SEC Examiner likewise required that the sentence "All remaining assets
upon dissolution shall accrue exclusively to A. G. Saludo, Jr. and all liabilities shall be solely
for his account" in Article X be likewise deleted;
WHEREAS, in order to meet the objections of said Examiner, the objectionable provisions
have been deleted and new Articles of Incorporation deleting said objectionable provisions
have been executed by the parties and filed with the SEC.
NOW, THEREFORE, for and in consideration of the premises and the mutual covenant of the
parties, the parties hereby agree as follows:
1. Notwithstanding the deletion of the portions objected to by the said Examiner, by reason of
which entirely new Articles of Incorporation have been executed by the parties removing the
objected portions, the actual and real intent of the parties is still as originally envisioned,
namely:
a) That partners R. E. Agpalo, F. L. Fernandez and A. D. Aquino shall not in any way be
liable for any loss or liability that may be incurred by the law firm in the course of its operation;
b) That all remaining assets upon dissolution shall accrue exclusively to A. G. Saludo, Jr. and
all liabilities shall be solely for his account.
2. That the parties hereof hereby bind and obligate themselves to adhere and observe the
Page 24 of 45
real intent of the parties as above-stated, any provisions in the Articles of Incorporation as Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void,
filed to meet the objections of the SEC Examiner to the contrary notwithstanding. except as among the partners.

IN WITNESS WHEREOF, we have set our hands this _____ day of May, 1997 at Makati City, The MOU is an agreement forged under the foregoing provision. Consequently, the sole
Philippines. liability being undertaken by Saludo serves to bind only the parties to the MOU, but never
third persons like PNB.
[Sgd.]
Considering that the MOU is sanctioned by the law on partnership, it cannot change the
A.G. SALUDO, JR. nature of a duly-constituted partnership. Hence, we cannot sustain Saludo's position that
SAFA Law Office is a sole proprietorship.
[Sgd.]
II.
[Sgd.]

Having settled that SAFA Law Office is a partnership, we hold that it acquired juridical
[Sgd.]
personality by operation of law. The perfection and validity of a contract of partnership brings
about the creation of a juridical person separate and distinct from the individuals comprising
RUBEN E. AGPALO the partnership. Thus, Article 1768 of the Civil Code provides:

FILEMON L. FERNANDEZ Art. 1768. The partnership has a juridical personality separate and distinct from that of each
of the partners, even in case of failure to comply with the requirements of Article 1772, first
AMADO D. AQUINO paragraph.

The foregoing evinces the parties' intention to entirely shift any liability that may be incurred Article 44 of the Civil Code likewise provides that partnerships are juridical persons, to wit:
by SAFA Law Office in the course of its operation to Saludo, who shall also receive all the
remaining assets of the firm upon its dissolution. This MOU, however, does not serve to Art. 44. The following are juridical persons:
convert SAFA Law Office into a sole proprietorship. As discussed, SAFA Law Office was
manifestly established as a partnership based on the Articles of Partnership. The MOU, from
(1)
its tenor, reinforces this fact. It did not change the nature of the organization of SAFA Law
Office but only excused the industrial partners from liability.
The State and its political subdivisions;
The law, in its wisdom, recognized the possibility that partners in a partnership may decide to
place a limit on their individual accountability. Consequently, to protect third persons dealing (2)
with the partnership, the law provides a rule, embodied in Article 1816 of the Civil Code,
which states: Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law;
Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their property
and after all the partnership assets have been exhausted, for the contract which may be (3)
entered into in the name and for the account of the partnership, under its signature and by a
person authorized to act for the partnership. However, any partner may enter into a separate Corporations, partnerships and associations for private interest or purpose to which the law
obligation to perform a partnership contract. grants a juridical personality, separate and distinct from that of each shareholder, partner or
member.54
The foregoing provision does not prevent partners from agreeing to limit their liability, but
such agreement may only be valid as among them. Thus, Article 1817 of the Civil Code
It is this juridical personality that allows a partnership to enter into business transactions to
provides: fulfill its purposes. Article 46 of the Civil Code provides that "[j]uridical persons may acquire

Page 25 of 45
and possess property of all kinds, as well as incur obligations and bring civil or criminal
actions, in conformity with the laws and regulations of their organization."
SAFA Law Office entered into a contract of lease with PNB as a juridical person to pursue the
objectives of the partnership. The terms of the contract and the manner in which the parties
implemented it are a glaring recognition of SAFA Law Office's juridical personality. Thus, the
contract stated that it is being executed by PNB as the lessor and "SALUDO AGPALO
FERNANDEZ & AQUINO, a partnership organized and existing under the laws of the
Republic of the Philippines," as the lessee.55 It also provided that the lessee, i.e., SAFA Law
Office, shall be liable in case of default.56
Furthermore, subsequent communications between the parties have always been made for or
on behalf ofPNB and SAFA Law Office, respectively.57
In view of the above, we see nothing to support the position of the RTC and the CA, as well
as Saludo, that SAFA Law Office is not a partnership and a legal entity. Saludo's claims that
SAFA Law Office is his sole proprietorship and not a legal entity fail in light of the clear
provisions of the law on partnership. To reiterate, SAFA Law Office was created as a
partnership, and as such, acquired juridical personality by operation of law. Hence, its rights
and obligations, as well as those of its partners, are determined by law and not by what the
partners purport them to be.
III.
In holding that SAFA Law Office, a partnership for the practice of law, is not a legal entity, the
CA cited58the case of Petition for Authority to Continue Use of the Firm Name "Sycip, Salazar,
Feliciano, Hernandez & Castillo"59 (Sycip case) wherein the Court held that "[a] partnership
for the practice of law is not a legal entity. It is a mere relationship or association for a
particular purpose. x x x It is not a partnership formed for the purpose of carrying on trade or
business or of holding property."60 These are direct quotes from the US case of In re
Crawford's Estate.61 We hold, however, that our reference to this US case is an obiter
dictum which cannot serve as a binding precedent.62
An obiter dictum is an opinion of the court upon a question which was not necessary to the
decision of the case before it. It is an opinion uttered by the way, not upon the point or
question pending, as if turning aside from the main topic of the case to collateral subjects, or
an opinion that does not embody the court's determination and is made without argument or
full consideration of the point. It is not a professed deliberate determination of the judge
himself.63
The main issue raised for the court's determination in the Sycip case is whether the two
petitioner law firms may continue using the names of their deceased partners in their
respective firm names. The court decided the issue in the negative on the basis of "legal and
ethical impediments."64 To be sure, the pronouncement that a partnership for the practice of
law is not a legal entity does not bear on either the legal or ethical obstacle for the continued
use of a deceased partner's name, inasmuch as it merely describes the nature of a law firm.
The pronouncement is not determinative of the main issue. As a matter of fact, if deleted from
the judgment, the rationale of the decision is neither affected nor altered.
Moreover, reference of the Sycip case to the In re Crawford's Estate case was made without
a full consideration of the nature of a law firm as a partnership possessed with legal
personality under our Civil Code. First, we note that while the Court mentioned that a
partnership for the practice of law is not a legal entity, it also identified petitioner law firms as
partnerships over whom Civil Code provisions on partnership apply.65 The Court thus cannot
hold that a partnership for the practice of law is not a legal entity without running into conflict
with Articles 44 and 1768 of the Civil Code which provide that a partnership has a juridical
personality separate and distinct from that of each of the partners.
Second, our law on partnership does not exclude partnerships for the practice of law from its
coverage. Article 1767 of the Civil Code provides that "[t]wo or more persons may also form a
partnership for the exercise of a profession." Article 1783, on the other hand, states that "[a]
particular partnership has for its object determinate things, their use or fruits, or a specific
undertaking, or the exercise of a profession or vocation." Since the law uses the word
"profession" in the general sense, and does not distinguish which professional partnerships
are covered by its provisions and which are not, then no valid distinction may be made.
Finally, we stress that unlike Philippine law, American law does not treat of partnerships as
forming a separate juridical personality for all purposes. In the case of Bellis v. United
States,66 the US Supreme Court stated that law firms, as a form of partnership, are generally
regarded as distinct entities for specific purposes, such as employment, capacity to be sued,
capacity to hold title to property, and more.67 State and federal laws, however, do not treat
partnerships as distinct entities for all purposes.68
Our jurisprudence has long recognized that American common law does not treat of
partnerships as a separate juridical entity unlike Philippine law. Hence, in the case of Campos
Rueda & Co. v. Pacific Commercial Co.,69 which was decided under the old Civil Code, we
held:
Unlike the common law, the Philippine statutes consider a limited partnership as a juridical
entity for all intents and purposes, which personality is recognized in all its acts and contracts
(art. 116, Code of Commerce). This being so and the juridical personality of a limited
partnership being different from that of its members, it must, on general principle, answer for,
and suffer, the consequence of its acts as such an entity capable of being the subject of
rights and obligations.70 x x x
On the other hand, in the case of Commissioner of Internal Revenue v. Suter.71 which was
decided under the new Civil Code, we held:
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical
personality of its own, distinct and separate from that of its partners (unlike American and
English law that does not recognize such separate juridical personality), the bypassing of the
Page 26 of 45
existence of the limited partnership as a taxpayer can only be done by ignoring or
disregarding clear statutory mandates and basic principles of our law.72 x x x
Indeed, under the old and new Civil Codes, Philippine law has consistently treated
partnerships as having a juridical personality separate from its partners. In view of the clear
provisions of the law on partnership, as enriched by jurisprudence, we hold that our reference
to In re Crawford's Estate in the Sycip case is an obiter dictum.
IV.
Having settled that SAFA Law Office is a juridical person, we hold that it is also the real party-
in-interest in the case filed by Saludo against PNB.
Section 2, Rule 3 of the Rules of Court defines a real party-in-interest as the one "who stands
to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the
suit." In Lee v. Romillo, Jr.,73 we held that the "real [party-in-interest]-plaintiffis one who has a
legal right[,] while a real[party-in-interest]-defendant is one who has a correlative legal
obligation whose act or omission violates the legal rights of the former." 74
SAFA Law Office is the party that would be benefited or injured by the judgment in the suit
before the RTC. Particularly, it is the party interested in the accounting and/or recomputation
of unpaid rentals and damages in relation to the contract of lease. It is also the party that
would be liable for payment to PNB of overdue rentals, if that claim would be proven. This is
because it is the one that entered into the contract of lease with PNB. As an entity possessed
of a juridical personality, it has concomitant rights and obligations with respect to the
transactions it enters into. Equally important, the general rule under Article 1816 of the Civil
Code is that partnership assets are primarily liable for the contracts entered into in the name
of the partnership and by a person authorized to act on its behalf. All partners, including
industrial ones, are only liable pro rata with all their property after all the partnership assets
have been exhausted.
In Guy v. Gacott,75 we held that under Article 1816 of the Civil Code, the partners' obligation
with respect to the partnership liabilities is subsidiary in nature. It is merely secondary and
only arises if the one primarily liable fails to sufficiently satisfy the obligation. Resort to the
properties of a partner may be made only after efforts in exhausting partnership assets have
failed or if such partnership assets are insufficient to cover the entire
obligation.76 Consequently, considering that SAFA Law Office is primarily liable under the
contract of lease, it is the real party-in-interest that should be joined as plaintiff in the RTC
case.
Section 2, Rule 3 of the Rules of Court requires that every action must be prosecuted or
defended in the name of the real party-in-interest. As the one primarily affected by the
outcome of the suit, SAFA Law Office should have filed the complaint with the RTC and
should be made to respond to any counterclaims that may be brought in the course of the
proceeding.
In Aguila, Jr. v. Court of Appeals,77 a case for declaration of nullity of a deed of sale was filed
against a partner of A.C. Aguila & Sons, Co. We dismissed the complaint and held that it was
the partnership, not its partners, which should be impleaded for a cause of action against the
partnership itself. Moreover, the partners could not be held liable for the obligations of the
partnership unless it was shown that the legal fiction of a different juridical personality was
being used for fraudulent, unfair, or illegal purposes. We held:
Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this case was filed,
provided that "every action must be prosecuted and defended in the name of the real party in
interest." A real party in interest is one who would be benefited or injured by the judgment, or
who is entitled to the avails of the suit. This ruling is now embodied in Rule 3, §2 of the 1997
Revised Rules of Civil Procedure. Any decision rendered against a person who is not a real
party in interest in the case cannot be executed. Hence, a complaint filed against such a
person should be dismissed for failure to state a cause of action.
Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate and
distinct from that of each of the partners." The partners cannot be held liable for the
obligations of the partnership unless it is shown that the legal fiction of a different juridical
personality is being used for fraudulent, unfair, or illegal purposes. In this case, private
respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is
being used for fraudulent, unfair, or illegal purposes. Moreover, the title to the subject
property is in the name of A.C. Aguila & Sons, Co. and the Memorandum of Agreement was
executed between private respondent, with the consent of her late husband, and A.C. Aguila
& Sons, Co., represented by petitioner. Hence, it is the partnership, not its officers or agents,
which should be impleaded in any litigation involving property registered in its name. A
violation of this rule will result in the dismissal of the complaint.78
In this case, there is likewise no showing that SAFA Law Office, as a separate juridical entity,
is being used for fraudulent, unfair, or illegal purposes. Hence, its partners cannot be held
primarily liable for the obligations of the partnership. As it was SAFA Law Office that entered
into a contract of lease with respondent PNB, it should also be impleaded in any litigation
concerning that contract.
Accordingly, the complaint filed by Saludo should be amended to include SAFA Law Office as
plaintiff. Section 11,79 Rule 3 of the Rules of Court gives power to the court to add a party to
the case on its own initiative at any stage of the action and on such tenns as are just. We
have also held in several cases80that the court has full powers, apart from that power and
authority which are inherent, to amend processes, pleadings, proceedings, and decisions by
substituting as party-plaintiff the real party-in-interest.
In view of the above discussion, we find it unnecessary to discuss the other issues raised in
the petition. It is unfortunate that the case has dragged on for more than 10 years even if it
involves an issue that may be resolved by a simple application of Civil Code provisions on
partnership. It is time for trial to proceed so that the parties' substantial rights may be
adjudicated without further unnecessary delay.
Page 27 of 45

WHEREFORE, the petition is DENIED. Petitioner is hereby ordered to amend his complaint
to include SAFA Law Office as plaintiff in Civil Case No. 06-678 pending before Branch 58 of
the Regional Trial Court of Makati City, it being the real party-in-interest.
SO ORDERED.
G.R. No. 113375 May 5, 1994
KILOSBAYAN, INCORPORATED, JOVITO R. SALONGA, CIRILO A. RIGOS, ERME
CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO,
FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL
G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, SEN.
FREDDIE WEBB, SEN. WIGBERTO TAÑADA, and REP. JOKER P. ARROYO, petitioners,
vs.
TEOFISTO GUINGONA, JR., in his capacity as Executive Secretary, Office of the
President; RENATO CORONA, in his capacity as Assistant Executive Secretary and
Chairman of the Presidential review Committee on the Lotto, Office of the President;
PHILIPPINE CHARITY SWEEPSTAKES OFFICE; and PHILIPPINE GAMING
MANAGEMENT CORPORATION, respondents.
Jovito R. Salonga, Fernando Santiago, Emilio C. Capulong, Jr. and Felipe L. Gozon for
petitioners.
Renato L. Cayetano and Eleazar B. Reyes for PGMC.
Gamaliel G. Bongco, Oscar Karaan and Jedideoh Sincero for intervenors.
DAVIDE, JR., J.:
This is a special civil action for prohibition and injunction, with a prayer for a temporary
restraining order and preliminary injunction, which seeks to prohibit and restrain the
implementation of the "Contract of Lease" executed by the Philippine Charity Sweepstakes
Office (PCSO) and the Philippine Gaming Management Corporation (PGMC) in connection
with the on- line lottery system, also known as "lotto."
Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is a non-stock domestic
corporation composed of civic-spirited citizens, pastors, priests, nuns, and lay leaders who
are committed to the cause of truth, justice, and national renewal. The rest of the petitioners,
except Senators Freddie Webb and Wigberto Tañada and Representative Joker P. Arroyo,
are suing in their capacities as members of the Board of Trustees of KILOSBAYAN and as
taxpayers and concerned citizens. Senators Webb and Tañada and Representative Arroyo
are suing in their capacities as members of Congress and as taxpayers and concerned
citizens of the Philippines.
The pleadings of the parties disclose the factual antecedents which triggered off the filing of
this petition.
Pursuant to Section 1 of the charter of the PCSO (R.A. No. 1169, as amended by B.P. Blg.
42) which grants it the authority to hold and conduct "charity sweepstakes races, lotteries and
other similar activities," the PCSO decided to establish an on- line lottery system for the
purpose of increasing its revenue base and diversifying its sources of funds. Sometime
before March 1993, after learning that the PCSO was interested in operating an on-line lottery
system, the Berjaya Group Berhad, "a multinational company and one of the ten largest
public companies in Malaysia," long "engaged in, among others, successful lottery operations
in Asia, running both Lotto and Digit games, thru its subsidiary, Sports Toto Malaysia," with its
"affiliate, the International Totalizator Systems, Inc., . . . an American public company
engaged in the international sale or provision of computer systems, softwares, terminals,
training and other technical services to the gaming industry," "became interested to offer its
services and resources to PCSO." As an initial step, Berjaya Group Berhad (through its
individual nominees) organized with some Filipino investors in March 1993 a Philippine
corporation known as the Philippine Gaming Management Corporation (PGMC), which "was
intended to be the medium through which the technical and management services required
for the project would be offered and delivered to PCSO." 1
Before August 1993, the PCSO formally issued a Request for Proposal (RFP) for the Lease
Contract of an on-line lottery system for the PCSO. 2 Relevant provisions of the RFP are the
following:
1. EXECUTIVE SUMMARY
xxx xxx xxx
1.2. PCSO is seeking a suitable contractor which shall build, at its own expense, all the
facilities ('Facilities') needed to operate and maintain a nationwide on-line lottery system.
PCSO shall lease the Facilities for a fixed percentage ofquarterly gross receipts. All receipts
from ticket sales shall be turned over directly to PCSO. All capital, operating expenses and
expansion expenses and risks shall be for the exclusive account of the Lessor.
xxx xxx xxx
1.4. The lease shall be for a period not exceeding fifteen (15) years.
1.5. The Lessor is expected to submit a comprehensive nationwide lottery development plan
("Development Plan") which will include the game, the marketing of the games, and the
logistics to introduce the games to all the cities and municipalities of the country within five (5)
years.
xxx xxx xxx
Page 28 of 45
1.7. The Lessor shall be selected based on its technical expertise, hardware and software xxx xxx xxx
capability, maintenance support, and financial resources. The Development Plan shall have a
substantial bearing on the choice of the Lessor. The Lessor shall be a domestic corporation, The Proponent is expected to provide upgrades to modernize the entire gaming system over
with at least sixty percent (60%) of its shares owned by Filipino shareholders. the life ofthe lease contract.

xxx xxx xxx The Proponent is expected to provide technology transfer to PCSO technical personnel. 4

The Office of the President, the National Disaster Control Coordinating Council, the Philippine 7. GENERAL GUIDELINES FOR PROPONENTS
National Police, and the National Bureau of Investigation shall be authorized to use the
nationwide telecommunications system of the Facilities Free of Charge.
xxx xxx xxx

1.8. Upon expiration of the lease, the Facilities shall be owned by PCSO without any Finally, the Proponent must be able to stand the acid test of proving that it is an entity able to
additional consideration. 3
take on the role of responsible maintainer of the on-line lottery system, and able to achieve
PSCO's goal of formalizing an on-line lottery system to achieve its mandated objective. 5
xxx xxx xxx
xxx xxx xxx
2.2. OBJECTIVES
16. DEFINITION OF TERMS
The objectives of PCSO in leasing the Facilities from a private entity are as follows:
Facilities: All capital equipment, computers, terminals, software, nationwide
xxx xxx xxx telecommunication network, ticket sales offices, furnishings, and fixtures; printing costs; cost
of salaries and wages; advertising and promotion expenses; maintenance costs; expansion
2.2.2. Enable PCSO to operate a nationwide on-line Lottery system at no expense or risk to and replacement costs; security and insurance, and all other related expenses needed to
the government. operate nationwide on-line lottery system.6

xxx xxx xxx Considering the above citizenship requirement, the PGMC claims that the Berjaya Group
"undertook to reduce its equity stakes in PGMC to 40%," by selling 35% out of the original
2.4. DUTIES AND RESPONSIBILITIES OF THE LESSOR 75% foreign stockholdings to local investors.

xxx xxx xxx On 15 August 1993, PGMC submitted its bid to the PCSO.7

2.4.2. THE LESSOR The bids were evaluated by the Special Pre-Qualification Bids and Awards Committee
(SPBAC) for the on-line lottery and its Bid Report was thereafter submitted to the Office of the
President. 8 The submission was preceded by complaints by the Committee's Chairperson,
The Proponent is expected to furnish and maintain the Facilities, including the personnel
Dr. Mita Pardo de Tavera. 9
needed to operate the computers, the communications network and sales offices under a
build-lease basis. The printing of tickets shall be undertaken under the supervision and
control of PCSO. The Facilities shall enable PCSO to computerize the entire gaming system. On 21 October 1993, the Office of the President announced that it had given the respondent
PGMC the go-signal to operate the country's on-line lottery system and that the
corresponding implementing contract would be submitted not later than 8 November 1993
The Proponent is expected to formulate and design consumer-oriented Master Games Plan
"for final clearance and approval by the Chief Executive." 10 This announcement was
suited to the marketplace, especially geared to Filipino gaming habits and preferences. In
published in the Manila Standard, Philippine Daily Inquirer, and the Manila Times on 29
addition, the Master Games Plan is expected to include a Product Plan for each game and
October 1993. 11
explain how each will be introduced into the market. This will be an integral part of the
Development Plan which PCSO will require from the Proponent.

Page 29 of 45
On 4 November 1993, KILOSBAYAN sent an open letter to Presidential Fidel V. Ramos
strongly opposing the setting up to the on-line lottery system on the basis of serious moral
and ethical considerations. 12
At the meeting of the Committee on Games and Amusements of the Senate on 12 November
1993, KILOSBAYAN reiterated its vigorous opposition to the on-line lottery on account of its
immorality and illegality. 13
On 19 November 1993, the media reported that despite the opposition, "Malacañang will
push through with the operation of an on-line lottery system nationwide" and that it is actually
the respondent PCSO which will operate the lottery while the winning corporate bidders are
merely "lessors." 14
On 1 December 1993, KILOSBAYAN requested copies of all documents pertaining to the
lottery award from Executive Secretary Teofisto Guingona, Jr. In his answer of 17 December
1993, the Executive Secretary informed KILOSBAYAN that the requested documents would
be duly transmitted before the end of the month. 15. However, on that same date, an
agreement denominated as "Contract of Lease" was finally executed by respondent PCSO
and respondent PGMC. 16 The President, per the press statement issued by the Office of the
President, approved it on 20 December 1993.17
In view of their materiality and relevance, we quote the following salient provisions of the
Contract of Lease:
1. DEFINITIONS
The following words and terms shall have the following respective meanings:
1.1 Rental Fee — Amount to be paid by PCSO to the LESSOR as compensation for the
fulfillment of the obligations of the LESSOR under this Contract, including, but not limited to
the lease of the Facilities.
xxx xxx xxx
1.3 Facilities — All capital equipment, computers, terminals, software (including source codes
for the On-Line Lottery application software for the terminals, telecommunications and central
systems), technology, intellectual property rights, telecommunications network, and
furnishings and fixtures.
1.4 Maintenance and Other Costs — All costs and expenses relating to printing, manpower,
salaries and wages, advertising and promotion, maintenance, expansion and replacement,
security and insurance, and all other related expenses needed to operate an On-Line Lottery
System, which shall be for the account of the LESSOR. All expenses relating to the setting-
up, operation and maintenance of ticket sales offices of dealers and retailers shall be borne
by PCSO's dealers and retailers.
1.5 Development Plan — The detailed plan of all games, the marketing thereof, number of
players, value of winnings and the logistics required to introduce the games, including the
Master Games Plan as approved by PCSO, attached hereto as Annex "A", modified as
necessary by the provisions of this Contract.
xxx xxx xxx
1.8 Escrow Deposit — The proposal deposit in the sum of Three Hundred Million Pesos
(P300,000,000.00) submitted by the LESSOR to PCSO pursuant to the requirements of the
Request for Proposals.
2. SUBJECT MATTER OF THE LEASE
The LESSOR shall build, furnish and maintain at its own expense and risk the Facilities for
the On-Line Lottery System of PCSO in the Territory on an exclusive basis. The LESSOR
shall bear all Maintenance and Other Costs as defined herein.
xxx xxx xxx
3. RENTAL FEE
For and in consideration of the performance by the LESSOR of its obligations herein, PCSO
shall pay LESSOR a fixed Rental Fee equal to four point nine percent (4.9%) of gross
receipts from ticket sales, payable net of taxes required by law to be withheld, on a semi-
monthly basis. Goodwill, franchise and similar fees shall belong to PCSO.
4. LEASE PERIOD
The period of the lease shall commence ninety (90) days from the date of effectivity of this
Contract and shall run for a period of eight (8) years thereafter, unless sooner terminated in
accordance with this Contract.
5. RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR OF THE ON-LINE LOTTERY
SYSTEM
PCSO shall be the sole and individual operator of the On-Line Lottery System. Consequently:
5.1 PCSO shall have sole responsibility to decide whether to implement, fully or partially, the
Master Games Plan of the LESSOR. PCSO shall have the sole responsibility to determine
the time for introducing new games to the market. The Master Games Plan included in Annex
"A" hereof is hereby approved by PCSO.
Page 30 of 45
5.2 PCSO shall have control over revenues and receipts of whatever nature from the On-Line
Lottery System. After paying the Rental Fee to the LESSOR, PCSO shall have exclusive
responsibility to determine the Revenue Allocation Plan; Provided, that the same shall be
consistent with the requirement of R.A. No. 1169, as amended, which fixes a prize fund of
fifty five percent (55%) on the average.
5.3 PCSO shall have exclusive control over the printing of tickets, including but not limited to
the design, text, and contents thereof.
5.4 PCSO shall have sole responsibility over the appointment of dealers or retailers
throughout the country. PCSO shall appoint the dealers and retailers in a timely manner with
due regard to the implementation timetable of the On-Line Lottery System. Nothing herein
shall preclude the LESSOR from recommending dealers or retailers for appointment by
PCSO, which shall act on said recommendation within forty-eight (48) hours.
5.5 PCSO shall designate the necessary personnel to monitor and audit the daily
performance of the On-Line Lottery System. For this purpose, PCSO designees shall be
given, free of charge, suitable and adequate space, furniture and fixtures, in all offices of the
LESSOR, including but not limited to its headquarters, alternate site, regional and area
offices.
5.6 PCSO shall have the responsibility to resolve, and exclusive jurisdiction over, all matters
involving the operation of the On-Line Lottery System not otherwise provided in this Contract.
5.7 PCSO shall promulgate procedural and coordinating rules governing all activities relating
to the On-Line Lottery System.
5.8 PCSO will be responsible for the payment of prize monies, commissions to agents and
dealers, and taxes and levies (if any) chargeable to the operator of the On-Line Lottery
System. The LESSOR will bear all other Maintenance and Other Costs, except as provided in
Section 1.4.
5.9 PCSO shall assist the LESSOR in the following:
5.9.1 Work permits for the LESSOR's staff;
5.9.2 Approvals for importation of the Facilities;
5.9.3 Approvals and consents for the On-Line Lottery System; and
5.9.4 Business and premises licenses for all offices of the LESSOR and licenses for the
telecommunications network.
5.10 In the event that PCSO shall pre-terminate this Contract or suspend the operation of the
On-Line Lottery System, in breach of this Contract and through no fault of the LESSOR,
PCSO shall promptly, and in any event not later than sixty (60) days, reimburse the LESSOR
the amount of its total investment cost associated with the On-Line Lottery System, including
but not limited to the cost of the Facilities, and further compensate the LESSOR for loss of
expected net profit after tax, computed over the unexpired term of the lease.
6. DUTIES AND RESPONSIBILITIES OF THE LESSOR
The LESSOR is one of not more than three (3) lessors of similar facilities for the nationwide
On-Line Lottery System of PCSO. It is understood that the rights of the LESSOR are primarily
those of a lessor of the Facilities, and consequently, all rights involving the business aspects
of the use of the Facilities are within the jurisdiction of PCSO. During the term of the lease,
the LESSOR shall.
6.1 Maintain and preserve its corporate existence, rights and privileges, and conduct its
business in an orderly, efficient, and customary manner.
6.2 Maintain insurance coverage with insurers acceptable to PCSO on all Facilities.
6.3 Comply with all laws, statues, rules and regulations, orders and directives, obligations and
duties by which it is legally bound.
6.4 Duly pay and discharge all taxes, assessments and government charges now and
hereafter imposed of whatever nature that may be legally levied upon it.
6.5 Keep all the Facilities in fail safe condition and, if necessary, upgrade, replace and
improve the Facilities from time to time as new technology develops, in order to make the On-
Line Lottery System more cost-effective and/or competitive, and as may be required by
PCSO shall not impose such requirements unreasonably nor arbitrarily.
6.6 Provide PCSO with management terminals which will allow real-time monitoring of the
On-Line Lottery System.
6.7 Upon effectivity of this Contract, commence the training of PCSO and other local
personnel and the transfer of technology and expertise, such that at the end of the term of
this Contract, PCSO will be able to effectively take-over the Facilities and efficiently operate
the On-Line Lottery System.
6.8 Undertake a positive advertising and promotions campaign for both institutional and
product lines without engaging in negative advertising against other lessors.
6.9 Bear all expenses and risks relating to the Facilities including, but not limited to,
Maintenance and Other Costs and:
Page 31 of 45
xxx xxx xxx
6.10 Bear all risks if the revenues from ticket sales, on an annualized basis, are insufficient to
pay the entire prize money.
6.11 Be, and is hereby, authorized to collect and retain for its own account, a security deposit
from dealers and retailers, in an amount determined with the approval of PCSO, in respect of
equipment supplied by the LESSOR. PCSO's approval shall not be unreasonably withheld.
xxx xxx xxx
6.12 Comply with procedural and coordinating rules issued by PCSO.
7. REPRESENTATIONS AND WARRANTIES
The LESSOR represents and warrants that:
7.1 The LESSOR is corporation duly organized and existing under the laws of the Republic of
the Philippines, at least sixty percent (60%) of the outstanding capital stock of which is owned
by Filipino shareholders. The minimum required Filipino equity participation shall not be
impaired through voluntary or involuntary transfer, disposition, or sale of shares of stock by
the present stockholders.
7.2 The LESSOR and its Affiliates have the full corporate and legal power and authority to
own and operate their properties and to carry on their business in the place where such
properties are now or may be conducted. . . .
7.3 The LESSOR has or has access to all the financing and funding requirements to promptly
and effectively carry out the terms of this Contract. . . .
7.4 The LESSOR has or has access to all the managerial and technical expertise to promptly
and effectively carry out the terms of this Contract. . . .
xxx xxx xxx
10. TELECOMMUNICATIONS NETWORK
The LESSOR shall establish a telecommunications network that will connect all municipalities
and cities in the Territory in accordance with, at the LESSOR's option, either of the
LESSOR's proposals (or a combinations of both such proposals) attached hereto as Annex
"B," and under the following PCSO schedule:
xxx xxx xxx
PCSO may, at its option, require the LESSOR to establish the telecommunications network in
accordance with the above Timetable in provinces where the LESSOR has not yet installed
terminals. Provided, that such provinces have existing nodes. Once a municipality or city is
serviced by land lines of a licensed public telephone company, and such lines are connected
to Metro Manila, then the obligation of the LESSOR to connect such municipality or city
through a telecommunications network shall cease with respect to such municipality or city.
The voice facility will cover the four offices of the Office of the President, National Disaster
Control Coordinating Council, Philippine National Police and the National Bureau of
Investigation, and each city and municipality in the Territory except Metro Manila, and those
cities and municipalities which have easy telephone access from these four offices. Voice
calls from the four offices shall be transmitted via radio or VSAT to the remote municipalities
which will be connected to this voice facility through wired network or by radio. The facility
shall be designed to handle four private conversations at any one time.
xxx xxx xxx
13. STOCK DISPERSAL PLAN
Within two (2) years from the effectivity of this Contract, the LESSOR shall cause itself to be
listed in the local stock exchange and offer at least twenty five percent (25%) of its equity to
the public.
14. NON-COMPETITION
The LESSOR shall not, directly or indirectly, undertake any activity or business in competition
with or adverse to the On-Line Lottery System of PCSO unless it obtains the latter's prior
written consent thereto.
15. HOLD HARMLESS CLAUSE
15.1 The LESSOR shall at all times protect and defend, at its cost and expense, PCSO from
and against any and all liabilities and claims for damages and/or suits for or by reason of any
deaths of, or any injury or injuries to any person or persons, or damages to property of any
kind whatsoever, caused by the LESSOR, its subcontractors, its authorized agents or
employees, from any cause or causes whatsoever.
15.2 The LESSOR hereby covenants and agrees to indemnify and hold PCSO harmless from
all liabilities, charges, expenses (including reasonable counsel fees) and costs on account of
or by reason of any such death or deaths, injury or injuries, liabilities, claims, suits or losses
caused by the LESSOR's fault or negligence.
15.3 The LESSOR shall at all times protect and defend, at its own cost and expense, its title
to the facilities and PCSO's interest therein from and against any and all claims for the
duration of the Contract until transfer to PCSO of ownership of the serviceable Facilities.
Page 32 of 45
16. SECURITY
16.1 To ensure faithful compliance by the LESSOR with the terms of the Contract, the
LESSOR shall secure a Performance Bond from a reputable insurance company or
companies acceptable to PCSO.
16.2 The Performance Bond shall be in the initial amount of Three Hundred Million Pesos
(P300,000,000.00), to its U.S. dollar equivalent, and shall be renewed to cover the duration of
the Contract. However, the Performance Bond shall be reduced proportionately to the
percentage of unencumbered terminals installed; Provided, that the Performance Bond shall
in no case be less than One Hundred Fifty Million Pesos (P150,000,000.00).
16.3 The LESSOR may at its option maintain its Escrow Deposit as the Performance Bond. . .
. and failure to take remedial action within seven (7) days and cure or remedy the same within
17. PENALTIES
17.1 Except as may be provided in Section 17.2, should the LESSOR fail to take remedial
measures within seven (7) days, and rectify the breach within thirty (30) days, from written
notice by PCSO of any wilfull or grossly negligent violation of the material terms and
conditions of this Contract, all unencumbered Facilities shall automatically become the
property of PCSO without consideration and without need for further notice or demand by
PCSO. The Performance Bond shall likewise be forfeited in favor of PCSO.
17.2 Should the LESSOR fail to comply with the terms of the Timetables provided in Section
9 and 10, it shall be subject to an initial Penalty of Twenty Thousand Pesos (P20,000.00), per
city or municipality per every month of delay; Provided, that the Penalty shall increase, every
ninety (90) days, by the amount of Twenty Thousand Pesos (P20,000.00) per city or
municipality per month, whilst shall failure to comply persists. The penalty shall be deducted
by PCSO from the rental fee.
xxx xxx xxx
20. OWNERSHIP OF THE FACILITIES
After expiration of the term of the lease as provided in Section 4, the Facilities directly
required for the On-Line Lottery System mentioned in Section 1.3 shall automatically belong
in full ownership to PCSO without any further consideration other than the Rental Fees
already paid during the effectivity of the lease.
21. TERMINATION OF THE LEASE
PCSO may terminate this Contract for any breach of the material provisions of this Contract,
including the following:
21.1 The LESSOR is insolvent or bankrupt or unable to pay its debts, stops or suspends or
threatens to stop or suspend payment of all or a material part of its debts, or proposes or
makes a general assignment or an arrangement or compositions with or for the benefit of its
creditors; or
21.2 An order is made or an effective resolution passed for the winding up or dissolution of
the LESSOR or when it ceases or threatens to cease to carry on all or a material part of its
operations or business; or
21.3 Any material statement, representation or warranty made or furnished by the LESSOR
proved to be materially false or misleading;
said termination to take effect upon receipt of written notice of termination by the LESSOR
thirty (30) days from notice.
Any suspension, cancellation or termination of this Contract shall not relieve the LESSOR of
any liability that may have already accrued hereunder.
xxx xxx xxx
Considering the denial by the Office of the President of its protest and the statement of
Assistant Executive Secretary Renato Corona that "only a court injunction can stop
Malacañang," and the imminent implementation of the Contract of Lease in February 1994,
KILOSBAYAN, with its co-petitioners, filed on 28 January 1994 this petition.
In support of the petition, the petitioners claim that:
. . . X X THE OFFICE OF THE PRESIDENT, ACTING THROUGH RESPONDENTS
EXECUTIVE SECRETARY AND/OR ASSISTANT EXECUTIVE SECRETARY FOR LEGAL
AFFAIRS, AND THE PCSO GRAVELY ABUSE[D] THEIR DISCRETION AND/OR
FUNCTIONS TANTAMOUNT TO LACK OF JURISDICTION AND/OR AUTHORITY IN
RESPECTIVELY: (A) APPROVING THE AWARD OF THE CONTRACT TO, AND (B)
ENTERING INTO THE SO-CALLED "CONTRACT OF LEASE" WITH, RESPONDENT PGMC
FOR THE INSTALLATION, ESTABLISHMENT AND OPERATION OF THE ON-LINE
LOTTERY AND TELECOMMUNICATION SYSTEMS REQUIRED AND/OR AUTHORIZED
UNDER THE SAID CONTRACT, CONSIDERING THAT:
a) Under Section 1 of the Charter of the PCSO, the PCSO is prohibited from holding and
conducting lotteries "in collaboration, association or joint venture with any person,
association, company or entity";
b) Under Act No. 3846 and established jurisprudence, a Congressional franchise is required
before any person may be allowed to establish and operate said telecommunications system;
Page 33 of 45
c) Under Section 11, Article XII of the Constitution, a less than 60% Filipino-owned and/or
controlled corporation, like the PGMC, is disqualified from operating a public service, like the
said telecommunications system; and
d) Respondent PGMC is not authorized by its charter and under the Foreign Investment Act
(R.A. No. 7042) to install, establish and operate the on-line lotto and telecommunications
systems.18
Petitioners submit that the PCSO cannot validly enter into the assailed Contract of Lease with
the PGMC because it is an arrangement wherein the PCSO would hold and conduct the on-
line lottery system in "collaboration" or "association" with the PGMC, in violation of Section
1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the PCSO from holding
and conducting charity sweepstakes races, lotteries, and other similar activities "in
collaboration, association or joint venture with any person, association, company or entity,
foreign or domestic." Even granting arguendo that a lease of facilities is not within the
contemplation of "collaboration" or "association," an analysis, however, of the Contract of
Lease clearly shows that there is a "collaboration, association, or joint venture between
respondents PCSO and PGMC in the holding of the On-Line Lottery System," and that there
are terms and conditions of the Contract "showing that respondent PGMC is the actual lotto
operator and not respondent PCSO."19
The petitioners also point out that paragraph 10 of the Contract of Lease requires or
authorizes PGMC to establish a telecommunications network that will connect all the
municipalities and cities in the territory. However, PGMC cannot do that because it has no
franchise from Congress to construct, install, establish, or operate the network pursuant to
Section 1 of Act No. 3846, as amended. Moreover, PGMC is a 75% foreign-owned or
controlled corporation and cannot, therefore, be granted a franchise for that purpose because
of Section 11, Article XII of the 1987 Constitution. Furthermore, since "the subscribed foreign
capital" of the PGMC "comes to about 75%, as shown by paragraph EIGHT of its Articles of
Incorporation," it cannot lawfully enter into the contract in question because all forms of
gambling — and lottery is one of them — are included in the so-called foreign investments
negative list under the Foreign Investments Act (R.A. No. 7042) where only up to 40% foreign
capital is allowed. 20
Finally, the petitioners insist that the Articles of Incorporation of PGMC do not authorize it to
establish and operate an on-line lottery and telecommunications systems.21
Accordingly, the petitioners pray that we issue a temporary restraining order and a writ of
preliminary injunction commanding the respondents or any person acting in their places or
upon their instructions to cease and desist from implementing the challenged Contract of
Lease and, after hearing the merits of the petition, that we render judgment declaring the
Contract of Lease void and without effect and making the injunction permanent. 22
We required the respondents to comment on the petition.
In its Comment filed on 1 March 1994, private respondent PGMC asserts that "(1) [it] is
merely an independent contractor for a piece of work, (i.e., the building and maintenance of a
lottery system to be used by PCSO in the operation of its lottery franchise); and (2) as such
independent contractor, PGMC is not a co-operator of the lottery franchise with PCSO, nor is
PCSO sharing its franchise, 'in collaboration, association or joint venture' with PGMC — as
such statutory limitation is viewed from the context, intent, and spirit of Republic Act 1169, as
amended by Batas Pambansa 42." It further claims that as an independent contractor for a
piece of work, it is neither engaged in "gambling" nor in "public service" relative to the
telecommunications network, which the petitioners even consider as an "indispensable
requirement" of an on-line lottery system. Finally, it states that the execution and
implementation of the contract does not violate the Constitution and the laws; that the issue
on the "morality" of the lottery franchise granted to the PCSO is political and not judicial or
legal, which should be ventilated in another forum; and that the "petitioners do not appear to
have the legal standing or real interest in the subject contract and in obtaining the reliefs
sought." 23
In their Comment filed by the Office of the Solicitor General, public respondents Executive
Secretary Teofisto Guingona, Jr., Assistant Executive Secretary Renato Corona, and the
PCSO maintain that the contract of lease in question does not violate Section 1 of R.A. No.
1169, as amended by B.P. Blg. 42, and that the petitioner's interpretation of the phrase "in
collaboration, association or joint venture" in Section 1 is "much too narrow, strained and
utterly devoid of logic" for it "ignores the reality that PCSO, as a corporate entity, is vested
with the basic and essential prerogative to enter into all kinds of transactions or contracts as
may be necessary for the attainment of its purposes and objectives." What the PCSO charter
"seeks to prohibit is that arrangement akin to a "joint venture" or partnership where there is
"community of interest in the business, sharing of profits and losses, and a mutual right of
control," a characteristic which does not obtain in a contract of lease." With respect to the
challenged Contract of Lease, the "role of PGMC is limited to that of a lessor of the facilities"
for the on-line lottery system; in "strict technical and legal sense," said contract "can be
categorized as a contract for a piece of work as defined in Articles 1467, 1713 and 1644 of
the Civil Code."
They further claim that the establishment of the telecommunications system stipulated in the
Contract of Lease does not require a congressional franchise because PGMC will not operate
a public utility; moreover, PGMC's "establishment of a telecommunications system is not
intended to establish a telecommunications business," and it has been held that where the
facilities are operated "not for business purposes but for its own use," a legislative franchise
is not required before a certificate of public convenience can be granted. 24 Even
granting arguendo that PGMC is a public utility, pursuant to Albano S.
Reyes, 25 "it can establish a telecommunications system even without a legislative franchise
because not every public utility is required to secure a legislative franchise before it could
establish, maintain, and operate the service"; and, in any case, "PGMC's establishment of the
telecommunications system stipulated in its contract of lease with PCSO falls within the
exceptions under Section 1 of Act No. 3846 where a legislative franchise is not necessary for
the establishment of radio stations."
Page 34 of 45
They also argue that the contract does not violate the Foreign Investment Act of 1991; that
the Articles of Incorporation of PGMC authorize it to enter into the Contract of Lease; and that
the issues of "wisdom, morality and propriety of acts of the executive department are beyond
the ambit of judicial review."
Finally, the public respondents allege that the petitioners have no standing to maintain the
instant suit, citing our resolution in Valmonte vs. Philippine Charity Sweepstakes Office. 26
Several parties filed motions to intervene as petitioners in this case, 27 but only the motion of
Senators Alberto Romulo, Arturo Tolentino, Francisco Tatad, Gloria Macapagal-Arroyo,
Vicente Sotto III, John Osmeña, Ramon Revilla, and Jose Lina 28 was granted, and the
respondents were required to comment on their petition in intervention, which the public
respondents and PGMC did.
In the meantime, the petitioners filed with the Securities and Exchange Commission on 29
March 1994 a petition against PGMC for the nullification of the latter's General Information
Sheets. That case, however, has no bearing in this petition.
On 11 April 1994, we heard the parties in oral arguments. Thereafter, we resolved to consider
the matter submitted for resolution and pending resolution of the major issues in this case, to
issue a temporary restraining order commanding the respondents or any person acting in
their place or upon their instructions to cease and desist from implementing the challenged
Contract of Lease.
In the deliberation on this case on 26 April 1994, we resolved to consider only these issues:
(a) the locus standi of the petitioners, and (b) the legality and validity of the Contract of Lease
in the light of Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the
PCSO from holding and conducting lotteries "in collaboration, association or joint venture with
any person, association, company or entity, whether domestic or foreign." On the first issue,
seven Justices voted to sustain the locus standi of the petitioners, while six voted not to. On
the second issue, the seven Justices were of the opinion that the Contract of Lease violates
the exception to Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, and is,
therefore, invalid and contrary to law. The six Justices stated that they wished to express no
opinion thereon in view of their stand on the first issue. The Chief Justice took no part
because one of the Directors of the PCSO is his brother-in-law.
This case was then assigned to this ponente for the writing of the opinion of the Court.
The preliminary issue on the locus standi of the petitioners should, indeed, be resolved in
their favor. A party's standing before this Court is a procedural technicality which it may, in
the exercise of its discretion, set aside in view of the importance of the issues raised. In the
landmark Emergency Powers Cases, 29 this Court brushed aside this technicality because
"the transcendental importance to the public of these cases demands that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure. (Avelino vs.
Cuenco, G.R. No. L-2821)." Insofar as taxpayers' suits are concerned, this Court had
declared that it "is not devoid of discretion as to whether or not it should be entertained," 30 or
that it "enjoys an open discretion to entertain the same or not." 31 In De La Llana vs.
Alba, 32 this Court declared:
1. The argument as to the lack of standing of petitioners is easily resolved. As far as Judge
de la Llana is concerned, he certainly falls within the principle set forth in Justice Laurel's
opinion in People vs. Vera [65 Phil. 56 (1937)]. Thus: "The unchallenged rule is that the
person who impugns the validity of a statute must have a personal and substantial interest in
the case such that he has sustained, or will sustain, direct injury as a result of its enforcement
[Ibid, 89]. The other petitioners as members of the bar and officers of the court cannot be
considered as devoid of "any personal and substantial interest" on the matter. There is
relevance to this excerpt from a separate opinion in Aquino, Jr. v. Commission on
Elections [L-40004, January 31, 1975, 62 SCRA 275]: "Then there is the attack on the
standing of petitioners, as vindicating at most what they consider a public right and not
protecting their rights as individuals. This is to conjure the specter of the public right dogma
as an inhibition to parties intent on keeping public officials staying on the path of
constitutionalism. As was so well put by Jaffe; "The protection of private rights is an essential
constituent of public interest and, conversely, without a well-ordered state there could be no
enforcement of private rights. Private and public interests are, both in a substantive and
procedural sense, aspects of the totality of the legal order." Moreover, petitioners have
convincingly shown that in their capacity as taxpayers, their standing to sue has been amply
demonstrated. There would be a retreat from the liberal approach followed in Pascual v.
Secretary of Public Works, foreshadowed by the very decision of People v. Vera where the
doctrine was first fully discussed, if we act differently now. I do not think we are prepared to
take that step. Respondents, however, would hard back to the American Supreme Court
doctrine in Mellon v. Frothingham, with their claim that what petitioners possess "is an interest
which is shared in common by other people and is comparatively so minute and
indeterminate as to afford any basis and assurance that the judicial process can act on it."
That is to speak in the language of a bygone era, even in the United States. For as Chief
Justice Warren clearly pointed out in the later case of Flast v. Cohen, the barrier thus set up if
not breached has definitely been lowered.
In Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, 33 reiterated
in Basco vs. Philippine Amusements and Gaming Corporation,34 this Court stated:
Objections to taxpayers' suits for lack of sufficient personality standing or interest are,
however, in the main procedural matters. Considering the importance to the public of the
cases at bar, and in keeping with the Court's duty, under the 1987 Constitution, to determine
whether or not the other branches of government have kept themselves within the limits of
the Constitution and the laws and that they have not abused the discretion given to them, this
Court has brushed aside technicalities of procedure and has taken cognizance of these
petitions.
and in Association of Small Landowners in the Philippines, Inc. vs. Secretary of Agrarian
Reform,35 it declared:
Page 35 of 45
With particular regard to the requirement of proper party as applied in the cases before us,
we hold that the same is satisfied by the petitioners and intervenors because each of them
has sustained or is in danger of sustaining an immediate injury as a result of the acts or
measures complained of. [Ex ParteLevitt, 303 US 633]. And even if, strictly speaking, they
are not covered by the definition, it is still within the wide discretion of the Court to waive the
requirement and so remove the impediment to its addressing and resolving the serious
constitutional questions raised.
In the first Emergency Powers Cases, ordinary citizens and taxpayers were allowed to
question the constitutionality of several executive orders issued by President Quirino although
they were invoking only an indirect and general interest shared in common with the public.
The Court dismissed the objective that they were not proper parties and ruled that the
transcendental importance to the public of these cases demands that they be settled promptly
and definitely, brushing aside, if we must, technicalities of procedure. We have since then
applied this exception in many other cases. (Emphasis supplied)
In Daza vs. Singson, 36 this Court once more said:
. . . For another, we have early as in the Emergency Powers Cases that where serious
constitutional questions are involved, "the transcendental importance to the public of these
cases demands that they be settled promptly and definitely, brushing aside, if we must,
technicalities of procedure." The same policy has since then been consistently followed by
the Court, as in Gonzales vs. Commission on Elections [21 SCRA 774] . . .
The Federal Supreme Court of the United States of America has also expressed its
discretionary power to liberalize the rule on locus standi. In United States vs. Federal Power
Commission and Virginia Rea Association vs. Federal Power Commission,37 it held:
We hold that petitioners have standing. Differences of view, however, preclude a single
opinion of the Court as to both petitioners. It would not further clarification of this complicated
specialty of federal jurisdiction, the solution of whose problems is in any event more or less
determined by the specific circumstances of individual situations, to set out the divergent
grounds in support of standing in these cases.
In line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of
Congress, and even association of planters, and non-profit civic organizations were allowed
to initiate and prosecute actions before this Court to question the constitutionality or validity of
laws, acts, decisions, rulings, or orders of various government agencies or instrumentalities.
Among such cases were those assailing the constitutionality of (a) R.A. No. 3836 insofar as it
allows retirement gratuity and commutation of vacation and sick leave to Senators and
Representatives and to elective officials of both Houses of Congress; 38 (b) Executive Order
No. 284, issued by President Corazon C. Aquino on 25 July 1987, which allowed members of
the cabinet, their undersecretaries, and assistant secretaries to hold other government offices
or positions; 39 (c) the automatic appropriation for debt service in the General Appropriations
Act; 40 (d) R.A. No. 7056 on the holding of desynchronized elections; 41 (d) R.A. No. 1869 (the
charter of the Philippine Amusement and Gaming Corporation) on the ground that it is
contrary to morals, public policy, and order; 42 and (f) R.A. No. 6975, establishing the
Philippine National
Police. 43
Other cases where we have followed a liberal policy regarding locus standi include those
attacking the validity or legality of (a) an order allowing the importation of rice in the light of
the prohibition imposed by R.A. No. 3452; 44 (b) P.D. Nos. 991 and 1033 insofar as they
proposed amendments to the Constitution and P.D. No. 1031 insofar as it directed the
COMELEC to supervise, control, hold, and conduct the referendum-plebiscite on 16 October
1976; 45(c) the bidding for the sale of the 3,179 square meters of land at Roppongi, Minato-
ku, Tokyo, Japan; 46 (d) the approval without hearing by the Board of Investments of the
amended application of the Bataan Petrochemical Corporation to transfer the site of its plant
from Bataan to Batangas and the validity of such transfer and the shift of feedstock from
naphtha only to naphtha and/or liquefied petroleum gas; 47 (e) the decisions, orders, rulings,
and resolutions of the Executive Secretary, Secretary of Finance, Commissioner of Internal
Revenue, Commissioner of Customs, and the Fiscal Incentives Review Board exempting the
National Power Corporation from indirect tax and duties; 48 (f) the orders of the Energy
Regulatory Board of 5 and 6 December 1990 on the ground that the hearings conducted on
the second provisional increase in oil prices did not allow the petitioner substantial cross-
examination; 49 (g) Executive Order No. 478 which levied a special duty of P0.95 per liter or
P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil products; 50 (h)
resolutions of the Commission on Elections concerning the apportionment, by district, of the
number of elective members of Sanggunians; 51 and (i) memorandum orders issued by a
Mayor affecting the Chief of Police of Pasay City.52
In the 1975 case of Aquino vs. Commission on Elections, 53 this Court, despite its
unequivocal ruling that the petitioners therein had no personality to file the petition, resolved
nevertheless to pass upon the issues raised because of the far-reaching implications of the
petition. We did no less in De Guia vs. COMELEC 54 where, although we declared that De
Guia "does not appear to have locus standi, a standing in law, a personal or substantial
interest," we brushed aside the procedural infirmity "considering the importance of the issue
involved, concerning as it does the political exercise of qualified voters affected by the
apportionment, and petitioner alleging abuse of discretion and violation of the Constitution by
respondent."
We find the instant petition to be of transcendental importance to the public. The issues it
raised are of paramount public interest and of a category even higher than those involved in
many of the aforecited cases. The ramifications of such issues immeasurably affect the
social, economic, and moral well-being of the people even in the remotest barangays of the
country and the counter-productive and retrogressive effects of the envisioned on-line lottery
system are as staggering as the billions in pesos it is expected to raise. The legal standing
then of the petitioners deserves recognition and, in the exercise of its sound discretion, this
Court hereby brushes aside the procedural barrier which the respondents tried to take
advantage of.
Page 36 of 45
And now on the substantive issue.
Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42, prohibits the PCSO from holding
and conducting lotteries "in collaboration, association or joint venture with any person,
association, company or entity, whether domestic or foreign." Section 1 provides:
Sec. 1. The Philippine Charity Sweepstakes Office. — The Philippine Charity Sweepstakes
Office, hereinafter designated the Office, shall be the principal government agency for raising
and providing for funds for health programs, medical assistance and services and charities of
national character, and as such shall have the general powers conferred in section thirteen of
Act Numbered One thousand four hundred fifty-nine, as amended, and shall have the
authority:
A. To hold and conduct charity sweepstakes races, lotteries and other similar activities, in
such frequency and manner, as shall be determined, and subject to such rules and
regulations as shall be promulgated by the Board of Directors.
B. Subject to the approval of the Minister of Human Settlements, to engage in health and
welfare-related investments, programs, projects and activities which may be profit-
oriented, by itself or in collaboration, association or joint venture with any person, association,
company or entity, whether domestic or foreign, except for the activities mentioned in the
preceding paragraph (A), for the purpose of providing for permanent and continuing sources
of funds for health programs, including the expansion of existing ones, medical assistance
and services, and/or charitable grants: Provided, That such investment will not compete with
the private sector in areas where investments are adequate as may be determined by the
National Economic and Development Authority. (emphasis supplied)
The language of the section is indisputably clear that with respect to its franchise or privilege
"to hold and conduct charity sweepstakes races, lotteries and other similar activities," the
PCSO cannot exercise it "in collaboration, association or joint venture" with any other party.
This is the unequivocal meaning and import of the phrase "except for the activities mentioned
in the preceding paragraph (A)," namely, "charity sweepstakes races, lotteries and other
similar activities."
B.P. Blg. 42 originated from Parliamentary Bill No. 622, which was covered by Committee
Report No. 103 as reported out by the Committee on Socio-Economic Planning and
Development of the Interim Batasang Pambansa. The original text of paragraph B, Section 1
of Parliamentary Bill No. 622 reads as follows:
To engage in any and all investments and related profit-oriented projects or programs and
activities by itself or in collaboration, association or joint venture with any person, association,
company or entity, whether domestic or foreign, for the main purpose of raising funds for
health and medical assistance and services and charitable grants. 55
During the period of committee amendments, the Committee on Socio-Economic Planning
and Development, through Assemblyman Ronaldo B. Zamora, introduced an amendment by
substitution to the said paragraph B such that, as amended, it should read as follows:
Subject to the approval of the Minister of Human Settlements, to engage in health-oriented
investments, programs, projects and activities which may be profit- oriented, by itself or in
collaboration, association, or joint venture with any person, association, company or entity,
whether domestic or foreign, for the purpose of providing for permanent and continuing
sources of funds for health programs, including the expansion of existing ones, medical
assistance and services and/or charitable grants. 56
Before the motion of Assemblyman Zamora for the approval of the amendment could be
acted upon, Assemblyman Davide introduced an amendment to the amendment:
MR. DAVIDE.
Mr. Speaker.
THE SPEAKER.
The gentleman from Cebu is recognized.
MR. DAVIDE.
May I introduce an amendment to the committee amendment? The amendment would be to
insert after "foreign" in the amendment just read the following: EXCEPT FOR THE ACTIVITY
IN LETTER (A) ABOVE.
When it is joint venture or in collaboration with any entity such collaboration or joint venture
must not include activity activity letter (a) which is the holding and conducting of sweepstakes
races, lotteries and other similar acts.
MR. ZAMORA.
We accept the amendment, Mr. Speaker.
MR. DAVIDE.
Thank you, Mr. Speaker.
THE SPEAKER.
Page 37 of 45
Is there any objection to the amendment? (Silence) The amendment, as amended, is
approved. 57
Further amendments to paragraph B were introduced and approved. When Assemblyman
Zamora read the final text of paragraph B as further amended, the earlier approved
amendment of Assemblyman Davide became "EXCEPT FOR THE ACTIVITIES
MENTIONED IN PARAGRAPH (A)"; and by virtue of the amendment introduced by
Assemblyman Emmanuel Pelaez, the word PRECEDING was inserted before PARAGRAPH.
Assemblyman Pelaez introduced other amendments. Thereafter, the new paragraph B was
approved. 58
This is now paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42.
No interpretation of the said provision to relax or circumvent the prohibition can be allowed
since the privilege to hold or conduct charity sweepstakes races, lotteries, or other similar
activities is a franchise granted by the legislature to the PCSO. It is a settled rule that "in all
grants by the government to individuals or corporations of rights, privileges and franchises,
the words are to be taken most strongly against the grantee .... [o]ne who claims a franchise
or privilege in derogation of the common rights of the public must prove his title thereto by a
grant which is clearly and definitely expressed, and he cannot enlarge it by equivocal or
doubtful provisions or by probable inferences. Whatever is not unequivocally granted is
withheld. Nothing passes by mere implication." 59
In short then, by the exception explicitly made in paragraph B, Section 1 of its charter, the
PCSO cannot share its franchise with another by way of collaboration, association or joint
venture. Neither can it assign, transfer, or lease such franchise. It has been said that "the
rights and privileges conferred under a franchise may, without doubt, be assigned or
transferred when the grant is to the grantee and assigns, or is authorized by statute. On the
other hand, the right of transfer or assignment may be restricted by statute or the constitution,
or be made subject to the approval of the grantor or a governmental agency, such as a public
utilities commission, exception that an existing right of assignment cannot be impaired by
subsequent legislation." 60
It may also be pointed out that the franchise granted to the PCSO to hold and conduct
lotteries allows it to hold and conduct a species of gambling. It is settled that "a statute which
authorizes the carrying on of a gambling activity or business should be strictly construed and
every reasonable doubt so resolved as to limit the powers and rights claimed under its
authority." 61
Does the challenged Contract of Lease violate or contravene the exception in Section 1 of
R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the PCSO from holding and
conducting lotteries "in collaboration, association or joint venture with" another?
We agree with the petitioners that it does, notwithstanding its denomination or designation as
a (Contract of Lease). We are neither convinced nor moved or fazed by the insistence and
forceful arguments of the PGMC that it does not because in reality it is only an independent
contractor for a piece of work, i.e., the building and maintenance of a lottery system to be
used by the PCSO in the operation of its lottery franchise. Whether the contract in question is
one of lease or whether the PGMC is merely an independent contractor should not be
decided on the basis of the title or designation of the contract but by the intent of the parties,
which may be gathered from the provisions of the contract itself. Animus hominis est anima
scripti. The intention of the party is the soul of the instrument. In order to give life or effect to
an instrument, it is essential to look to the intention of the individual who executed it. 62 And,
pursuant to Article 1371 of the Civil Code, "to determine the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally considered." To put
it more bluntly, no one should be deceived by the title or designation of a contract.
A careful analysis and evaluation of the provisions of the contract and a consideration of the
contemporaneous acts of the PCSO and PGMC indubitably disclose that the contract is not in
reality a contract of lease under which the PGMC is merely an independent contractor for a
piece of work, but one where the statutorily proscribed collaboration or association, in the
least, or joint venture, at the most, exists between the contracting parties. Collaboration is
defined as the acts of working together in a joint project. 63 Association means the act of a
number of persons in uniting together for some special purpose or business. 64 Joint
venture is defined as an association of persons or companies jointly undertaking some
commercial enterprise; generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to direct and govern
the policy in connection therewith, and duty, which may be altered by agreement to share
both in profit and
losses.65
The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had neither
funds of its own nor the expertise to operate and manage an on-line lottery system, and that
although it wished to have the system, it would have it "at no expense or risks to the
government." Because of these serious constraints and unwillingness to bear expenses and
assume risks, the PCSO was candid enough to state in its RFP that it is seeking for "a
suitable contractor which shall build, at its own expense, all the facilities needed to operate
and maintain" the system; exclusively bear "all capital, operating expenses and expansion
expenses and risks"; and submit "a comprehensive nationwide lottery development plan . . .
which will include the game, the marketing of the games, and the logistics to introduce the
game to all the cities and municipalities of the country within five (5) years"; and that the
operation of the on-line lottery system should be "at no expense or risk to the government" —
meaning itself, since it is a government-owned and controlled agency. The facilities referred
to means "all capital equipment, computers, terminals, software, nationwide
telecommunications network, ticket sales offices, furnishings and fixtures, printing costs,
costs of salaries and wages, advertising and promotions expenses, maintenance costs,
expansion and replacement costs, security and insurance, and all other related expenses
needed to operate a nationwide on-line lottery system."
In short, the only contribution the PCSO would have is its franchise or authority to operate the
on-line lottery system; with the rest, including the risks of the business, being borne by the
Page 38 of 45
proponent or bidder. It could be for this reason that it warned that "the proponent must be
able to stand to the acid test of proving that it is an entity able to take on the role of
responsible maintainer of the on-line lottery system." The PCSO, however, makes it clear in
its RFP that the proponent can propose a period of the contract which shall not exceed fifteen
years, during which time it is assured of a "rental" which shall not exceed 12% of gross
receipts. As admitted by the PGMC, upon learning of the PCSO's decision, the Berjaya
Group Berhad, with its affiliates, wanted to offer its services and resources to the PCSO.
Forthwith, it organized the PGMC as "a medium through which the technical and
management services required for the project would be offered and delivered to PCSO." 66
Undoubtedly, then, the Berjaya Group Berhad knew all along that in connection with an on-
line lottery system, the PCSO had nothing but its franchise, which it solemnly guaranteed it
had in the General Information of the RFP. 67Howsoever viewed then, from the very inception,
the PCSO and the PGMC mutually understood that any arrangement between them would
necessarily leave to the PGMC the technical, operations, and managementaspects of the on-
line lottery system while the PCSO would, primarily, provide the franchise. The
words Gaming andManagement in the corporate name of respondent Philippine Gaming
Management Corporation could not have been conceived just for euphemistic purposes. Of
course, the RFP cannot substitute for the Contract of Lease which was subsequently
executed by the PCSO and the PGMC. Nevertheless, the Contract of Lease incorporates
their intention and understanding.
The so-called Contract of Lease is not, therefore, what it purports to be. Its denomination as
such is a crafty device, carefully conceived, to provide a built-in defense in the event that the
agreement is questioned as violative of the exception in Section 1 (B) of the PCSO's charter.
The acuity or skill of its draftsmen to accomplish that purpose easily manifests itself in the
Contract of Lease. It is outstanding for its careful and meticulous drafting designed to give an
immediate impression that it is a contract of lease. Yet, woven therein are provisions which
negate its title and betray the true intention of the parties to be in or to have a joint venture for
a period of eight years in the operation and maintenance of the on-line lottery system.
Consistent with the above observations on the RFP, the PCSO has only its franchise to offer,
while the PGMC represents and warrants that it has access to all managerial and technical
expertise to promptly and effectively carry out the terms of the contract. And, for a period of
eight years, the PGMC is under obligation to keep all the Facilitiesin safe condition and if
necessary, upgrade, replace, and improve them from time to time as new technology
develops to make the on-line lottery system more cost-effective and competitive; exclusively
bear all costs and expenses relating to the printing, manpower, salaries and wages,
advertising and promotion, maintenance, expansion and replacement, security and
insurance, and all other related expenses needed to operate the on-line lottery system;
undertake a positive advertising and promotions campaign for both institutional and product
lines without engaging in negative advertising against other lessors; bear the salaries and
related costs of skilled and qualified personnel for administrative and technical operations;
comply with procedural and coordinating rulesissued by the PCSO; and to train PCSO and
other local personnel and to effect the transfer of technology and other expertise, such that at
the end of the term of the contract, the PCSO will be able to effectively take over the Facilities
and efficiently operate the on-line lottery system. The latter simply means that, indeed, the
managers, technicians or employees who shall operate the on-line lottery system are not
managers, technicians or employees of the PCSO, but of the PGMC and that it is only after
the expiration of the contract that the PCSO will operate the system. After eight years, the
PCSO would automatically become the owner of the Facilities without any other further
consideration.
For these reasons, too, the PGMC has the initial prerogative to prepare the detailed plan of
all games and the marketing thereof, and determine the number of players, value of winnings,
and the logistics required to introduce the games, including the Master Games Plan. Of
course, the PCSO has the reserved authority to disapprove them. 68 And, while the PCSO
has the sole responsibility over the appointment of dealers and retailers throughout the
country, the PGMC may, nevertheless, recommend for appointment dealers and retailers
which shall be acted upon by the PCSO within forty-eight hours and collect and retain, for its
own account, a security deposit from dealers and retailers in respect of equipment supplied
by it.
This joint venture is further established by the following:
(a) Rent is defined in the lease contract as the amount to be paid to the PGMC as
compensation for the fulfillment of its obligations under the contract, including, but not
limited to the lease of the Facilities. However, this rent is not actually a fixed amount.
Although it is stated to be 4.9% of gross receipts from ticket sales, payable net of taxes
required by law to be withheld, it may be drastically reduced or, in extreme cases, nothing
may be due or demandable at all because the PGMC binds itself to "bear all risks if the
revenue from the ticket sales, on an annualized basis, are insufficient to pay the entire prize
money." This risk-bearing provision is unusual in a lessor-lessee relationship, but inherent in
a joint venture.
(b) In the event of pre-termination of the contract by the PCSO, or its suspension of operation
of the on-line lottery system in breach of the contract and through no fault of the PGMC, the
PCSO binds itself "to promptly, and in any event not later than sixty (60) days, reimburse the
Lessor the amount of its total investment cost associated with the On-Line Lottery System,
including but not limited to the cost of the Facilities, and further compensate the LESSOR for
loss of expected net profit after tax, computed over the unexpired term of the lease." If the
contract were indeed one of lease, the payment of the expected profits or rentals for the
unexpired portion of the term of the contract would be enough.
(c) The PGMC cannot "directly or indirectly undertake any activity or business in competition
with or adverse to the On-Line Lottery System of PCSO unless it obtains the latter's prior
written consent." If the PGMC is engaged in the business of leasing equipment and
technology for an on-line lottery system, we fail to see any acceptable reason why it should
allow a restriction on the pursuit of such business.
Page 39 of 45
(d) The PGMC shall provide the PCSO the audited Annual Report sent to its stockholders,
and within two years from the effectivity of the contract, cause itself to be listed in the local
stock exchange and offer at least 25% of its equity to the public. If the PGMC is merely a
lessor, this imposition is unreasonable and whimsical, and could only be tied up to the fact
that the PGMC will actually operate and manage the system; hence, increasing public
participation in the corporation would enhance public interest.
(e) The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant to the
requirements of the RFP, which it may, at its option, maintain as its initial performance bond
required to ensure its faithful compliance with the terms of the contract.
(f) The PCSO shall designate the necessary personnel to monitor and audit the daily
performance of the on-line lottery system; and promulgate procedural and coordinating
rules governing all activities relating to the on-line lottery system. The first further confirms
that it is the PGMC which will operate the system and the PCSO may, for the protection of its
interest, monitor and audit the daily performance of the system. The second admits
the coordinating and cooperative powers and functions of the parties.
(g) The PCSO may validly terminate the contract if the PGMC becomes insolvent or bankrupt
or is unable to pay its debts, or if it stops or suspends or threatens to stop or suspend
payment of all or a material part of its debts.
All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit,
operation, conduct, and management of the On-Line Lottery System. They exhibit and
demonstrate the parties' indivisible community of interest in the conception, birth and growth
of the on-line lottery, and, above all, in its profits, with each having a right in the formulation
and implementation of policies related to the business and sharing, as well, in the losses —
with the PGMC bearing the greatest burden because of its assumption of expenses and risks,
and the PCSO the least, because of its confessed unwillingness to bear expenses and risks.
In a manner of speaking, each is wed to the other for better or for worse. In the final analysis,
however, in the light of the PCSO's RFP and the above highlighted provisions, as well as the
"Hold Harmless Clause" of the Contract of Lease, it is even safe to conclude that the
actual lessor in this case is the PCSO and the subject matter thereof is its franchise to hold
and conduct lotteries since it is, in reality, the PGMC which operates and manages the on-line
lottery system for a period of eight years.
We thus declare that the challenged Contract of Lease violates the exception provided for in
paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore,
invalid for being contrary to law. This conclusion renders unnecessary further discussion on
the other issues raised by the petitioners.
WHEREFORE, the instant petition is hereby GRANTED and the challenged Contract of
Lease executed on 17 December 1993 by respondent Philippine Charity Sweepstakes Office
(PCSO) and respondent Philippine Gaming Management Corporation (PGMC) is hereby
DECLARED contrary to law and invalid.
The Temporary Restraining Order issued on 11 April 1994 is hereby MADE PERMANENT.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 158085 October 14, 2005
REPUBLIC OF THE PHILIPPINES, Represented by the COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
SUNLIFE ASSURANCE COMPANY OF CANADA, Respondent.
DECISION
PANGANIBAN, J.:
aving satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this
Court that it is a bona fide cooperative, respondent is entitled to exemption from the payment
of taxes on life insurance premiums and documentary stamps. Not being governed by the
Cooperative Code of the Philippines, it is not required to be registered with the Cooperative
Development Authority in order to avail itself of the tax exemptions. Significantly, neither the
Tax Code nor the Insurance Code mandates this administrative registration.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the
January 23, 2003 Decision2 and the April 21, 2003 Resolution3 of the Court of Appeals (CA)
in CA-GR SP No. 69125. The dispositive portion of the Decision reads as follows:
"WHEREFORE, the petition for review is hereby DENIED."4
The Facts
The antecedents, as narrated by the CA, are as follows:
"Sun Life is a mutual life insurance company organized and existing under the laws of
Canada. It is registered and authorized by the Securities and Exchange Commission and the
Insurance Commission to engage in business in the Philippines as a mutual life insurance
company with principal office at Paseo de Roxas, Legaspi Village, Makati City.
"On October 20, 1997, Sun Life filed with the [Commissioner of Internal Revenue] (CIR) its
insurance premium tax return for the third quarter of 1997 and paid the premium tax in the
Page 40 of 45
amount of ₱31,485,834.51. For the period covering August 21 to December 18, 1997,
petitioner filed with the CIR its [documentary stamp tax (DST)] declaration returns and paid
the total amount of ₱30,000,000.00.
"On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its decision in Insular
Life Assurance Co. Ltd. v. [CIR], which held that mutual life insurance companies are purely
cooperative companies and are exempt from the payment of premium tax and DST. This
pronouncement was later affirmed by this court in [CIR] v. Insular Life Assurance Company,
Ltd. Sun Life surmised that[,] being a mutual life insurance company, it was likewise exempt
from the payment of premium tax and DST. Hence, on August 20, 1999, Sun Life filed with
the CIR an administrative claim for tax credit of its alleged erroneously paid premium tax and
DST for the aforestated tax periods.
"For failure of the CIR to act upon the administrative claim for tax credit and with the 2-year
period to file a claim for tax credit or refund dwindling away and about to expire, Sun Life filed
with the CTA a petition for review on August 23, 1999. In its petition, it prayed for the
issuance of a tax credit certificate in the amount of ₱61,485,834.51 representing
₱31,485,834.51 of erroneously paid premium tax for the third quarter of 1997 and
₱30,000[,000].00 of DST on policies of insurance from August 21 to December 18, 1997. Sun
Life stood firm on its contention that it is a mutual life insurance company vested with all the
characteristic features and elements of a cooperative company or association as defined in
[S]ection 121 of the Tax Code. Primarily, the management and affairs of Sun Life were
conducted by its members; secondly, it is operated with money collected from its members;
and, lastly, it has for its purpose the mutual protection of its members and not for profit or
gain.
"In its answer, the CIR, then respondent, raised as special and affirmative defenses the
following:
‘7. Petitioner’s (Sun Life’s) alleged claim for refund is subject to administrative routinary
investigation/examination by respondent’s (CIR’s) Bureau.
‘8. Petitioner must prove that it falls under the exception provided for under Section 121 (now
123) of the Tax Code to be exempted from premium tax and be entitled to the refund sought.
‘9. Claims for tax refund/credit are construed strictly against the claimants thereof as they are
in the nature of exemption from payment of tax.
‘10. In an action for tax credit/refund, the burden is upon the taxpayer to establish its right
thereto, and failure to sustain this burden is fatal to said claim x x x.
‘11. It is incumbent upon petitioner to show that it has complied with the provisions of Section
204[,] in relation to Section 229, both in the 1997 Tax Code.’
"On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely from its earlier
findings in Insular Life Assurance Company, Ltd. v. [CIR], which it found to be on all fours
with the present action, the CTA ruled:
‘The [CA] has already spoken. It ruled that a mutual life insurance company is a purely
cooperative company[;] thus, exempted from the payment of premium and documentary
stamp taxes. Petitioner Sun Life is without doubt a mutual life insurance company. x x x.
‘xxxxxxxxx
‘Being similarly situated with Insular, Petitioner at bar is entitled to the same interpretation
given by this Court in the earlier cases of The Insular Life Assurance Company, Ltd. vs. [CIR]
(CTA Case Nos. 5336 and 5601) and by the [CA] in the case entitled [CIR] vs. The Insular
Life Assurance Company, Ltd., C.A. G.R. SP No. 46516, September 29, 1998. Petitioner Sun
Life as a mutual life insurance company is[,] therefore[,] a cooperative company or
association and is exempted from the payment of premium tax and [DST] on policies of
insurance pursuant to Section 121 (now Section 123) and Section 199[1]) (now Section
199[a]) of the Tax Code.’
"Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to
have registered, foremost, with the Cooperative Development Authority before it could enjoy
the exemptions from premium tax and DST extended to purely cooperative companies or
associations under [S]ections 121 and 199 of the Tax Code. For its failure to register, it could
not avail of the exemptions prayed for. Moreover, the CIR alleged that Sun Life failed to prove
that ownership of the company was vested in its members who are entitled to vote and elect
the Board of Trustees among [them]. The CIR further claimed that change in the 1997 Tax
Code subjecting mutual life insurance companies to the regular corporate income tax rate
reflected the legislature’s recognition that these companies must be earning profits.
"Notwithstanding these arguments, the CTA denied the CIR’s motion for reconsideration.
"Thwarted anew but nonetheless undaunted, the CIR comes to this court via this petition on
the sole ground that:
‘The Tax Court erred in granting the refund[,] because respondent does not fall under the
exception provided for under Section 121 (now 123) of the Tax Code to be exempted from
premium tax and DST and be entitled to the refund.’
"The CIR repleads the arguments it raised with the CTA and proposes further that the [CA]
decision in [CIR] v. Insular Life Assurance Company, Ltd. is not controlling and cannot
constitute res judicata in the present action. At best, the pronouncements are merely
persuasive as the decisions of the Supreme Court alone have a universal and mandatory
effect."5
Ruling of the Court of Appeals
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In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation
duly licensed to engage in mutual life insurance business in the Philippines. Thus, respondent
was deemed exempt from premium and documentary stamp taxes, because its affairs are
managed and conducted by its members with money collected from among themselves,
solely for their own protection, and not for profit. Its members or policyholders constituted
both insurer and insured who contribute, by a system of premiums or assessments, to the
creation of a fund from which all losses and liabilities were paid. The dividends it distributed to
them were not profits, but returns of amounts that had been overcharged them for insurance.
For having satisfactorily shown with substantial evidence that it had erroneously paid and
seasonably filed its claim for premium and documentary stamp taxes, respondent was
entitled to a refund, the CA ruled.
Hence, this Petition.6
The Issues
Petitioner raises the following issues for our consideration:
"I.
"Whether or not respondent is a purely cooperative company or association under Section
121 of the National Internal Revenue Code and a fraternal or beneficiary society, order or
cooperative company on the lodge system or local cooperation plan and organized and
conducted solely by the members thereof for the exclusive benefit of each member and not
for profit under Section 199 of the National Internal Revenue Code.
"II.
"Whether or not registration with the Cooperative Development Authority is a sine qua
non requirement to be entitled to tax exemption.
"III.
"Whether or not respondent is exempted from payment of tax on life insurance premiums and
documentary stamp tax."7
We shall tackle the issues seriatim.
The Court’s Ruling
The Petition has no merit.
First Issue:
Whether Respondent Is a Cooperative
The Tax Code defines a cooperative as an association "conducted by the members thereof
with the money collected from among themselves and solely for their own protection and not
for profit."8 Without a doubt, respondent is a cooperative engaged in a mutual life insurance
business.
First, it is managed by its members. Both the CA and the CTA found that the management
and affairs of respondent were conducted by its member-policyholders.9
A stock insurance company doing business in the Philippines may "alter its organization and
transform itself into a mutual insurance company."10 Respondent has been mutualized or
converted from a stock life insurance company to a nonstock mutual life insurance
corporation11 pursuant to Section 266 of the Insurance Code of 1978.12 On the basis of its
bylaws, its ownership has been vested in its member-policyholders who are each entitled to
one vote;13and who, in turn, elect from among themselves the members of its board of
trustees.14 Being the governing body of a nonstock corporation, the board exercises
corporate powers, lays down all corporate business policies, and assumes responsibility for
the efficiency of management.15
Second, it is operated with money collected from its members. Since respondent is
composed entirely of members who are also its policyholders, all premiums collected
obviously come only from them.16
The member-policyholders constitute "both insurer and insured"17 who "contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses and
liabilities are paid."18 The premiums19 pooled into this fund are earmarked for the payment of
their indemnity and benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit of anyone.
As early as October 30, 1947, the director of commerce had already issued a license to
respondent -- a corporation organized and existing under the laws of Canada -- to engage in
business in the Philippines.20 Pursuant to Section 225 of Canada’s Insurance Companies Act,
the Canadian minister of state (for finance and privatization) also declared in its Amending
Letters Patent that respondent would be a mutual company effective June 1, 1992. 21 In the
Philippines, the insurance commissioner also granted it annual Certificates of Authority to
transact life insurance business, the most relevant of which were dated July 1, 1997 and July
1, 1998.22
A mutual life insurance company is conducted for the benefit of its member-
policyholders,23 who pay into its capital by way of premiums. To that extent, they are
responsible for the payment of all its losses.24 "The cash paid in for premiums and the
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premium notes constitute their assets x x x."25 In the event that the company itself fails before
the terms of the policies expire, the member-policyholders do not acquire the status of
creditors.26 Rather, they simply become debtors for whatever premiums that they have
originally agreed to pay the company, if they have not yet paid those amounts in full, for
"[m]utual companies x x x depend solely upon x x x premiums."27 Only when the premiums
will have accumulated to a sum larger than that required to pay for company losses will the
member-policyholders be entitled to a "pro rata division thereof as profits."28
Contributing to its capital, the member-policyholders of a mutual company are obviously also
its owners.29Sustaining a dual relationship inter se, they not only contribute to the payment of
its losses, but are also entitled to a proportionate share30 and participate alike31 in its profits
and surplus.
Where the insurance is taken at cost, it is important that the rates of premium charged by a
mutual company be larger than might reasonably be expected to carry the insurance, in order
to constitute a margin of safety. The table of mortality used will show an admittedly higher
death rate than will probably prevail; the assumed interest rate on the investments of the
company is made lower than is expected to be realized; and the provision for contingencies
and expenses, made greater than would ordinarily be necessary.32 This course of action is
taken, because a mutual company has no capital stock and relies solely upon its premiums to
meet unexpected losses, contingencies and expenses.
Certainly, many factors are considered in calculating the insurance premium. Since they vary
with the kind of insurance taken and with the group of policyholders insured, any excess in
the amount anticipated by a mutual company to cover the cost of providing for the insurance
over its actual realized cost will also vary. If a member-policyholder receives an excess
payment, then the apportionment must have been based upon a calculation of the actual cost
of insurance that the company has provided for that particular member-policyholder.
Accordingly, in apportioning divisible surpluses, any mutual company uses a contribution
method that aims to distribute those surpluses among its member-policyholders, in the same
proportion as they have contributed to the surpluses by their payments. 33
Sharing in the common fund, any member-policyholder may choose to withdraw dividends in
cash or to apply them in order to reduce a subsequent premium, purchase additional
insurance, or accelerate the payment period. Although the premium made at the beginning of
a year is more than necessary to provide for the cost of carrying the insurance, the member-
policyholder will nevertheless receive the benefit of the overcharge by way of dividends, at
the end of the year when the cost is actually ascertained. "The declaration of a dividend upon
a policy reduces pro tanto the cost of insurance to the holder of the policy. That is its purpose
and effect."34
A stipulated insurance premium "cannot be increased, but may be lessened annually by so
much as the experience of the preceding year has determined it to have been greater than
the cost of carrying the insurance x x x."35 The difference between that premium and the cost
of carrying the risk of loss constitutes the so-called "dividend" which, however, "is not in any
real sense a dividend."36 It is a technical term that is well understood in the insurance
business to be widely different from that to which it is ordinarily attached.
The so-called "dividend" that is received by member-policyholders is not a portion of profits
set aside for distribution to the stockholders in proportion to their subscription to the capital
stock of a corporation.37 One, a mutual company has no capital stock
to which subscription is necessary; there are no stockholders to speak of, but only members.
And, two, the amount they receive does not partake of the nature of a profit or income. The
quasi-appearance of profit will not change its character. It remains an overpayment, a benefit
to which the member-policyholder is equitably entitled.38
Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its
own members. It does not operate for profit, but for the mutual benefit of its member-
policyholders. They receive their insurance at cost, while reasonably and properly guarding
and maintaining the stability and solvency of the company. 39 "The economic benefits filter to
the cooperative members. Either equally or proportionally, they are distributed among
members in correlation with the resources of the association utilized."40
It does not follow that because respondent is registered as a nonstock corporation and thus
exists for a purpose other than profit, the company can no longer make any profits.41 Earning
profits is merely its secondary, not primary, purpose. In fact, it may not lawfully engage in any
business activity for profit, for to do so would change or contradict its nature42 as a non-profit
entity.43 It may, however, invest its corporate funds in order to earn additional income for
paying its operating expenses and meeting benefit claims. Any excess profit it obtains as an
incident to its operations can only be used, whenever necessary or proper, for the furtherance
of the purpose for which it was organized.44
Second Issue:
Whether CDA Registration Is Necessary
Under the Tax Code although respondent is a cooperative, registration with the Cooperative
Development Authority (CDA)45 is not necessary in order for it to be exempt from the payment
of both percentage taxes on insurance premiums, under Section 121; and documentary
stamp taxes on policies of insurance or annuities it grants, under Section 199.
First, the Tax Code does not require registration with the CDA. No tax provision requires a
mutual life insurance company to register with that agency in order to enjoy exemption from
both percentage and documentary stamp taxes.
A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the
submission of the Certificate of Registration with the CDA,46 before the issuance of a tax
exemption certificate. That provision cannot prevail over the clear absence of an equivalent
requirement under the Tax Code. One, as we will explain below, the Circular does not apply
to respondent, but only to cooperatives that need to be registered under the Cooperative
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Code. Two, it is a mere issuance directing all internal revenue officers to publicize a new tax
legislation. Although the Circular does not derogate from their authority to implement the law,
it cannot add a registration requirement,47when there is none under the law to begin with.
Second, the provisions of the Cooperative Code of the Philippines 48 do not apply. Let us trace
the Code’s development in our history.
As early as 1917, a cooperative company or association was already defined as one
"conducted by the members thereof with money collected from among themselves and solely
for their own protection and not profit."49 In 1990, it was further defined by the Cooperative
Code as a "duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a fair share of the risks and
benefits of the undertaking in accordance with universally accepted cooperative principles." 50
The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973,
Presidential Decree (PD) No. 175 was
signed into law by then President Ferdinand E. Marcos in order to strengthen the cooperative
movement.51 The promotion of cooperative development was one of the major programs of
the "New Society" under his administration. It sought to improve the country’s trade and
commerce by enhancing agricultural production, cottage industries, community development,
and agrarian reform through cooperatives.52
The whole cooperative system, with its vertical and horizontal linkages -- from the market
cooperative of agricultural products to cooperative rural banks, consumer cooperatives and
cooperative insurance -- was envisioned to offer considerable economic opportunities to
people who joined cooperatives.53 As an effective instrument in redistributing income and
wealth,54 cooperatives were promoted primarily to support the agrarian reform program of the
government.55
Notably, the cooperative under PD 175 referred only to an organization composed primarily of
small producers and consumers who voluntarily joined to form a business enterprise that they
themselves owned, controlled, and patronized.56 The Bureau of Cooperatives Development --
under the Department of Local Government and Community Development (later Ministry of
Agriculture)57 -- had the authority to register, regulate and supervise only the following
cooperatives: (1) barrio associations involved in the issuance of certificates of land transfer;
(2) local or primary cooperatives composed of natural persons and/or barrio associations; (3)
federations composed of cooperatives that may or may not perform business activities; and
(4) unions of cooperatives that did not perform any business activities. 58 Respondent does
not fall under any of the above-mentioned types of cooperatives required to be registered
under PD 175.
When the Cooperative Code was enacted years later, all cooperatives that were registered
under PD 175 and previous laws were also deemed registered with the CDA. 59 Since
respondent was not required to be registered under the old law on cooperatives, it followed
that it was not required to be registered even under the new law.
Furthermore, only cooperatives to be formed or organized under the Cooperative Code
needed registration with the CDA.60 Respondent already existed before the passage of the
new law on cooperatives. It was not even required to organize under the Cooperative Code,
not only because it performed a different set of functions, but also because it did not operate
to serve the same objectives under the new law -- particularly on productivity, marketing and
credit extension.61
The insurance against losses of the members of a cooperative referred to in Article 6(7) of the
Cooperative Code is not the same as the life insurance provided by respondent to member-
policyholders. The former is a function of a service cooperative,62 the latter is not.
Cooperative insurance under the Code is limited in scope and local in character. It is not the
same as mutual life insurance.
We have already determined that respondent is a cooperative. The distinguishing feature of a
cooperative enterprise63 is the mutuality of cooperation among its member-policyholders
united for that purpose.64 So long as respondent meets this essential feature, it does not even
have to use65 and carry the name of a cooperative to operate its mutual life insurance
business. Gratia argumenti that registration is mandatory, it cannot deprive respondent of its
tax exemption privilege merely because it failed to register. The nature of its operations is
clear; its purpose well-defined. Exemption when granted cannot prevail over administrative
convenience.
Third, not even the Insurance Code requires registration with the CDA. The provisions of this
Code primarily govern insurance contracts; only if a particular matter in question is not
specifically provided for shall the provisions of the Civil Code on contracts and special laws
govern.66
True, the provisions of the Insurance Code relative to the organization and operation of an
insurance company also apply to cooperative insurance entities organized under the
Cooperative Code.67 The latter law, however, does not apply to respondent, which already
existed as a cooperative company engaged in mutual life insurance prior to the laws passage
of that law. The statutes prevailing at the time of its organization and mutualization were the
Insurance Code and the Corporation Code, which imposed no registration requirement with
the CDA.
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Third Issue:

Whether Respondent Is Exempted

from Premium Taxes and DST

Having determined that respondent is a cooperative that does not have to be registered with
the CDA, we hold that it is entitled to exemption from both premium taxes and documentary
stamp taxes (DST).

The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative
companies from the 5 percent percentage tax on insurance premiums. On the other hand,
Section 199 also exempts from the DST, policies of insurance or annuities made or granted
by cooperative companies. Being a cooperative, respondent is thus exempt from both types
of taxes.

It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax of
10 percent imposed upon the gross investment income of mutual life insurance companies --
domestic68 and foreign69 -- the provisions of Section 121 and 199 remain unchanged.70

Having been seasonably filed and amply substantiated, the claim for exemption in the amount
of ₱61,485,834.51, representing percentage taxes on insurance premiums and documentary
stamp taxes on policies of insurance or annuities that were paid by respondent in 1997, is in
order. Thus, the grant of a tax credit certificate to respondent as ordered by the appellate
court was correct.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are
AFFIRMED. No pronouncement as to costs.

SO ORDERED.

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