CHAPTER 5

CORPORATE CONTRACT LAW1

UNIFYING THEME ON THEORIES RELATING TO
PROMOTERS' CONTRACTS, DE FACTO CORPORATIONS,
CORPORATION BY ESTOPPEL, ARTICLES OF INCORPORATION,
BY-LAWS, AND ULTRA VIRES ACTS

Merging Principles of Corporate Law and Contract Law

Pre-Incorporation Stages: Promoter's Contract
Who is a Promoter?
Pre-incorporation Subscription Agreements
Other Promoter’s Contracts
CONTRACTS OF DEFECTIVELY-FORMED OR NON-EXISTENT
CORPORATIONS
De Facto Corporations
Rationale of Doctrine
Various Scopes of De Facto Corporation Doctrine
Requisites for De Facto Status
Valid Statute Under Which Organized
Colorable Compliance with Law
User of Corporate Powers
Continued Good Faith
Corporation by Estoppel Doctrine
Rationale of Doctrine
Historical Development of Doctrine
Current Status of Doctrine
Cases Outside De Facto Corporation and Corporation by Estoppel Doctrines
ARTICLES OF INCORPORATION AND BY-LAWS
Articles of Incorporation
By-Laws
Non-Bonding Effects of By-Laws for “Outsiders”
ULTRA VIRES DOCTRINE
Types of Ultra Vires Cases
Test to Determine Ultra Vires of First Type
Policies Supervening in Ultra Vires Issues
Distinguishing from Acts Which Are Per Se Illegal
Doctrine of Estoppel or Ratification
Illegal Acts
Acts or Contracts in Behalf of Corporation by Unauthorized Persons
Premise on Corporate Power
Doctrine of Apparent Authority
“Timely-Repudiation” Ruling
De Facto Corporate Officers

1
The chapter is an updated and revised version of the article with the same title published
in 37 ATENEO L.J. 1 (No. 2, June 1994).
 Corporate Dealings with Directors and Officers
Comparison with Principles in Unenforceable Contracts
FINAL OBSERVATIONS

————

MERGING PRINCIPLES OF CORPORATE LAW AND CONTRACT LAW

Corporations are expressly empowered to deal with third parties and enter
into valid and binding contracts with them. We have in the relationship of
corporations with third parties a merging of the legal disciplines of Contract Law
and Corporate Law. In such a merging of disciplines, there is often created a
conflict between policies and social values put forth by each of the disciplines.
In Contract Law, for a contract to be valid and binding, three essential
requisites must concur: (a) consent of the contracting parties; (b) subject matter
of the contract; and (c) cause or consideration.2
The essential requisite of consent requires two parties who are legally
capacitated by law to bind and be bound by obligations, and also should not
represent the same interests. Article 1305 of the Civil Code defines a contract as
"a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service." In addition,
Article 1305 of the same Code provides that a "contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them." The very form of the consent has requisites, laid down in Article 1319 of
the Civil Code, which requires two parties not representing the same interests,
thus: "Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract."
Although the corporate entity is a juridical person, being a legal fiction it
cannot act in the world except through its duly authorized officers or
representatives. There is therefore the issue in Corporate Law which impinges on
the Law on Contracts on what happens to contracts entered into where the
corporation either has not been legally constituted, or has been defectively
constituted. Also, there are issues as to contracts involving duly constituted
corporations, but which were entered into by officers who either were not duly
authorized, or who exceeded the scope of their authorities.
When a corporation has not been constituted by law, there is as yet no
juridical person which can validly enter into a contract. Contract Law would
consider a contract entered into in behalf of a non-existent corporation as a void
contract for lack of the essential requisite of consent being given by two
contracting parties. However, in the Corporate Law, such contracts could have
binding effects depending on the prevailing circumstances.
In addition, a distinction has to be drawn between a situation where such a
contract is entered into with the parties knowing fully well that a corporation does
not yet legally exist, and the other situation where at least one of the parties is

2
Art. 1318, Civil Code of the Philippines.
unaware that a corporation has not been duly constituted. The first situation
refers to what the author would generically term as promoter's contracts or pre-
incorporation contracts. The second situation is what is termed as contracts
entered into with a defectively formed corporation, which would include the de
facto corporations and the corporations by estoppel.

PRE-INCORPORATION STAGES: PROMOTER'S CONTRACT

1. Who is a Promoter?
It is not the Corporation Code, but rather the Securities Regulation Code3
that defines a promoter to be “a person who, acting alone or with others, takes
initiative in founding and organizing the business or enterprise of the issuer and
receives consideration therefor.”4
Promoters, as the visionaries or trailblazers in founding a corporate
enterprise, are certainly not in the same category as carpetbaggers. Their
activities are deemed beneficial to society and therefore are regulated by law. No
formal recognition is accorded to promoter's contracts in the Corporation Code,
except under Sections 60 and 61 thereof, on pre-incorporation subscriptions.

2. Pre-incorporation Subscription Agreement

Under Section 60 any contract for the acquisition of unissued stock in an
existing or a corporation still to be formed shall be deemed a subscription within
the meaning of the Corporation Code, notwithstanding the fact that the parties
refer to it as a purchase or some other contract.
Under Section 61, a subscription for shares of stock of a corporation still to
be formed shall be irrevocable for a period of at least six (6) months from the
date of subscription, unless all of the other subscribers consent to the revocation,
or unless the incorporation of said corporation fails to materialize within said
period or within a longer period as may be stipulated in the contract of
subscription. However, no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the SEC.
Sections 60 and 61 have effectively adopted in our jurisdiction a fused
version of both the "contract theory" and the "offer theory" in defining the nature
of pre-incorporation subscription agreements.
The offer theory construes subscription agreement as only continuing
offers to proposed corporations, which offer does not ripen into a contract until
accepted by the corporation when organized.5 The obvious result of the offer

3
Rep. Act No. 8799 (May, 2000).
4
Sec. 3.10, ibid.
5
Navarro, Two Points of Reform of Philippine Corporate Law, 27 PHIL. L.J. 669 (1952). "The
‘offer' theory is worked out from the law of contracts. The analogy, however, fails for while in
ordinary contracts, there are both offerors and offerees, in our case the contemplated corporation
has not yet come into existence. To consider the offer as continuing and, therefore, as if made at
the time the corporation comes into existence is a twisting of the facts, for it is not so made in
fact. Neither may analogy be drawn between the contemplated corporation and a conceived child
for no one ever imagines contracting with it, except, perhaps, giving a gift to it, which does not
theory is that it allows withdrawal of subscriber at least before the corporation
comes into existence and accepts the offer.
Under the contract theory, a subscription agreement among several
persons to take shares in a proposed corporation becomes a binding contract
and is irrevocable from the time of subscription, unless cancelled by all the
parties before acceptance by the corporation.
It can be seen therefore that Sections 60 and 61 have fused the essential
features of both theories in their provisions. A subscription contract is essentially
a contract between the corporation and the subscribing person. The essence of
the stock subscription is an agreement to take and pay for original unissued
shares of a corporation, formed or to be formed.6
In the case of a pre-incorporation subscription agreement, Contract Law
would consider the subscription contract void, because one of the parties of the
contract, the corporation, does not exist. Yet Sections 60 and 61, as special
provisions in the Corporation Code, override the general provisions of Contract
Law, and mandate that pre-incorporation contracts are valid and enforceable. In
fact, Section 61 goes to the extent of saying that pre-incorporation subscription
agreements are irrevocable for a period of six (6) months from the date of
subscription. Under one point of view, there is no necessity under Section 61 for
the corporation to accept the subscription agreements, and it seems to bind the
corporation upon formation, as much as it binds the subscriber.
However, under another point of view, the provisions under Section 61 of
the Corporation Code making irrevocable pre-incorporation subscription
agreements pertains to the subscriber and between the subscribers among
themselves, and does not and cannot pertain to the corporation, because legally
speaking irrevocability (which the said section strictly covers prior to the fact of
incorporation of the corporation) cannot apply to a party who during that period
does not yet exist.
In addition, a pre-incorporation agreement is a type of promoter's contract,
and the prevailing theories in the Philippine jurisdiction (i.e., the contract theory
and the offer theory) are consistent with the fact that a promoter's contract is not
necessarily binding on the corporation once it is formed or organized and may be
refused by the corporation once formed. The only time when the corporation is
bound by a promoter's contract is when it has at the time of its constitution
received benefits from the contract. This appears to be the more logical and
forceful view.
Subscription agreements are "special contracts" in the sense that they go
beyond what we would term as ordinary contracts. Although subscription
agreements are contracts between the subscriber and the corporation, they are

come within the purview of contract law. It is not any good to consider the subscriptions as made
with an agent of the proposed corporation, for then there would be an agent for a principal that
does not exist. Again, if we grant the legal possibility of there being an agent of a non-existing
principal, this destroys the theory, as the subscription becomes perfected contract between two
able parties." Ibid, at p. 671.
6
Delpher Trades Corp. v. Intermediate Appellate Court, 157 SCRA 349, 353-354 [1988],
quoting Rohrlich 243, cited in AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE
COMMERCIALS LAWS OF THE PHILIPPINES, Vol. III, 1980 ed., at p. 430.
at the same time deemed to be contracts among the stockholders of the
corporation. Such a "special relationship" among the subscribers of a corporation
can be sustained only if we look beyond the pale of the corporate fiction and see
that actually, beneath the corporate shell, is an association of warm-bodied
persons who decided to band together in the corporation in pursuit of a business.
This is clear from the fact that under Section 61, a pre-incorporation agreement is
generally irrevocable within the stipulated 6 month period "unless all of the other
subscribers consent to the revocation."

3. Other Promoter’s Contracts

Other than the subscription agreements which in the pre-incorporation
stage are essential in the process of founding a corporation, there are other
contracts that may have to be entered into in founding the "business of the
corporation." These are contracts entered into in the name of the intended
corporation by the promoters or organizers of the corporation. An example of
this type of contract, are deeds of assignment entered into by subscribers who
transfer their property holdings to the corporation as payment for their paid-up
capital subscription, under the provisions for tax-free exchanges of property of
the National Internal Revenue Code.7 The validity of such contracts, and their
binding power over the corporation, are notions that come to us as common law
doctrine; Contract Law would consider such promoter's contracts void.
In Cagayan Fishing Development Co., Inc. v. Teodoro Sandiko,8 four
parcels of land were sold to a corporation in the process of incorporation, under
specific terms whereby the outstanding mortgage loan on the properties would
have to be fully paid by the corporation. Later, the corporation was incorporated,
but the mortgage loan was not paid. However, the corporation sold the parcels of
land to Sandiko with the condition that the latter would shoulder the mortgage
debts. When Sandiko failed to comply with his obligation, the corporation filed a
recovery suit. In dismissing the case, the trial court held the contract to be void
since it was entered into with a corporation that had no corporate existence at
that time the properties were transferred to it. The Court upheld the dismissal of
the case holding:

That a corporation should have a full and complete

organization and existence as an entity before it can enter into
any kind of contract or transact any business, would seem to
be self-evident. . . . A corporation, until organized, has no
being, franchises, or faculties. Nor do those engaged in
bringing it into being have any power to bind it by contract,
unless so authorized by the charter. Until organized as
authorized by the charter there is not a corporation, nor does it
possess franchises or faculties for it or others to exercise, until
it acquires a complete existence.9

7
Sec. 30(C), National Internal Revenue Code of 1997.
8
65 Phil. 223 (1937).
9
Ibid, at pp. 227-228, quoting Gent v. Manufacturers and Merchants' Mutual Insurance
Company, 107 Ill. 652, 658.
 But more importantly, while the Court conceded that there are
circumstances where "the acts of promoters of a corporation [may] be ratified by
the corporation if and when subsequently organized . . . but under the peculiar
facts and circumstances of the present case we decline to extend the doctrine of
ratification which would result in the commission of injustice or fraud to the
candid and unwary."10 The Court elaborated thus:

Boiled down to its naked reality, the contract here

(Exhibit A) was entered into not only between Manuel Tabora
and a non-existent corporation but between Manuel Tabora as
owner of four parcels of land on the one hand and the same
Manuel Tabora, his wife and others, as mere promoters of a
corporation on the other hand. For reasons that are self-
evident, these promoters could not have acted as agents for a
projected corporation since that which had no legal existence
could have no agent. A corporation, until organized, has no life
and therefore no faculties. It is, as it were, a child in ventre sa
mere.11

It would seem that the ratio in Cagayan Fishing is that ratification is the
key element in upholding the validity and enforceability of promoter's contracts.
Without ratification by a corporation after its due incorporation, a contract entered
into in behalf of a corporation yet to be organized or still in the process of
incorporation is void as against the corporation. In Cagayan Fishing the Court
found significant, the fact that the deals involving the properties were treated not
as corporate assets but as the personal assets of the Taboras; as well as the fact
that the titles of the parcels of land were not even registered in the name of the
corporation: "In fact, to this day, the lands remain inscribed in Tabora's name.
The defendant always regarded Tabora as the owner of the lands. He dealt with
Tabora directly. Jose Ventura, president of the plaintiff corporation, intervened
only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine
National Bank, mortgagee of the four parcels of land, always treated Tabora as
the owner of the same." These all pointed to a lack of a bona fide ratification of
the deed of sale of the properties in favor of the corporation.
In Rizal Light & Ice Co., v. Municipality of Morong, Rizal,12 a franchise
awarded in favor of a corporation was sought to be annulled on the ground that
at the time the application was filed, the corporation was then only in the process
of incorporation. In dismissing the action, the Court held that although a franchise
may be treated as a contract, the eventual incorporation of the applicant
corporation after the grant of the franchise, "and its acceptance of the franchise
as shown by its action in prosecuting the application filed with the Commission
for the approval of said franchise, not only perfected a contract between the
respondent municipality and Morong Electric but cured the deficiency pointed out
by the petitioner in the application of Morong Electric."13

10
Ibid, at pp. 227-228, citing FLETCHER CYC. OF CORP., Perm. Ed., 1931, Vol. I, Secs. 207 et
seq.
11
Ibid, at p. 228.
12
25 SCRA 285 (1968).
13
Ibid, at p. 305.
 The Court also clarified in Rizal Light that in deciding Cagayan Fishing
"this Court did not say in that case that the rule is absolute and that under no
circumstances may the acts of promoters of a corporation be ratified or accepted
by the corporation if and when subsequently organized. Of course, there are
exceptions. It will be noted that American courts generally hold that a contract
made by the promoters of a corporation on its behalf may be adopted, accepted
or ratified by the corporation when organized."14
In Caram, Jr. v. Court of Appeals,15 the Court stated that it would not
resolve the issue of whether it is the promoters or the corporation itself that shall
be responsible for the expenses incurred in connection with such organization.
Nevertheless it ruled that investors who were not the "moving spirit" behind the
organization of the corporation, but who were merely convinced to invest in the
proposed corporate venture on the basis of the feasibility study undertaken, are
not liable personally with the corporation for the cost of such feasibility study.
"The most that can be said is that they benefited from such services, but that
surely is no justification to hold them personally liable therefor. Otherwise, all the
other stockholders of the corporation, including those who came in later, and
regardless of the amount of their shareholdings, would be equally and personally
liable also with the petitioners for the claims of the private respondents."16
Although Justice Cruz in Caram, Jr. stated at the onset that "[f]or purposes
of resolving this case before us, it is not necessary to determine whether it is the
promoters of the proposed corporation, or the corporation itself after its
organization, that shall be responsible for the expenses incurred in connection
with such organization," the issue was in fact resolved in Caram, Jr. since the
Court took pains to point out that the majority investing incorporators were not
included in the definition of "promoter":

The above finding bolsters the conclusion that the

petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by
Barreto as the main promoter. It was he who was putting all
the pieces together, so to speak. The petitioners were merely
among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to
invest in the proposed airline.17

If indeed, the question of whether or not one is a promoter is irrelevant in

determining one's liability for the pre-organization expenses, then it would have
been unnecessary in Caram, Jr. to determine that the majority investing
incorporators were not promoters in order to absolve them from any liability on
the pre-organizational expenses.
What is of further significance in Caram, Jr. is the finding of the Court that
since there was no representation that the corporation was fictitious, there was
14
Ibid, at p. 306, citing FLETCHER CYC. OF CORP., Perm. Ed., Vol. I, Chap. 9, Sec. 207, p.
681.
15
151 SCRA 372 (1987).
16
Ibid, at p. 375.
17
Ibid, at p. 375.
no justification to hold the stockholders thereof personally liable. This is a
doctrine that has an effect similar to the doctrine of corporation by estoppel, thus:

Significantly, there was no showing that the Filipinas

Orient Airways was a fictitious corporation and did not have a
separate juridical personality, to justify making the petitioners,
as principal stockholders thereof, responsible for its
obligations. As a bona fide corporation, the Filipinas Orient
Airways should alone be liable for its corporate acts as duly
authorized by its officers and directors.18

CONTRACTS OF DEFECTIVELY-FORMED
OR NON-EXISTENT CORPORATIONS
1. De Facto Corporation
a. Rationale of Doctrine
It should be borne in mind that the de facto doctrine is not limited in its
application to Corporate Law; it is also a well-developed concept in the Law on
Public Corporations and the Law on Public Officers. The common feature of the
de facto doctrine in those legal fields, is that it prevents any party from raising the
defect of authority as a means to avoid fulfillment of a contract or a transaction
entered into in good faith.
Tayko v. Capistrano,19 which discussed the policy of the doctrine as
applied to public officers, held that "[t]he principle is one founded in policy and
convenience, for the right of one claiming a title or interest under or through the
proceedings of an officer having an apparent authority to act would be safe, if it
were necessary in every case to examine the legality of the title of such officer up
to its original source, and the title or interest of such person were held to be
invalidated by some accidental defect or flaw in the appointment, election or
qualification of such officer, or in the rights of those from whom his appointment
or election emanated; nor could the supremacy of the laws be maintained, or
their execution enforced, if the acts of the judge having a colorable, but not a
legal title, were to be deemed invalid."20
The de facto doctrine's essence is to protect the sanctity of dealings by the
public with persons or entities whose authority emanates from the State, to allow
the public to take such authority at face value, provided nothing is clearly shown
to be defective in such authority. Even if it should be proven that such authority
was indeed defective, such defect cannot be used as an excuse to set aside a
relationship or transaction entered into in good faith.
In the field of Corporate Law, the de facto corporation doctrine is meant to
protect the enforceability of corporate dealings and contracts, to allow the public
to take at reasonable face value the authority of the corporation to enter into valid

18
Ibid, at p. 375.
19
53 Phil. 866 (1928). See also Gamboa v. Court of Appeals, 108 SCRA 1 (1981).
20
Ibid , at p. 873.
and binding contracts, thereby providing a healthy system by which to encourage
the public to deal with corporate entities. The de facto corporation doctrine is
therefore meant to apply to the level of existence that pertains to the relationship
of the corporation with the dealing public; and is not meant to govern nor be
applicable to other levels of existence, such as those pertaining to intra-corporate
relationships.

b. Various Scope of De Facto Corporation Doctrine

The main sequences of the de facto corporation doctrine are as follows:

(a) The enterprise contracts with an outsider, who later brings

action against the enterprise as though it were a corporation,
and the enterprise is held liable in corporate form;
(b) The enterprise contracts with an outsider, and subsequently
brings actions in corporate form against the outsider, the
outsider is held liable to the enterprise;
(c) The enterprise contracts with an outsider, and the outsider
brings action against the component individuals, they are
absolved from liability and the outsider held to his remedy
against the enterprise only; or
(d) The enterprise contracts with an outsider, and the
component individuals seek to hold the outsider liable on his
contract, where logically the individuals are not allowed to
recover, recovery must be by the enterprise.21

c. Requisites for De Facto Status

Under American jurisprudence, for the de facto corporation doctrine to
apply, the following requisites must concur:

(a) The existence of a valid law under which it may be

incorporated;
(b) An attempt in good faith to incorporate, or “colorable
compliance” with provisions on incorporation; and
(c) Assumption by the enterprise of corporate powers.

In Hall v. Piccio,22 a corporation was organized from an unregistered

partnership among several individuals. Immediately after the execution of the
articles of incorporation, the corporation proceeded to do business with the
adoption of by-laws and the election of its officers. The articles of incorporation
were forwarded to the SEC for registration. But before the issuance of the
corresponding certificate of incorporation, some of the incorporators filed an
action in court to have the unregistered partnership dissolved, and included as
defendants some of the officers of the partnership. The defendants filed a motion
to dismiss on the ground that the court had no jurisdiction over the dissolution of
21
Berle, The Theory of Enterprise Entity, 47 COL. L. REV. (No. 3), 343, 345.
22
86 Phil. 603 (1950).
the company. Since it was a de facto corporation, they argued, dissolution
thereof could only be ordered in a quo warranto proceeding; and since the
plaintiffs signed the articles of incorporation, they were now estopped from
claiming that it is not a corporation but only a partnership.
The Court held that since the certificate of incorporation had not been
issued by the SEC, then the de facto corporation doctrine did not apply. None of
the incorporation directors could claim in good faith to be a corporation, being
fully aware of the non-issuance of the certificate of incorporation. Likewise, since
the suit was not one where the corporation itself was made a party, but was
merely a litigation between stockholders of the alleged corporation for the
purpose of obtaining its dissolution, "[e]ven the existence of a de jure corporation
may be terminated in a private suit for its dissolution between stockholders,
without the intervention of the state."23
In spite of the rulings therein, Piccio cannot be taken to have changed the
parameters of the de facto corporation doctrine.
Firstly, Piccio cannot be taken to be doctrinal when it comes to the de
facto doctrine simply because the suit therein involved really intra-corporate
disputes; the de facto doctrine applies to contracts and transactions made by or
on behalf of the corporation with “outsiders” and has no application in intra-
corporate disputes.
If one where to look closely at the ruling, then the real value of Piccio
would be that de facto doctrine and the corporation by estoppel doctrine have no
applications to issues and controversies that deal on the level of those that fall
within the intra-corporate level. This much has been confirmed in the recent
case of Lozano v. De los Santos,24 where the Supreme Court held that
“Corporation by estoppel is founded on principles of equity and is designed to
prevent injustice and unfairness. It applies when persons assume to form a
corporation and exercise corporate functions and enter into business relations
with third persons. Where there is no third person involved and the conflict arises
only among those assuming the form of a corporation, who therefore know that it
has not been registered, there is no corporation by estoppel.”
Secondly, since good faith is the underlying element of the de facto
doctrine, Piccio actually made it the essential test of the existence of such good
faith, that the parties to a corporate entity, i.e., the incorporators, must have been
aware of the issuance of the certificate of incorporation by the SEC for such good
faith to exist. Since ignorance of the law excuses no one from compliance
therewith, and since Section 11 of the then Corporation Law specifically provided
that corporate existence begins "only from the moment such certificate is issued,"
there was no instance in which incorporators and the public dealing with
corporations could pretend to be in good faith. They were duty-bound to
ascertain that such a certificate had in fact been issued. More would be said of
the Piccio doctrine hereunder.

d. Valid Statute Under Which Organized

23
Ibid, at p. 606.
24
274 SCRA 452 (1997).
 The valid statute under which most private corporations are organized
today would be the Corporation Code, which therefore supplies the first element
of what would constitute a de facto corporation existing in Philippine jurisdiction.
Can there be a de facto corporation organized under an enabling statute
that is an unconstitutional? Following the "orthodox view" that "an
unconstitutional act, whether legislative or executive, is not a law, confers no
rights, imposes no dues, and affords no protection,"25 the enabling statute being
unconstitutional would be absolutely void, and no corporation organized under it
can achieve the status of being de facto corporation. Therefore, the prevailing
view is that an unconstitutional enabling law has the same effect as though there
is no law under which to organize, and even if the associates organize in good
faith in reliance upon it, the resulting association cannot claim to be a de facto
corporation.
There is, however, the "qualified view" that the "actual existence of a
statute prior to such a determination [of unconstitutionality], is an operative fact
and may have consequences which cannot always be erased by a new judicial
declaration."26 Under that theory, a corporation defectively organized under the
law before it was declared unconstitutional can claim to be a de facto corporation
(presuming that other requisites are present), since it was organized under color
of law, that the statute is presumptively constitutional until it has been judicially
declared to be invalid, and that until it is so declared, men have a right to act and
contract under such presumption. Consequently, the acts and contracts of such a
defectively formed corporation, before the enabling law under which is was
organized is declared unconstitutional, cannot be avoided as against the
interests of the public, or of third persons who have invested or acted in good
faith in reliance upon their validity, by any ex post-facto declaration or decision
that the law under which they act was void.
After declaration of the invalidity or unconstitutionality of the enabling
statute, any corporation organized under it can no longer claim the status of
being a de facto corporation, since at that point the element of good faith would
no longer exist.
Hence, a distinction should be made when dealing with a corporation that
has been organized under an enabling law that has been declared
unconstitutional. If the constitutionality of the statute is raised for the first time in
an action wherein it is sought to prevent the future incurring of rights and
obligations, it will be proper to permit collateral attack; where the constitutionality
of the statute is raised for the first time in litigation seeking enforcement of
contracts or transaction which have been fully or partially consummated,
collateral attack on the juridical personality of the corporation should not be
permitted, since the corporation should be treated as a de facto corporation.
Courts have, however, through jurisprudence, arrived at the same result
as that upheld by such minority opinion, holding that a corporation organized
under a statute subsequently declared unconstitutional may nevertheless be

25
Fernandez v. Cuerva, 21 SCRA 1095, 1106 (1967).
26
Ibid. Also De Agbayani v. Philippine National Bank, 36 SCRA 429 (1971).
considered a corporation by estoppel, where there have been previous dealing
between the parties on a corporate basis.

e. Colorable Compliance with Law

The general principle is that while substantial compliance is not
necessary, colorable compliance with the requirements of the law must be
shown. When there has been no attempt in good faith to create a corporation de
jure, there can be no de facto corporation. Any other rule might well open the
door to fraud upon the public. Mere intent is not sufficient. In addition, there must
be a bona fide attempt to comply with the requirements of the law. The outward
manifestation of the existence of a corporate being is therefore necessary as the
basis upon which the dealing public may be led to believe that they are dealing
with a juridical person.
Some defects that would preclude the creation of even a de facto
corporation are the absence of articles of incorporation, the failure of filing the
articles of incorporation with the SEC, and the lack of certificate of incorporation
from the SEC.
In Philippine jurisdiction, the filing of articles of incorporation and the
issuance of the certificate of incorporation may therefore be considered as
essential for the existence of a de facto corporation.27
Some defects that do not preclude the creation of a de facto corporation
are as follows:

(a) Defects in the incorporation papers - the articles of

incorporation fail to state all the matters required by the
Corporation Code to be stated, or state some of them
incorrectly;
(b) Corporate name - the name of the corporation closely
resembles that of a pre-existing corporation that it will tend to
deceive the public;
(c) Ineligibility of incorporators - the incorporators or a certain
number of them are not residents of the Philippines;28 or
(d) Defects in the execution of incorporation papers, the
acknowledgment of the articles of incorporation, or certificate
of incorporation is insufficient or defective in form, or it was
acknowledged before the wrong office.

f. User of Corporate Powers

Taking subscriptions to and issuing shares of stocks, electing members
and directors, adopting by-laws in connection with buying a lot and constructing
and leasing a building upon it, are sufficient acts of user of corporate power to
constitute a corporation de facto.

27
Hall v. Piccio, 86 Phil. 603 (1950).
28
SEC Opinion, 17 January 1985, SEC ANNUAL OPINIONS 1985, at p. 9.
 "Organization" as used in reference to corporations, has a well-understood
meaning, which is the election of officers, providing for the subscription and
payment of the capital stock, the adoption of by-laws, and such other steps as
are necessary to endow the legal entity with the capacity to transact the
legitimate business for which it was created. Under a statute providing that, until
articles of incorporation should be recorded, the corporation should transact no
business except its own organization, it is held that the term "organization"
means simply the process of forming and arranging into suitable disposition the
parties who are to act together in, and defining the objects of, the compound
body, and that this process, even when complete in all its parts, does not confer
a franchise either valid or defective, but, on the contrary, it is only the act of the
individuals, and something else must be done to secure the corporate
franchise.29

g. Continued Good Faith

In Hall v. Piccio,30 the Court denied the ground that the corporation was a
de facto corporation and its existence could not be attacked collaterally: that the
incorporating group had not obtained the certificate or incorporation, and
consequently, the incorporating group could not claim in good faith, to be a
corporation. The Court held that under our statute, it is the issuance of the
certificate of incorporation by the SEC which calls a corporation into being.
If despite such a substantial defect there is nevertheless the issuance of a
certificate of incorporation by the SEC, and the incorporators knew of such defect
at the time of issuance, would the situation still call for the application of the de
facto corporation doctrine? Also, if there was good faith at the time of
incorporation which would have brought about the creation of a de facto
corporation with the issuance of the SEC certificate, but later on the directors and
officers of the corporation came to know of such defect, would the corporation
then lose it standing as a de facto corporation?
Section 20 of the Corporation Code which uses the language "any
corporation claiming in good faith," in defining a de facto corporation, and
applying Piccio ruling that the issuance of the certificate of incorporation by the
SEC is the minimum requirement by which such good faith may exist, then the
proper position that can be taken in the two issues raised would be that such
issuance of the SEC certificate would raise the corporation to the level of being a
de facto corporation and therefore, "its right to exercise corporate powers, shall
not be inquired into collaterally in any private suit to which such corporation may
be a party."31
This position is bolstered by the fact that under Section 6(l) of Pres.
Decree No. 902-A, in defining the powers of the SEC, grants as one of the basis
by which the SEC may suspend or revoke "after proper notice and hearing," the
franchise or certificate of registration of corporations when there has been "fraud
in procuring its certificate of registration." In other words, even the SEC has to go
through a quasi-judicial process before it can revoke the certificate of a

29
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711, 720 (1956).
30
86 Phil. 603 (1950).
31
Sec. 20, Corporation Code.
corporation which has used fraud in the process of its incorporation, clearly
indicating that prior to such revocation, the corporation has all the powers and
attributes of a corporation de facto.
In addition, to allow the collateral attack on the personality of a corporation
because of existing defects known to the corporation and its board would
circumvent the very rationale of the de facto doctrine which seeks to prevent any
party from raising the defect of authority as a means to avoid fulfillment of a
contract or a transaction entered into.
On the other hand, in a suit between and among the parties who knew
that there was a defect in the incorporation of the corporation, there certainly is
no good faith on their part and in their case, the de facto doctrine cannot be
availed of in order to further their fraud.

2. Corporation by Estoppel Doctrine

The corporation by estoppel doctrine presents a clear exception to the
general treatment of unregistered associations.32

a. Rationale of Doctrine
Estoppel is essentially a common law principle, and has been the source
of many rules which seek to work out justice or equity between the parties, on the
theory that an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person
relying thereon.33 The doctrine of estoppel has its origins in equity, and is based
on moral right and natural justice,34 and is designed to prevent injustice and
unfairness.35 The doctrine therefore permeates and goes beyond Corporate Law
considerations.
The doctrine is meant to hold contractual parties to their representations
or expectations at the time the contract was perfected; and it does not allow
parties to draw on a basic defect—lack of one contracting party—to avoid the
enforcement of the contract. The doctrine has evolved in Corporate Law primarily
as a rule to promote the integrity of commercial contracts; the basic role of the
32
In an opinion rendered by the SEC, it characterized the advantages of a corporation from
an unregistered corporation: "A corporation is a legal entity deriving its existence from a
franchise, whereas, as association in the narrow sense of the term is a creature of contract
without legal personality separate and distinct from the individuals composing it. An unregistered
association cannot sue and be sued; it cannot enter into contracts in the name of the association
and neither can it acquire properties under its common name. Contracts entered into in its behalf
make the persons signing or executing them liable to the other contracting party. It is not
competent to act or appoint agents or confer upon another authority to act on its behalf, and
those who act or purpose to act as its representatives or agents do so at their own risk. It is only
when the association is incorporated under the Corporation Code that it acquires juridical
personality, distinct and separate from its stockholders or members. Such incorporation enables
the association to exercise the powers which its charter and the Corporation Code grant to said
association." SEC Opinion, 22 August 1989, XXIV SEC QUARTERLY BULLETIN 2 (No. 1, March
1990).
33
Report of the Code Commission, p. 59, Introduction to Title IV of the Civil Code on
Estoppel.
34
Mirasol v. Municipality of Tabaco, 43 Phil. 610 (1922).
35
Lozano v. De los Santos, 274 SCRA 452, 83 SCAD 898 (1997).
doctrine of corporation by estoppel is to promote the public's underlying faith in
contracts drawn with corporate entities, rather than to promote corporate
principles. For this reason, the doctrine as it has evolved in Section 21 seems
convoluted from a strict Corporate Law point of view; or at least, the basic
elements of the doctrine as expressed in Section 21 seem to be contradictory or
antithetical.
A review of jurisprudential history up to the adoption of Section 21 clearly
show that an uneven path had to be followed by our courts in applying the
original versions of the doctrine. Section 21 had to cut through the logical maze
to practically dictate a solution long sought by the courts, which they had been
unable to logically reach through accepted legal principles of those times.

b. Historical Development of Doctrine

The case of Asia Banking Corporation v. Standard Products Co.,36
reiterated the estoppel principle upheld by the earlier decisions of the Supreme
Court in Behn, Meyer & Co. v. Rosatzin,37 and Chamber of Commerce v. Pua Te
Ching.38 In Asia Banking a collection suit was brought by the bank on a
promissory note issued in behalf of the corporate borrower. At the trial, the bank
failed to prove affirmatively the corporate existence of the parties, and so the
defendant corporate borrower insisted on appeal that the judgment rendered
against it was wrong.
In brushing aside the contention of the corporate borrower, the Court held
that the "general rule is that in the absence of fraud a person who has contracted
or otherwise dealt with an association in such a way as to recognize and in effect
admit its legal existence as a corporate body is thereby estopped to deny its
corporate existence in any action leading out of or involving such contract or
dealing, unless its existence is attacked for causes which have arisen since
making the contract or other dealing relied on as an estoppel and this applies to
foreign as well as to domestic corporations."39
In Asia Banking, the defendant corporate borrower, having recognized the
corporate existence of the plaintiff by making a promissory note in its favor and
making partial payments on the same, was estopped to deny plaintiff's corporate
existence, and also from denying its own corporate existence; evidence to
establish such facts was thus unnecessary.
Asia Banking affirmed the first element of the corporation by estoppel
doctrine now found in the second paragraph of Section 21: "One who assumes
an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation." At the time of Asia
Banking, it was the only element of the doctrine. The effect of the estoppel is to
prevent the declaration of nullity of a contract on the ground that one of the
parties thereto, a purported corporate entity, does not in fact exist.

36
46 Phil. 144 (1924).
37
5 Phil. 660 (1906).
38
14 Phil. 222 (1909).
39
Ibid, at p. 145 citing 14 C.J. 227 and Chinese Chamber of Commerce v. Pua Te Ching, 14
Phil. 222 (1909).
 However, if one were to examine further this element of the doctrine, one
would see that to uphold the validity of a contract, both parties thereto must
recognize the corporate party even when one does not exist. Consequently, the
recognition of a corporate entity which in fact did not exist, in order to uphold the
validity of the contract, would lead to the application of the doctrine that once a
corporate entity exists, then it has a personality separate and distinct from the
stockholders or members who compose it. The separate juridical personality
doctrine requires that officers and stockholders acting for the corporation cannot
be held personally liable for corporate debts and liabilities. The conclusion is that
the persons who purport to act for a non-existent corporation would be held to
the existence of such corporate entity, and logically the corporate contract cannot
be enforced against them because of the separate juridical personality that is a
consequence of the recognition of the corporation.
This was the logical wall that faced the courts with the application of the
then version of the corporation by estoppel doctrine, as amply demonstrated in
Hall v. Piccio40 previously discussed above. The Supreme Court found in Piccio
that all parties to the contract were aware that the certificate of incorporation had
not yet been issued. The Court also held that the parties knew, or ought to have
known, that the personality of a corporation begins to exist only from the moment
such certificate is issued. Since "nobody was led to believe anything to his
prejudice or damage, the principle of estoppel does not apply [and] [o]bviously
this is not an instance requiring the enforcement of contract with the corporation
through the rule of estoppel."
The implication in Piccio is that the corporation by estoppel doctrine
applies only when at least one party to a contract was under the impression that
the other, corporate party was a duly incorporated entity. When both parties, as
in Piccio, are aware that a corporation has not been duly organized, then the
corporation by estoppel doctrine does not apply. Piccio therefore establishes one
of the elements of the doctrine: that at least one of the contracting parties was
under the impression or belief that the corporate entity party to the contract was
duly incorporated.
But if we were to take Piccio to its logical conclusion then it would
practically mean that the doctrine of corporation by estoppel will never apply,
since under Piccio all parties, whether incorporating stockholders or third-parties,
are mandated by law to be aware that corporate existence begins only upon the
issuance of the certificate of incorporation by the SEC.41 And since the issuance
or non-issuance of a certificate of incorporation is a matter of public record, even
third parties are charged with constructive knowledge of the fact of such non-
issuance. In fact, it would seem to be an obligation of one who deals with a
corporate entity to know whether such certificate has been issued, since this is
easily verifiable with the SEC.
If such a certificate is indeed issued but there is a defect in the
incorporation process of a contracting corporate entity, pursuant to Piccio, the
doctrine of de facto corporation would come into play. However, if no such
certificate of incorporation has been issued, then even the corporation by
40
86 Phil. 603 (1950).
41
Sec. 19, Corporation Code.
estoppel doctrine would be inapplicable, because both the associates in the
purported corporation and the other party to the contract cannot plead ignorance
of the fact that no corporation existed, since they are chargeable with the
knowledge of the non-issuance.
One conclusion that may be drawn from all this is that, following Piccio,
the corporation by estoppel doctrine cannot apply when no certificate has been
issued. It can only apply when a certificate is issued but where, for lack of the
other criteria, the de facto corporation doctrine cannot apply. This does not seem
to be a good doctrine. What we can reasonably draw as a conclusion from Piccio
is that the non-issuance of a certificate of incorporation affects the good faith only
of the corporate insiders, mainly the incorporating stockholders or members. The
lack of the certificate does not prevent the application of the estoppel doctrine to
a third party who entered into a contract with the purported corporation, believing
it to be duly incorporated.
As was pointed earlier, it was wrong for Piccio to have discussed the
applicability of the corporation by estoppel doctrine in a suit between and among
corporate insiders. As was said much later on in Lozano v. De los Santos,42 the
doctrine applies when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third persons, and
therefore has no application “[w]here there is no third person involved and the
conflict arises only among those assuming the form of a corporation.”
Nevertheless, Piccio is clear in stating the proposition that in a purported-
corporation setting, when the de facto corporation doctrine cannot be applied, it
does not necessarily mean that the corporation by estoppel doctrine becomes
the applicable doctrine.
Subsequently in Vda. de Salvatierra v. Hon. Garlitos,43 the Court added a
new twist. Salvatierra, as owner of a piece of land, entered into a contract of
lease with a corporation allegedly "duly organized and existing under the laws of
the Philippines," represented by its president. When the obligations imposed
under the contract of lease on the corporate lessee were not complied with,
Salvatierra brought an action for accounting, rescission and damages. Judgment
was rendered against the corporation. When a writ of execution was sought to be
enforced, no properties in the name of the corporation could be located, and
consequently properties registered in the name of its president were levied upon.
The president sought to have the levy against his properties lifted, since he was
not even a party to the case against the corporation. On the other hand,
Salvatierra showed that the case was brought against the corporation in the
belief that it was duly incorporated, and that he found out only after judgment that
it had not been duly registered with the SEC.
Under those proven facts, the Supreme Court held the president
personally liable on the contract entered into on behalf of the purported
corporation. In resolving the case, the Court in Salvatierra refused to apply the
corporation by estoppel doctrine:

42
274 SCRA 452, 83 SCAD 898 (1997).
43
103 Phil. 757 (1958).
 . . . While as a general rule a person who has contracted
or dealt with a corporate body is estopped from denying the
same in an action arising out of such transaction or dealing . . .
yet this doctrine may not be held to be applicable where fraud
takes a part in the said transaction. In the instant case, on
plaintiff's charge that she was unaware of the fact that the
Philippine Fibers Producers Co., Inc. had no juridical
personality, defendant Refuerzo gave no confirmation or
denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff
Manuela T. Vda. de Salvatierra was really made to believe that
such corporation was duly organized in accordance with law.44

Clearly, Salvatierra recognized then the logical effect of the estoppel

doctrine, that once a non-existent corporation is recognized to exist as a
corporate entity capable of executing a valid and binding contract, then it has a
separate personality, and its obligations under the contract cannot be ascribed to
its agents. Salvatierra thus reasoned out —

There can be no question that a corporation when

registered has a juridical personality separate and distinct from
its component members or stockholders and officers such that
a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its
president . . . and conversely, a stockholder or member cannot
be held personally liable for any financial obligation by the
corporation in excess of his unpaid subscription. But the rule is
understood to refer merely to registered corporations and
cannot be made applicable to liability of members of an
unincorporated association. The reason behind this doctrine is
obvious--since an organization which before the law is non-
existent has no personality and would be incompetent to act
and appropriate for itself the powers and attribute of a
corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who
act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as agent
without authority or without a principal is himself regarded as
the principal, possessed of all the rights and subjects to all the
liabilities of a principal, a person acting or purporting to act on
behalf a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable
for contracts entered into for other acts performed as such
agent. . .45

In Salvatierra the Court, having problems with the logical repercussions of

the corporation by estoppel doctrine as it stood at that time, refused to apply it.
Instead it relied upon a principle of the Law on Agency: that an agent who enters
44
Ibid, at p. 763.
45
Ibid.
into a contract outside of his authority or for a non-existent principal is deemed to
be the principal in the said contract. In other words, using the agency principle,
Salvatierra was able to prevent the frustration of enforcement of a contract on the
mere ground that one contracting party is missing.
What is intriguing about Salvatierra is that although it refused to apply the
estoppel doctrine, the principle it used to make individuals personally liable for
the contract has been adopted under Section 21, as an integral part of the
corporation by estoppel doctrine: "All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result
thereof."
There is, therefore, contradiction in Section 21: While the heart of the
estoppel doctrine lies in recognizing a corporation as party to a contract where
none in fact exists; there is also embodied in Section 21, the legal consequence
that actors are made personally liable for contracts entered into in behalf of the
corporation.
The question then is why was there a need to merge both Asia Banking
and Salvatierra rulings in the corporation by estoppel doctrine under Section 21?
There seemed to be more expedience in just adopting Salvatierra's agency
doctrine by itself, since it accomplishes both objectives without illogical results,
namely, (a) it validates the contract in question by supplying the missing
contracting party in the person of the agent (i.e., acting officer of the purported
corporation); and (b) it makes the perpetrator of the misrepresentation personally
liable for the contract.
Later, Albert v. University Publishing Co., Inc.,46 gave new input to the then
version of the estoppel doctrine. Albert sued the University Publishing Co., Inc.
for his share in the publication of a book under a contract entered into by the
parties, with the corporation being represented in the contract by its president,
Jose M. Aruego. Judgment was rendered in favor of Albert against the
corporation. When judgment was sought to be enforced against the corporation,
it was discovered that it had never been registered with the SEC. The judgment
was then sought to be enforced against Aruego in his personal capacity. Aruego
raised the point that the contract was not a personal contract but one with a
juridical entity. The Court ruled -

. . . Precisely, however, on account of the non-

registration it cannot be considered a corporation, not even a
corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has
therefore no personality separate from Jose M. Aruego; it
cannot be sued independently."47

However, the Court also rejected application of the corporation by

estoppel doctrine to resolve the issue:

46
13 SCRA 84 (1965).
47
Ibid, at pp. 86-87l.
 The corporation-by-estoppel doctrine has not been
invoked. At any rate, the same is inapplicable here. Aruego
represented a non-existent entity and induced not only the
plaintiff but even the court to believe in such a representation.
He signed the contract as “President” of “University Publishing
Co., Inc.,” stating that this was a “corporation duly organized
and existing under the laws of the Philippines,” and obviously
misled plaintiff (Mariano A. Albert) into believing the same.
One who has induced another to act upon his willful
misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his
victim the principle of corporation by estoppel (Salvatierra [sic]
vs. Garlitos, 56 O.G. 3069).48

However, in Albert, the Court discussed how the then version of the
estoppel doctrine could be applied to hold the actors behind the purported
corporation, personally liable for the contract, at the same time that corporate
liability was upheld:

Even with regard to corporations duly organized and

existing under the law, we have in many a case pierced the
veil of corporate fiction to administer the ends of justice. And in
Salvatiera (sic) vs. Garlitos, supra, p. 3073, we ruled: `A
person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts
entered into or for other acts performed as such agent. . . .49

The implication of Albert is clear: even with the then version of the
estoppel doctrine, we could uphold the validity and enforceability of a contract by
upholding the fiction of the contracting corporation's existence, (although in fact it
cannot exist); but nonetheless, under the piercing doctrine, we can pierce the veil
of the recognized corporate party and make the actors liable personally for the
obligations arising from the contract.
Although Albert itself refused to apply the estoppel doctrine, it was such a
thesis that eventually found itself embodied as the corporation by estoppel
doctrine in Section 21. Albert therefore offers us the "philosophical bridge"
between the two doctrines: the first, that a corporation can be deemed to exist
when in fact none may exist, in order to validate a contract; and the second, that
although the veil of corporate fiction is set up, it will be pierced to enforce the
contract, to hold the actors behind such misrepresentation liable for the
obligations arising from such contract.
The remaining issue is why we need to adopt such a crisscrossing
estoppel doctrine at all under Section 21, when Salvatierra's agency doctrine—
that of making the agent of an inexistent principal liable on the contract—already
achieves with clearer logic the same ends sought to be achieved by Section 21?

48
Ibid, at p. 87, emphasis supplied.
49
Ibid, at pp. 87-88.
 The reason is that Salvatierra is sufficient only when there is fraud or
misrepresentation on the part of one of the contracting parties. It has no
application to a situation where both parties to the contract acted in the honest
belief that a contracting corporate entity did exist. In such a case, Salvatierra
cannot apply, since only an agent who knew that his purported principal did not
exist can be held personally liable. In a no-fraud or no-misrepresentation case,
since the "agent" cannot be held as principal to the contract to validate it, there is
an issue as to the validity and enforceability a contract where a contracting party
is missing.
It is in such no-fraud or no-misrepresentation cases that Salvatierra is
clearly inadequate. This is where the present statutory version of the corporation
by estoppel doctrine applies, since its applicability does not require fault or
conscious misrepresentation.

c. Current Status of Doctrine

Section 21 of the Corporation Code now contains the statutory parameters
of the "corporation by estoppel" doctrine, which provides that all persons who
assume to act as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities and damages incurred or
arising as a result thereof, provided, however, that when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any
tort committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
In addition, the section also provides that one who assumes an obligation
to an ostensible corporation as such, cannot resist performance thereof on the
ground that there was in fact no corporation.
Section 21, as a fusion of the strict estoppel doctrine and the Albert
rationale for piercing, amply covers both fraud and no-fraud cases. When fraud
or misrepresentation occurs with the perfection of the contract with a purported
corporation, then section makes the actor personally liable on the contract as a
general partner. On the other hand, when no fraud or misrepresentation occurs,
although it does not make persons acting for the purported corporation liable
personally, it would prevent both sides from raising the non-existence of the
corporation as a means to avoid enforcement of the contract.
In no-fraud or no-misrepresentation cases, the estoppel doctrine under
Section 21 would create a corporation when none exists to uphold the validity
and enforceability of the contract, but ultimately does it not make the persons
acting for the purported corporation liable? If so, how can enforcement be made
effectively on a contract against a corporation that does not exist? On these
issues the special wording of Section 21 seems to provide an answer.
Section 21 uses the word "liable as general partners" instead of "liable
personally," in defining the liability of persons who assume to act as a corporation
knowing it to be without authority to do so. Had Section 21 used the words "liable
personally," then the clear implication would be that persons who act for a
purported corporation without knowing it to be without authority to do so would
not be personally liable for the debts, liabilities and damages incurred or arising
from the contract.
 For example, in People v. Garcia,50 the Court held that an individual
cannot avoid his liabilities to the public as an incorporator of a corporation whose
incorporation was not consummated, when he held himself out to the public as
officer of the corporation and received money from applicants who availed of
their services, thus: “Such individual is estopped from claiming that he is not
liable as corporate officers for illegal recruitment under the corporation by
estoppel doctrine under Section 25 of the Corporation Code which provides that
all persons who assume to act as a corporation knowing it to be without authority
to do so shall be liable as general partners for all the debts, liabilities and
damages incurred or arising as a result thereof.”
By using the term "general partners", the implication under Section 21 is
that one who knows a corporation not to exist would be liable not only with what
he purported to invest in the venture, but he could be held liable to all his
properties, even those not actually invested or promised to be invested in the
purported corporate venture. Therefore, one who acts for a purported corporation
not knowing that it had no authority to do so would be liable, by way of
distinction, only as a limited partner; that is, he would be liable only to the extent
of his investment or promised investment in the purported corporate venture. In a
no-fraud or no-misrepresentation case, the persons acting in good faith for the
purported corporation would still be personally liable, but only to the extent of
their actual or promised investment in the corporate venture. This logically ties in
with the limited liability feature of a purported corporation given legal recognition
in the estoppel doctrine.
Nevertheless, Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.,51
the Supreme Court held that it is not only those who actually participated in the
contract or transactions that can be held as general partner, but also that “the
liability for a contract entered into on behalf of an unincorporated association or
ostensible corporation may lie in a person who may not have directly transacted
on its behalf, but reaped benefits from that contract,” thus:

In such case, all those who benefit from the transaction

made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly
assented to or took advantage of. . . Clearly, under the law on
estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are
held liable as general partners.

This latest ruling of the Supreme Court in Lim is in stark contract to its
rulings in Pioneer Insurance v. Court of Appeals,52 where the liabilities of parties
to a corporate venture was sought to be determined when it was shown that the
corporation intended to be formed was never duly incorporated. The Court held
in that case that:

50
271 SCRA 621, 88 SCAD 898 (1997).
51
317 SCRA 728 (1999).
52
175 SCRA 668 (1989).
 While it has been held that as between themselves the
rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter and
the laws of the state relating thereto and not by the rule
governing partners . . . it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on
business under the corporate name occupy the position of
partners inter se. . . Thus, where persons associate
themselves together under articles to purchase property to
carry on a business, and their organization is so defective as
to come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as
members of the company to the property acquired by the
company will be recognized. . . However, such a relation does
not necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners, as between themselves, when
their purpose is that no partnership shall exist. . ., and it should
be implied only when necessary to do justice between the
parties; thus, one who take no part except to subscribe for
stock in a proposed corporation which is never legally formed
does not become a partner with other subscribers who engage
in the business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the
alleged partnership and contribution. . . A partnership relation
between certain stockholders and other stockholders, who
were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter. . . 53

The resulting doctrine would therefore be that when there was clear
intention to form a partnership venture through a corporate vehicle, which
essentially means that the partners had intended to be active participants in the
business of the corporation, then even those who did not directly participate in
the contract or transaction being sued upon, but benefited therefrom may be held
liable as general partners under the corporation by estoppel doctrine. On the
other hand, when the investors intended only to invest in a corporate venture with
no intention of participating in its corporate affairs, and the corporation was not
formed, no partnership relation is deemed established by the failure to
incorporate, and such investors cannot even be held liable for the contracts and
transaction sued upon even when such contracts and transactions were entered
into by the corporate actors in the name of an ostensible corporation.
It should be borne in mind that Section 21 is merely a "freeze-frame" of
Congress’ appreciation of the doctrine as it stood at the time of the adoption of
the Corporation Code. However, the doctrine itself existed even prior to attaining
statutory definition, and is based on the common law principle of estoppel.
Therefore, despite the language of Section 21, it should be expected that since
the corporation by estoppel doctrine is meant to be used to render justice, it will
continue to evolve and to be developed by judicial and quasi-judicial bodies to

53
Ibid, at pp. 682-683.
make it an optimum means of rendering justice, or achieving equitable solutions
to issues involving the use of the corporate medium.

3. Cases Outside De Facto Corporation

and Corporation by Estoppel Doctrines
As discussed previously, there are instances when the de facto doctrine
cannot be applied because of the lack of one of its requisites. There are also
cases where the corporation by estoppel doctrine cannot be applied, such as
when both parties knew that the corporate party to the contract does not exist.
Obviously, even the old version of the estoppel doctrine in Asia Banking is not
applicable, since there is no element of misrepresentation in such cases. What
then is the applicable doctrine?
A possible solution would be application of the pari delicto doctrine.54 In
such a case, we hark back to Piccio which applied pari delicto where both the de
facto corporation and the estoppel doctrines could not be applied. However, it is
not clear in Piccio how exactly the pari delicto doctrine was applicable; rather, the
ruling expounded more on the lack of cause of action than on the in pari delicto
doctrine.
A further difficulty is that, both Articles 1411 and 1412 of the Civil Code on
pari delicto cover only situations when there is outright "illegality of the cause or
object of the contract." They do not apply in the cases under consideration,
where there is no illegality in the cause or object of the contract, but where one of
the requisites of a valid contract is missing: consent from an existing party. In
addition, the pari delicto doctrine does not square with the intention of the parties
of entering into a contract, which intention is not in itself illegal. If we were to look
at the contractual motivation of the parties who used a non-existent corporation,
evidently they expected to be bound by their contract, and the more appropriate
doctrine to apply would be a derivative of the unenforceable contract doctrine.
Under Article 1403 of the Civil Code, unless ratified, a contract is
unenforceable when it has been "entered into in the name of another person by
one who has been given no authority or legal representation, or who has acted
beyond his powers." Clearly, for the cases under consideration, the actor for the
purported corporate party is without authority from a principal. Nevertheless the
contract can be enforced because of clear "ratification" on the part of the other
party, who entered into the contract knowing fully well that the other party had no
authority to act for the purported corporate party, and with both of them believing
that the contract would be enforceable as between them anyway.
This solution finds rational support in Salvatierra; but unlike Salvatierra
which applies only the representing party doctrine, the proposed solution applies
to both parties to the contract who knew that the corporate party did not exist.
Therefore, to paraphrase Salvatierra,55 since a non-existent organization
has no personality, and is incompetent to act and appropriate for itself the

54
Articles 1411 and 1412 of the Civil Code provide that neither contracting parties may
recover what he has given by virtue of the contract, or demand the performance of the other's
undertaking.
55
103 Phil. 757, at pp. 763-764.
powers and attributes of a corporation; it cannot create agents or confer authority
on another to act in its behalf. In contracts entered into for such purported
corporations, where both parties knew that no such corporation existed, the
actors enter the contract without authority and at their own risk. An elementary
principle in law is then applied: when actors to a contract act or allow others to
act as agents without authority or without a principal, the law considers such
agents as principals, possessed of all the rights and subject to all the liabilities of
a principal. Such agents may be considered by all the actors to have assumed
the privileges and obligations of the purported principal corporation, and become
personally liable for contracts entered into, or for other acts performed, by them
as such agents.

ARTICLES OF INCORPORATION AND BY-LAWS

1. Articles of Incorporation
The articles of incorporation is a basic contract document in Corporate
Law, defining the charter of the corporation. Early on, Government of the P.I. v.
Manila Railroad Co.,56 characterized the charter of the corporation as a contract
between the corporation and the State, and stated that "the state and the grantee
of a charter are equally bound by its provisions."57 It described the charter of the
corporation as a contract between three parties:

(a) Between the State and the corporation;

(b) Between the stockholders and the State; and
(c) Between the corporation and its stockholders.58

The reverence of the law, and of the courts, the binding effect of the
provisions of the articles of incorporation on the parties thereto is such that
amendments thereto can be made by one party only with the consent of the other
parties under the strict provisions of the Corporation Code,59 but also, the
contents thereof as mandated by law60 and are treated with strictness. Thus, the
use of a corporate name other than that provided for in the articles was not
allowed in Red Line Trans. Co. v. Rural Transit Co.,61 which stated that the
incorporators "constitute a body politic and corporate under the name stated in
the certificate" and that a corporation has the power "of succession by its
corporate name" and by "that name alone is it authorized to transact business."62

2. By-Laws
56
52 Phil. 699 (1929).
57
Ibid, at p. 702.
58
Ibid, at p. 703.
59
Sec. 16, Corporation Code.
60
Sec. 14, Corporation Code.
61
60 Phil. 549 (1934).
62
Ibid, at pp. 554-555. Parenthetically, though, the Supreme Court has stated in Republic
Planters Bank v. Court of Appeals, 216 SCRA 738 (1992), that a change in the corporate name
when approved by the SEC does not make a new corporation, and has no effect on the identity of
the corporation, or on its property, rights, or liabilities.
 By-laws, unlike the articles of incorporation, are meant to be an intramural
document, to govern the relationship between and among the members of a
corporate family. As held in Rural Bank of Salinas v. Court of Appeals,63 "[b]y-
laws are intended merely for the protection of the corporation, and prescribe
regulation, not restrictions." Thus, Rural Bank of Salinas held that restrictions
affecting the assignment or transfer of shares cannot validly be provided for in
the corporation's by-laws, and any such provisions in the by-laws are void.64
The rule, therefore, is that although the power of the corporation to adopt
by-laws is an inherent right, by-law provisions cannot contravene the law.65 The
validity or reasonableness of a by-law provision is a question of law, and in such
cases the issue to be resolved would be whether a by-law provision conflicts with
a provision of law, or with the charter of the corporation; or is in the legal sense
unreasonable and therefore unlawful.66
On the basis of their nature and their functions one may therefore
conclude that provisions of the articles of incorporation prevail over by-law
provisions. This seems however to be a sweeping statement, because of the
consequences that such a notion would have on the dealings of corporations with
third parties: since the articles of incorporation define the powers and purposes
of the corporation as it deals with the world, they would therefore bind a third
person dealing with the corporation, whether or not such person was aware of
the provisions of the articles of incorporation.
On the other hand, since by-law provisions are intramural in nature and
are not meant to bind parties outside the corporate family, it stands to reason that
the public dealing with the corporation is not supposed to be interested in the
provisions of the corporation's by-laws, and therefore should not be bound
thereby. This seems to be the principle followed in ultra vires cases decided by
the Supreme Court, especially as ultra vires goes into the power and authority of
corporate officers.
However, the case of Peña v. Court of Appeals,67 seems to negate this
proposition on the non-binding character of by-laws on third parties. In that case,
the Supreme Court ruled that the "by-laws of a corporation are its own private
laws which substantially have the same effect as the laws of the corporation.
They are in effect, written into the charter. In this sense they become part of the
fundamental law of the corporation with which the corporation and its directors
and officers must comply."68
Peña would then elevate by-law provisions to the level of provisions of the
articles of incorporation, and give them the same binding effect over third parties
63
210 SCRA 510 (1992).
64
This doctrine should be understood to mean that restrictions on transfers provided in the
by-laws contrary to law cannot have legal effect. It is possible to provide in the by-laws
procedures on the transfer of shares, provided they are consistent with law. Nava v. Peers
Marketing Corporation, 74 SCRA 65 (1976), has earlier held that a corporation can include in its
by-laws rules, not inconsistent with law, governing the transfer of its shares of stock. See further
discussions on the matter in Chapter 10.
65
Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).
66
Gokongwei v. SEC, 89 SCRA 336, 361-362 (1979).
67
193 SCRA 717 (1991).
68
Ibid, at p. 729, citing 8 FLETCHER CYC. CORP., Perm. Ed., pp. 750 -751.
dealing with the corporation. This conclusion is inevitable from Peña, which was
a suit between corporate "outsiders", with the highest bidder in a public auction of
corporate property on the one hand, and the buyer of the right of redemption of
the corporation on the other.
In that case, the Supreme Court held as void, the board resolution selling
the corporation's right to redeem the property, as well as the subsequent sale
thereof, because the resolution was adopted in a manner contrary to the
procedure outlined in the corporation's by-laws for special meetings.
On the other hand, in Board of Liquidators v. Heirs of Maximo Kalaw,69 the
Court held that it is possible for an express provision of the by-law to be violated
and the board may, in certain corporate actions, bind the corporation in spite of
the fact that it is contrary to the by-law provision. It held that there are two ways
by which corporate actions may come about through the corporation's board of
directors, either the board may empower or authorize the act or contract, or it can
be ratificatory act on the part of the board. As long as there is a corporate
approval through the board of directors, whether implied or express, it is valid to
bind the corporation.
In Yao Ka Sin Trading v. Court of Appeals,70 the Court in nullifying a
cement supply contract entered into by the President and Chairman of the
cement manufacturing company, but without prior board resolution, made
expressly binding on the purchaser the provisions of the company's by-laws
which provided that board resolution is required, although the President may be
the one to execute the resulting contract for the company. However, it should be
noted that in Yao Ka Sin Trading that before the contract could be implemented,
the board did pass a resolution expressly repudiating the same.
Post-Peña decisions of the Supreme Court clearly reiterate the non-
binding effects of by-laws to third parties who deal with the corporation without
specific knowledge of applicable by-law provisions.

a. Non-Binding Effects of By-Laws to “Outsiders”

In China Banking Corp. v. Court of Appeals,71 a pledge of shares of stock
was duly registered with the corporation, which sent out a letter acknowledging
the pledge. Later on, due to non-payment of the secured loan, the shares were
sold at public-auction, with the pledgee being the highest bidder. The corporation
refused to register the notice of sale in its books, and in fact declared the share
as being delinquent for non-payment of monthly dues and proceeded with
delinquency sale, all pursuant to the terms and conditions set forth in the
corporation’s by-laws. In insisting on its prior claim on the share, the corporation
relies upon the provision of its by-laws which provides for the delinquency sale,
and held the provision to be binding upon the pledgee.
The Court in China Banking held that in order that by-law provisions can
be binding upon third parties, such third-parties must have acquired knowledge
of the pertinent by-laws at the time the transaction or agreement between said

69
20 SCRA 987 (1967).
70
209 SCRA 763, 81 SCAD 184 (1992).
71
270 SCRA 503, 85 SCAD 846 (1997).
third party and the shareholders was entered into, in this case, at the time the
pledge agreement was executed. In that case, the Court held that the corporation
could have easily informed pledgee of its by-laws when it sent notice formally
recognizing pledgee of its shares registered in the name of a stockholder of
record. The corporation’s belated notice of said by-laws at the time of foreclosure
did not suffice to overturn the rights of the pledgee. The Court reiterated the
principle on the binding effects of by-laws as to third parties, thus:

By-laws signify the rules and regulations or private laws

enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and
among themselves in their relation to it. In other words, by-
laws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and
that of the individuals composing it and having the directions,
management and control of its affairs, in whole or in part, in
the management and control of its affairs and activities (9
Fletcher 4166, 1982 ed.)
The purpose of a by-law is to regulate the conduct and
define the duties of the members towards the corporation and
among themselves. They are self-imposed and, although
adopted pursuant to statutory authority, have no status as
public law. (Ibid.)
Therefore, it is the generally accepted rule that third
persons are not bound by by-laws, except when they have
knowledge of the provisions either actually or constructively.

In PMI Colleges v. NLRC,72 the corporation sought to avoid liability under

a contract of service which was not signed by the Chairman of the Board as
clearly mandated under the corporation’s by-laws. The Court held that such
contract cannot be held as invalid just because the signatory thereon was not the
Chairman of the Board which allegedly violated the corporation’s by-laws, “[s]ince
by-laws operate merely as internal rules among the stockholders, they cannot
affect or prejudice third persons who deal with the corporation, unless they have
knowledge of the same.”
Be that as it may, the "limiting" effect of provisions of the articles of
incorporation and by-laws on corporate contracts with the public, has been
tempered by the Supreme Court by the manner is has applied the ultra vires
doctrine.

ULTRA VIRES DOCTRINE

Section 45 of the Corporation Code, embodies in statutory form the ultra
vires doctrine as it provides that no corporation "shall possess or exercise any
corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of
72
277 SCRA 462 (1997).
the powers so conferred." During the early history of Philippine Corporate Law, it
was the accepted notion that any contract made or by-law provision adopted by a
corporation in contravention of law were ultra vires and void.73 The ultra vires
doctrine is based on two corporate principles.
Firstly, the ultra vires doctrine stems in part from the principle that a
corporation is a creature of the law, and has only such powers and privileges as
are granted by the State. Since the corporation is considered a legal creature,
the doctrine finds it hard to accommodate the notion that a corporation can be
more than just an entity of limited capacities and powers, and could hold powers
or privileges not emanating from the State. In other words, the ultra vires doctrine
is really a product of the theory of concession, which is expressed in the
Corporation Code's antediluvian definition of a corporation in Section 2. One can
see why much of the vigor of the ultra vires doctrine has since dissipated.
Secondly, the ultra vires doctrine upholds the duty of trust and obedience
owed by the corporation's directors and officers to the stockholders or members.
Such duty of obedience dictates that the corporation engage only in transactions
to which the stockholders and members bind themselves, by way of the
provisions of the purpose clause of the articles of incorporation. In addition, the
duties of corporate directors and officers must necessarily include an obligation
not to enter into transactions which violate the law.
The ultra vires doctrine may be viewed as the creature of an earlier time,
when society was unfamiliar with the corporate vehicle as a means of doing
business. Suspicious of the mischief such a medium made possible, society
decided it was prudent that it be controlled and regulated as much as possible.
Today the corporate entity has become commonplace, and doctrines and
mechanisms abound by which the State and society temper the corporation's
self-serving and profit-motivated nature to promote social and business welfare.
Currently, the attitude is to give business much more freedom to deal with the
world through the corporate medium.
As jurisprudential history has shown, the strict application of the principle
of ultra vires has undermined corporate contracts and commercial transactions.
As a consequence, courts have had the tendency to tone down the application of
the ultra vires doctrine when it begins to undermine public trust and confidence in
corporate contracts.

1. Types of Ultra-Vires Cases

There are three (3) types of ultra vires acts, namely:
(a) Acts done beyond the powers of the corporation as provided
for in the law or its articles of incorporation;
(b) Acts or contracts entered into in behalf of the corporation by
persons who have no corporate authority; and
(c) Acts or contracts which are per se illegal as being contrary to
law;

73
Baretto v. La Previsora Filipina, 57 Phil. 649 (1932).
 2. Test to Determine Ultra Vires of the First Type
Montelibano v. Bacolod-Murcia Milling Co., Inc.,74 clarified the extent of the
application of the ultra vires doctrine. At issue was the validity and binding effect
on the corporation of an amended milling contract that granted favorable terms to
planters. Although the amended milling contracts were approved by the board of
directors, it was interposed for the corporation that the resolution was null and
void ab initio, being in effect a donation that was ultra vires, beyond the powers
of the corporate directors to adopt. The Supreme Court upheld the authority of
the board acting for the corporation to modify the terms of the amended milling
contract for the purpose of making its terms more acceptable to the other
contracting parties. It gave the formula for determining the applicability of the
ultra vires doctrine:

It is a question, therefore, in each case of the logical

relation of the act to the corporate purpose expressed in the
charter. If that act is one which is lawful in itself, and not
otherwise prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the promotion of
those ends, in a substantial, and not in a remote and fanciful
sense, it may fairly be considered within charter powers. The
test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly
incident to the express powers and reasonably necessary to
their exercise. If so, the corporation has the power to do it;
otherwise, not.75

The test uses the rather stringent terms "direct and immediate" only with
reference to the business of the corporation; whereas, it uses the rather liberal
terms of "fairly incident" and "reasonably necessary" with reference to powers of
the corporation.
When the business of a corporation is used as the reference point, much
latitude is given to the corporation to enter into various contracts as long as they
have a logical relation to the pursuit of such business. Thus, in one early case,76
the Supreme Court upheld a purpose clause in the articles of incorporation which
allowed the corporation to engage in what were rather broadly worded activity as
"mercantile purposes." The Court construed that as allowing the corporation to
"engage in such incidental business as may be necessary and advisable to give
effect to, and aid in, the successful operation and conduct of the principal
business."77
On the other hand, when the purpose clause of a corporation's articles of
incorporation has unwittingly used limiting words, such as describing its business
as "transportation by water," the Court will hold the corporation to such limited
business and will refuse to construe the same to allow the corporation to engage

74
5 SCRA 36 (1962).
75
Ibid, at p. 42 quoting 6 FLETCHER CYC. CORP. Rev. Ed. 1950, pp 266-268. Emphasis
supplied.
76
Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 (1919).
77
Ibid, at p. 544.
in the land transportation business.78 In such instances, the corporation has no
one but itself (and perhaps its legal counsel who prepared the articles of
incorporation) to blame for tying its own hands.
Another example would be the sale of land owned by the corporation. In
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,79 the Court
held that a corporation whose primary purpose is to market, distribute, export and
import merchandise, the sale of land is not within the actual or apparent authority
of the corporation acting through its officers, much less when acting through the
treasurer. The Court also pointed out that Articles 1874 and 1878 of the Civil
Code require that when land is sold through an agent, the agent’s authority must
be in writing, otherwise the sale is void.
Another example would be the obtaining of loans by the corporation.
China Banking Corp. v. Court of Appeals,80 held that the power to borrow money
is one of those cases where even a special power of attorney is required under
Art. 1878 of the Civil Code, and therefore there is invariably a need of an
enabling act of the corporation to be approved by its board of directors. The
Court held that the argument that the obtaining of loan was in accordance with
the ordinary course of business usages and practices of the corporation was
devoid of merit because the prevailing practice in the corporation was to explicitly
authorize an officer to contract loans in behalf of the corporation.

a. Policies Supervening in Ultra Vires Issues

As the Montelibano test showed, the attitude of courts towards corporate
acts and contracts which are not per se illegal or prohibited, is quite liberal. This
is because of two public policies, one in the realm of Contract Law, the other in
the realm of Corporate Law.
Firstly, if contracts of corporations could be set aside by the mere showing
that they do not fall within the language of the purpose clause of the articles of
incorporation, then the public dealing with corporations would be wary of entering
into contracts with corporate entities. If they must deal at all with corporate
entities, they would be forced to engage upon costly and time-consuming
verification and contractual safeguards (such as making the officers and
stockholders jointly and severally liable on the contract) to ensure that they would
at least get relief in case the issue of ultra vires comes in.
More importantly, setting aside the corporate contract on the ground that
the corporation has no express authority, would contravene the expectations of
both parties, who entered into the contract expecting to be bound. As the Court
has aptly stated in a case, "[t]he defense of ultra vires rests on violation of trust or
duty toward stockholders, and should not be entertained where its allowance will
do greater wrong to innocent parties dealing with corporation."81
Secondly, the trend has been to move away from holding corporate acts
and contracts as ultra vires, because of the philosophy underlying the "business

78
Luneta Motor Company v. A.D. Santos, Inc., 5 SCRA 809 (1962).
79
296 SCRA 631, 645, 99 SCAD 281 (1998).
80
270 SCRA 503, 81 SCAD 184 (1997).
81
Republic v. Acoje Mining Co., Inc., 3 SCRA 361 (1963).
judgment rule." The business judgment rule states that courts will not sit in
judgment to substitute their business judgment for that of the directors; and that
as much as possible, directors, in the exercise of their business judgment, should
be given leeway to adopt corporate policies and to engage in transactions as
they deem best for the corporation, and the same cannot be claimed to be
beyond their powers or ultra vires.
Montelibano itself said that "[a]s the resolution in question was passed in
good faith by the board of directors, it is valid and binding, and whether or not it
will cause losses or decrease the profits of the central, the court has no authority
to review them."82 The Court added that "[i]t is a well-known rule of law that
questions of policy or management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to
substitute its judgment [for that] 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."83
Furthermore, the demands of business are such that it is impossible to
anticipate all possible contingencies at the time the articles of incorporation are
drawn. In the face of unreasonably strict application of ultra vires principles, there
would be a need for corporations to continually amend or revise charters simply
to keep abreast with the various aspects of the very businesses they were meant
to engage in.

b. Distinguishing From Acts Which Are Per Se Illegal

Montelibano indicates clearly that there is a difference in treatment
between an ultra vires act which is per se illegal, and one that is not. Obviously,
an act that is per se illegal or prohibited by law cannot be given much latitude
and is generally void. On the other hand, an act or contract of a corporation
which is not per se illegal or prohibited by law is subjected to a test to determine
whether it is intra vires or ultra vires.
The distinctions between acts and contracts which are illegal per se, and
those which are not, as to their legal effects, have been recognized in Pirovano v.
De la Rama Steamship Co.84 In that case the Supreme Court held that "illegal
acts" of a corporation contemplate the doing of an act which is contrary to law,
morals, or public order, or contravenes some rules of public policy or public duty,
and are, like similar transactions between individuals, void. Such acts or
contracts cannot serve as basis of a court action, nor acquire validity by
performance, ratification, or estoppel. On the other hand, ultra vires acts or those
which are not illegal and void ab initio but are within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable
when ratified by stockholders.
Pirovano held that the ratification by stockholders of an ultra vires act
which is not illegal, cures the infirmity of the corporate act, and makes it perfectly
valid and enforceable, specially so if it is not merely executory but executed and
consummated, and no creditors are prejudiced.
82
Ibid, at p. 42.
83
Ibid, quoting from 2 FLETCHER ON CORPORATIONS, p. 390.
84
96 Phil. 335 (1954).
 The latitude with which the courts tend to treat as intra vires, corporate
acts and contracts that do not squarely fall within the wordings of the purpose
clause of the corporate charter, has permeated Supreme Court decisions down
through the years. Thus, the Court has held that when a corporation by its
charter has the power to issue bonds, then it is deemed also to have the implied
power to guarantee them in order to place them upon the market under better,
more advantageous conditions, and thereby secure the profit derived from their
sale;85 it has construed the word "deal" in the charter to be broad enough to
include any manner of disposition, including donation of money not immediately
required by the corporation;86 it has validated a board resolution making the
corporation a guarantor for its designated postmaster for funds received by the
latter to service the mails of corporate employees;87 it has held that the charter
authority to write-off loans and advances includes the power to waive penalty
charges on past due loans, which are of a lesser category.88
Significantly, the Corporation Code in Section 36, expressly grants certain
powers to corporations. These powers were previously the subject of great
controversy, and much literature have been written on the subject powers, such
as the power of the corporation to make reasonable donations,89 and to establish
pension, retirement and other plans for the benefit of directors, trustees, officers
and employees.

c. Doctrine of Estoppel or Ratification

Even when a particular corporate transaction does not pass the lenient
Montelibano test and is held ultra vires, the transaction would nevertheless be
held binding on the corporation under the estoppel doctrine. Carlos v. Mindoro
Sugar Co.,90 laid down the following presumption:

When a contract is not on its face necessarily beyond the

scope of the power of the corporation by which it was made, it
will, in the absence of proof to the contrary, be presumed to be
valid. Corporations are presumed to contract within their
powers. The doctrine of ultra vires, when invoked for or
against a corporation, should not be allowed to prevail where it
would defeat the ends of justice or work a legal wrong.91

Carlos explained the law's attitude towards the ultra vires doctrine: "The
defense is by some courts regarded as an ungracious and odious one, to be
sustained only where the most persuasive considerations of public policy are
involved, and there are numerous decisions and dicta to the effect that the plea

85
Carlos v. Mindoro Sugar Co., 57 Phil. 343 (1932).
86
Pirovano v. De la Rama Steamship Co., 96 Phil. 335 (1954).
87
Republic v. Acoje Mining Co., Inc., 3 SCRA 361 (1963).
88
Land Bank of the Philippines v. Commission on Audit, 190 SCRA 154 (1990).
89
See Pirovano v. De la Rama Steamship Co., 96 Phil. 335 (1954), where the Supreme
Court had to go through several hair-splitting distinctions to validate a donation given by the
corporation to the minor children of its late president who was to a large extent responsible for the
rapid and very successful development and expansion of the activities of the corporation.
90
57 Phil. 343 (1932).
91
Ibid, at p. 353, quoting from Coleman v. Hotel de France Co., 29 Phil. 323 (1915).
should not as a general rule prevail whether interposed for or against the
corporation, where it will not advance justice but on the contrary will accomplish a
legal wrong."92
Carlos pointed out that the great weight of authority is to the effect that,
where a transaction is merely ultra vires and not malum in se or malum
prohibitum, although it may be made a basis for forfeiture of the corporate charter
or dissolution of the corporation, such transaction is, if performed by one party,
not void as between the parties, and an action may be brought directly upon the
transaction and relief had according to its terms.93
Therefore, even in the case of ultra vires acts which are not per se illegal,
a corporation cannot be heard to complain that it is not liable for the acts of its
board, because of estoppel by representation. In Republic v. Acoje Mining Co.,
Inc.,94 the Court, in making a distinction between ultra vires acts and illegal acts,
held:

. . . The term ultra vires should be distinguished from an

illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the
latter is void and cannot be validated. It being merely voidable,
an ultra vires act can be enforced or validated if there are
equitable grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel.95

People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals,96 held

that even when the contract entered into in behalf of the corporation is outside
the usual powers of the corporate officer, the corporation’s ratification of the
contract and acceptance of the benefits arising therefrom have made such
contract binding upon the corporation; and that the enforceability of contracts
made under Article 1403(2) of the Civil Code, where there has been no authority
by the principal, is ratified “by acceptance of benefits under them” under Article
1405 of the Civil Code.
The ratification that would bind the corporation would have to come from the
board of directors or a properly authorized representative. Thus, in Aguenza v.
Metropolitan Bank and Trust Co.,97 the Supreme Court held that when the
counsel representing the corporation in a collection suit admits on behalf of the
corporation that the latter admitted culpability for personal loans obtained by its
corporate officers, such admission cannot be given legal effect to the detriment of
the corporation, since the admission made in the answer by the counsel for the
corporation was “without any enabling act or attendant ratification of corporate
act,” as would authorize or even ratify such admission. In the absence of such
ratification or authority, such admission does not bind the corporation. The Court
further held:
92
Ibid, at p. 352.
93
Ibid, at p. 352, citing 14-A CORPUS JURIS, pp. 319-320.
94
3 SCRA 361 (1963).
95
Ibid, at p. 365.
96
297 SCRA 170, 185, 99 SCAD 482 (1998).
97
271 SCRA 1, 81 SCAD 397 (1997).
 Also, the letter issued by the corporate officers who
obtained the loan “as indicating the corporate liability of the
corporation,” cannot also serve to make the corporation liable.
The documents and admissions cannot have the effect of a
ratification of an unauthorized act. Ratification can never be
made on the part of the corporation by the same persons who
wrongfully assume the power to make the contract, but the
ratification must be by the officers as governing body having
authority to make such contract.

3. Illegal Acts
Curiously enough, even when confronted with what was obviously an
illegal act or a contract contrary to law, the Supreme Court has tended to uphold
the result of the contract with respect to the contracting parties, which contract
should have been void ab initio.
In Harden v. Benguet Consolidated Mining Co.,98 the mining company,
Benguet Consolidated Mining Company, in violation of the express prohibitions of
the then Corporation Law, held shares of stock in another mining corporation, the
Balatoc Mining Company. The shareholders of the Balatoc Mining Company filed
an action against Benguet Mining Company to annul the certificates of stock
issued in favor of the latter, and to recover money collected by the latter from the
arrangements.
In upholding the dismissal of the complaint by the trial court, the Court
noted that, although the contract between the two mining companies was illegal
for contravening the Corporation Law, the statutory provision in question was
adopted by the legislature with the intention that public policy should be
controlling in the granting of mining rights. The Court said that the violation of the
prohibition is of such a nature that it can be proceeded upon only by way of a
criminal prosecution, or by action of quo warranto, which can be maintained only
the State.
The Court observed that, insofar are the parties were concerned, no civil
wrong had been committed between them, and if public wrong had been
committed, then the directors of Balatoc Mining Company and the plaintiff
Harden himself, were the active inducers of the commission of that wrong. But
more importantly, the Court observed:

. . . The contract, supposing it to have been unlawful in

fact, has been performed on both sides, by the building of the
Balatoc plant by the Benguet Company and the delivery to the
latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has
been done. Nobody would suggest the demolition of the mill.
The Balatoc Company is secure in the possession of that
improvement, and talk about putting the parties in statu quo
ante by restoring the consideration with interest, while the
Balatoc Company remains in possession of what is obtained
98
58 Phil. 140 (1933).
 by the use of that money, does not quite meet the case. Also,
to mulct the Benguet Company in many millions of dollars in
favor of individuals who have not the slightest equitable right to
that money is a proposition to which no court can give a ready
assent.99

The lesson from Harden therefore is that, even where corporate contracts
are illegal per se, when only public or government policy is at stake and no
private wrong is committed, the courts will leave the parties as they are, in
accordance with their original contractual expectations.

4. Acts or Contracts in Behalf of

Corporation by Unauthorized Persons

a. Premise of Corporate Power

As a general rule, only the acts of corporate officers within the scope of
their authority are binding on the corporation; but when these officers exceed
their authority, their actions cannot bind the corporation, unless it has ratified
such acts or is estopped from disclaiming them.100 The officer acting without
proper authority cannot by his act be the basis upon which to bind the
corporation of ratification, nor can third-parties rely upon such unauthorized act to
bind the corporation to ratification.101
The primary rule therefore under the corporate set-up is that in the
absence of an authority from the board of directors, no person, not even the
officers of the corporation, can validly bind the corporation.102
In one case, the Court has said that a corporation is a juridical person,
separate and distinct from its stockholders and members, having powers,
attributes and properties expressly authorized by law or incident to its existence;
being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies
and is responsible for the efficiency of management, as provided in Section 23 of
the Corporation Code.103
While a corporation may appoint agents to enter into a contract in its
behalf, the agent should not exceed his authority.104 Consequently, persons who
deal with corporate agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the corporation liable.105
In another case, the Court held that indubitably, a corporation may act
only through its board of directors or, when authorized either by its by-laws or by
99
Ibid, at pp. 149-150.
100
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645,
99 SCAD 281 (1998).
101
Ibid.
102
Premium Marble Resources v. Court of Appeals, 264 SCRA 11, 76 SCAD 9 (1996).
103
People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 297 SCRA 170, 182,
99 SCAD 482 (1998).
104
Assets Privatization Trust v. Court of Appeals, 300 SCRA 579, 101 SCAD 1028 (1998).
105
Traders Royal Bank v. Court of Appeals, 269 SCRA 601, 80 SCAD 12 (1997); also Art.
1883, Civil Code.
its board resolution, through its officers or agents in the normal course of
business.106
When it comes therefore to other corporate officers who purport to act in
favor of the corporation, their dealings with third persons may be actual or
apparent, for which the corporation as the principal is liable for the obligations
contracted by its agent. Nevertheless, the agent's apparent representation yields
to the principal's true representation and the contract is considered as entered
into between the principal and the third person.107

b. Doctrine of Apparent Authority

The doctrine of apparent authority has evolved in consideration of the third
type of ultra vires acts, but which has had an uneven development.
In seems settled now from Supreme Court rulings that if a corporation
knowingly permits one of its officers, or any other agent, to act within the scope
of an apparent authority, it holds him out to the public possessing the power to so
do those acts; and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent’s
authority.108
The Court has also held that apparent authority is derived not merely from
practice, since its existence may be ascertained through: (a) the general manner
in which the corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with which it clothes
him; or (b) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers.109 Necessarily, the application of the doctrine of apparent
authority requires presentation of evidence of similar acts executed either in its
favor or in favor of other parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer with the
power to bind the corporation.110
Earlier, Ramirez v. Orientalist Co.,111 adopted the principle that when an
action is brought against a corporation upon an alleged contract, if the
corporation desires to set up the defense that the contract was executed by one
not authorized as its agent, it must plead such fact.112 The Court held -

A corporation can not avail itself of the defense that it

had no power to enter into the obligation to enforce which the
suit is brought, unless it pleads that defense. This principle

106
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645,
99 SCAD 281, 294 (1998).
107
First Philippine International Bank v. Court of Appeals, 252 SCRA 259, 67 SCAD 196
(1996).
108
People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 297 SCRA 170, 184-
185, 99 SCAD 482, 497-498 (1998).
109
People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 297 SCRA 170, 183-
184, 99 SCAD 482 (1998).
110
Ibid.
111
38 Phil. 634 (1918).
112
Ibid, at p. 644.
 applies equally where the defendant intends to challenge the
power of its officer or agent to execute in its behalf the contract
upon which the action is brought and where it intends to
defend on the ground of a total want of power in the
corporation to make such a contract.113

In Ramirez the corporation was sought to be held liable on film distribution

contracts entered into in its name by its director-treasurer. Although the
corporation did not deny under oath the contracts pleaded in the complaint, it
alleged that its officer did not have authority to sign the contracts for the
corporation. In brushing aside such a defense, the Court discussed the rationale
for the doctrine of apparent authority granted to corporate officers sufficient to
bind the corporation that "[i]n dealing with corporations the public at large is
bound to rely to a large extent upon outward appearances. If a man is found
acting for a corporation with the external indicia of authority, any person, not
having notice of want of authority, may usually rely upon those appearances; and
if it be found that the directors had permitted the agent to exercise that authority
and thereby held him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the benefit supposed to have been
conferred by it, the corporation will be bound, notwithstanding the actual authority
may never have been granted."114
Ramirez further held that the public is not supposed nor required to know
the transactions which happen around the table where the corporate board of
directors or the stockholders are from time to time convoked, and that whether a
particular officer actually possesses the authority which he assumes to exercise
is frequently known to very few, and the proof usually is not readily accessible to
the stranger who deals with the corporation on the faith of the ostensible
authority exercised by some of the corporate officers.115 It is therefore
reasonable, in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies his authority, to state
such defense in its answer, since by that means the plaintiff is apprised of the
fact that the agent's authority is contested; and he is given an opportunity to
adduce evidence showing either that the authority existed or that the contract
was ratified and approved.116
In Philippine National Bank v. Court of Appeals,117 a bank was held bound
by the acts of its branch manager, since the Court considered well-settled the
rule that if a private corporation intentionally or negligently clothes its officers or
agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real as to innocent third parties
dealing in good faith with such officers or agents.118

113
Ibid, at p. 644 quoting THOMPSON ON CORPORATIONS, 1st ed., Vol. 6, Sec. 7631.
114
Ibid, at pp. 645-646.
115
Ibid.
116
Ibid.
117
94 SCRA 357 (1979).
118
The principle was reiterated in The authority of a corporate officer in dealing with third
persons may be actual or apparent. . . the principal is liable for the obligations contracted by the
agent. The agent's apparent representation yields to the principal's true representation and the
contract is considered as entered into between the principal and the third person First Philippine
 In Francisco v. Government Service Insurance System119 at issue was the
binding effect of an acceptance telegram sent by the general manager of the
corporation, which contained provisions contrary to the terms approved by the
board of directors, covering the terms of settlement of an obligation. In upholding
the binding effect of the acceptance telegram on the corporation the Court held:

. . . Assuming this to be true, how was appellee to know

it? Corporate transactions would speedily come to a standstill
were every person dealing with a corporation held duty-bound
to disbelieve every act of its responsible officer, no matter how
regular they should appear on their faces . . .120

Francisco held that if a corporation intentionally or negligently clothes its

officers or agents with apparent power to perform acts for it, the corporation will
be estopped to deny that such apparent authority is real, as to innocent third
persons dealing in good faith with such officers or agents.121 Since a corporation
cannot see, or know, anything except through its officers, then knowledge of
facts acquired or possessed by an officer or agent of a corporation in the course
of his employment, and in relation to matters within the scope of his authority, is
notice to the corporation, whether he communicates such knowledge or not.122
Francisco also explained why the public generally cannot be required to
look beyond the officers acting for a corporation:

A very large part of the business of the country is carried

on by corporations. It certainly is not the practice of persons
dealing with officers or agents who assume to act for such
entities to insist on being shown the resolution of the board of
directors authorizing the particular officer or agent to transact
the particular business which he assumes to conduct. A
person who knows that the officer or agent of the corporation
habitually transacts certain kinds of business for such
corporation under circumstances which necessarily shows
knowledge on the part of those charged with conduct of the
corporate business assumes, as he has the right to assume,
that such agent or officer is acting within the scope of his
authority.123

International Bank v. Court of Appeals, 252 SCRA 259, 67 SCAD 196 (1996), where the Supreme
Court held that "[t]he authority of a corporate officer in dealing with third persons may be actual or
apparent. . . the principal is liable for the obligations contracted by the agent. The agent's
apparent representation yields to the principal's true representation and the contract is
considered as entered into between the principal and the third person."
119
7 SCRA 577 (1963).
120
Ibid, at p. 583.
121
Ibid, at p. 584.
122
Ibid, at pp. 584-585 quoting BALLANTINE, LAW ON CORPORATIONS, Sec. 112.
123
Ibid, at pp. 583-584 quoting from Curtis Land & Loan Co. v. Interior Land Co., 137 Wis.
341, 118 N.W. 853, 129 Am. St.Rep. 1068; as cited in 2 FLETCHER'S ENCYCLOPEDIA, PRIV. CORP.,
Perm. Ed., at p. 263,
 In Areola v. Court of Appeals,124 the corporate insurer was held liable for
damages for cancellation the insurance policy of the insured for alleged failure to
pay the premium, when in fact the premium had been paid to the branch
manager who failed to remit them to the head office. The Court held that a
corporation acts solely through its employees, and the latter's acts are
considered as its own for which it can be held to account.
In People’s Aircargo v. Court of Appeals,125 the Court held the corporation
liable to a second contract of service that was entered into by the President
without prior board authorization, when the facts showed that a first contract of
service was paid by the corporation when it was entered into by the President
also without prior board authorization. The Court held that when the first contract
was consummated and paid with full knowledge of the board of directors, it
clothed the President with power to bind the corporation and consequently the
contractor cannot be faulted for believing that President’s conformity to the
second contract was also binding on the Company. The Court also held that by
having accepted the benefits from the services of contractor for the second
contract, the corporation is estopped from denying the enforceability of the
second contract.
The Court in People’s Aircargo also recognized the peculiar position of the
President with respect to corporate operations, that inasmuch as a the President
is often given general supervision and control over corporate operations, the
strict rule that said officer has no inherent power to act for the corporation is
slowly giving way to the realization that such officer has certain limited powers in
transactions of the usual and ordinary business of the corporation, thus:

In the absence of a charter or bylaw provision to the

contrary, the president is presumed to have the authority to act
within the domain of the general objectives of the corporation’s
business and within the scope of his or her usual duties.
Hence, it has been ruled in other jurisdiction that the president
of the corporation possesses the power to enter into a contract
for the corporation, when the “conduct on the part of both the
president and the corporation [shows] that he had been in the
habit of acting in similar matters on behalf of the company and
that the company had authorized him so to act and had
recognized, approved and ratified his former and similar
actions.” Furthermore, a party dealing with the president of a
corporation is entitled to assume that he has the authority to
enter, on behalf of the corporation, into contracts that are
within the scope of the powers of said corporation and that do
not violate any statute or rule on public policy.126

c. “Timely-Repudiation” Ruling

124
236 SCRA 643, 55 SCAD 478 (1994).
125
297 SCRA 170, 99 SCAD 478 (1998).
126
Ibid, at p. 186.
 On the other hand, the recent case of Yao Ka Sin Trading v. Court of
Appeals127 presents what seems to be a reversal of the Ramirez doctrine. Yao Ka
Sin invalidated a contract to supply cement entered into by a cement company by
Mr. Maglana, its President and Chairman of the board of directors. Aside from
the fact that the by-laws of the cement company did not give the President the
authority to enter into contracts without prior board approval, the Court held that
application of the doctrine of apparent authority is the burden of the outsider
dealing with a corporation to show: "It was incumbent upon the petitioner to prove
that indeed the private respondent had clothed Mr. Maglana with apparent power
to executive Exhibit `A' or any similar contract. This could have been easily done
by evidence of similar acts executed either in its favor or in favor of other parties.
Petitioner miserably failed to do that." Upon the other hand, private respondent's
evidence overwhelmingly shows that no contract can be signed by the president
without first being approved by the Board of Directors."128
More importantly, in Yao Ka Sin, within a number of days (23 days) from
the execution of the President of the unauthorized contract, the board of directors
of the cement company passed a resolution repudiating the contract and given
due notice thereof to the other party when the contract was still as the executory
stage. In other words, there was no omission or misconduct on the part of the
board in Yao Ka Sin for the doctrine of estoppel or ratification to come in.
Although one would first get the impression that Yao Ka Sin may have
reversed the Ramirez doctrine, by shifting the burden in the doctrine of apparent
authority from the corporation to the other contracting party, but taken in its
entirety, Yao Ka Sin did not reverse the Ramirez doctrine, but rather completed
the cycle.
Yao Ka Sin did not repudiate the Ramirez doctrine that if the corporation
desires to set up the defense that the contract was executed by one not
authorized as its agent, it must plead and prove such fact; so that the burden is
initially on the shoulders of the corporation. However, the facts as they reach the
Supreme Court in Yao Ka Sin shows that indeed the cement company had
already discharged such burden by showing by clear evidence that its President
was not so authorized. Yao Ka Sin therefore holds, that once the corporation has
discharged its obligation under the Ramirez doctrine that acting officer was not in
fact authorized, then the burden of proof now shifts to the contracting party to
show that indeed by previous acts and actuations the acting officer had been
clothed by the corporation with apparent authority for the public to have taken
such authority at face value.
Vicente v. Geraldez,129 declared non-binding on the corporation, a
compromise agreement entered into by counsel without a prior special power of
attorney having been granted by the corporation. The Supreme Court refused to
apply the doctrine of estoppel or ratification even when it was shown that the
administrative manager had signed the compromise or had pursued an act
pursuant to the compromise agreement under the ruling that, it is only the board
of directors of the corporation that has the power to ratify a previously

127
209 SCRA 763 (1992).
128
Ibid, at p. 784.
129
52 SCRA 210 (1973).
unauthorized corporate act. The Court held that "ratification can never be made
`on the part of the corporation by the same persons who wrongfully assume the
power to make the contract, but the ratification must be by the officer or
governing body having authority to make such contract and, as we have seen,
must be with full knowledge.'"130
Vicente is not really a radical departure since it involved power to
compromise in suits, which is governed by particular provisions of the Rules of
Court, and therefore, it cannot be expected that proceedings on compromise,
especially involving a corporate party, would be pursued on the basis of apparent
authority. The Court held "the Rules require for attorneys to compromise the
litigation of their clients, a special authority. And while the same does not state
that the special authority be in writing the court has every reason to expect that, if
not in writing, the same be duly established by evidence other than the self-
serving assertion of counsel himself that such authority was verbally given
him."131
Crisologo-Jose v. Court of Appeals,132 held that accommodation contracts
on negotiable instruments executed in behalf of the corporation would not bind
the corporation without previous board authorization.133 The issuance or
indorsement of negotiable instruments in the name of a corporation without
consideration and for the accommodation of another was deemed to be ultra
vires, and the person who takes the instrument with knowledge of the
accommodation nature thereof cannot recover against a corporation which is
only an accommodation party.134
Crisologo-Jose stands as one of the few contemporary cases where the
Court has upheld the defense of ultra vires as validly exempting liability on the
part of the corporation for a contract entered into its name by an unauthorized
officer. In that case, the payee of the check issued by the corporation as an
accommodation party, was fully aware that the corporation was not receiving any
benefit from the transaction and that the issuance of the check was not for the
benefit of the corporation, and was therefore fully aware that the corporate
signatories to the check had not been duly authorized by the board of directors.
Therefore, the principles of ratification by acceptance of benefits or the doctrine
of apparent authority, nor the principle of estoppel espoused by the Court to
undermine the defense of ultra vires were inapplicable to favor the payee as
against the corporation since in his case estoppel could not apply being fully
aware of the lack of authority. It is unfortunate that Crisologo-Jose did not clearly
point out in this clear manner the reason why the ultra vires doctrine prevailed in
that instance when normally it is brushed aside by the courts.
Mendezona v. Phil. Sugar Estates Dev. Co.,135 had long before ruled that
the declarations of an individual director relating to the affairs of the corporation,
but not made in the course of, or connected with, the performance of the
130
Ibid, at p. 229, quoting from 2 FLETCHER, CYCLOPEDIA CORPORATIONS, 1067-1069, (1969
Rev. Volume).
131
Ibid, at p. 225.
132
177 SCRA 594 (1989)
133
Ibid, citing Oppenheim v. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S. 309.
134
Ibid, at p. 599, citing 11 C.J.S. 309, 14A C.J. 732.
135
41 Phil. 475, 491-492 (1921), citing 2 THOMPSON, par. 1073 and 1408.
authorized duties of such director, are held not biding on the corporation. False
statements made by a single director, for the purpose of defrauding the creditors
of the corporation, including the corporation itself, could not affect or bind it. The
general rule is that officers of corporations acting within the scope of their
authority may bind the corporation in the same way and to the same extent as if
they were the agents of natural persons, unless the charter or by-laws, otherwise
provide. They cannot, in general, bind the corporation by acts in excess of the
authority with which they are clothed unless such acts are ratified.
From the foregoing, it would seen that in the realm of contract
enforcement, the ultra vires doctrine has found very little application. It has
become more of a technical defense raised by or against the corporation, which
courts have readily brushed aside. However, the ultra vires doctrine still stands
as a principle of Corporate Law, and it reigns supreme in a purely intramural
corporate setting. In cases where the protagonists remain within the corporate
setting, or when the contract with an outsider is still executory as not to have
caused yet damage to the latter, the doctrine has been applied by courts with
vigor, for indeed it goes into the root of corporate relationship.

d. De Facto Corporate Officers

In a opinion,136 the SEC has applied the doctrine of de facto officers in the
Law on Public Officers to corporate officers. The SEC opined that the principle on
de facto officers may be applied insofar as third parties dealing with the
corporations.137 It defined a corporate officer as a de facto officer where he acts
as such, under color of an election or appointment, but fails being a de jure
officer by some irregularity or failure to qualify as required by law.138
In applying the doctrine to purported corporate officers, the SEC held:
"The doctrine of the validity of the acts of officers de facto rest on public policy
and justice. The official dealings of directors de facto with third persons are
sustained as rightful and valid on ground of continuous acquiescence by the
corporation, and suffering them to hold themselves out as having such authority;
thereby inducing others to deal with them in such capacity. It would be
impracticable for third persons to deal with corporations at all, if each one must
investigate the legality of the title of each corporation officers as a condition
precedent to a business transaction."139
One would notice from the reasoning of the SEC that it is really applying
the jurisprudential doctrine on apparent authority.

8. Corporate Dealings with Directors and Officers

Prime White Cement Corp. v. Intermediate Appellate Court,140 recognized
the self-dealing contracts of directors and officers constitute a strong exception to
the doctrine of apparent authority. In that case, a director entered into a
136
SEC Opinion, 27 September 1993, XXVIII SEC QUARTERLY BULLETIN 14 (No. 1, March
1994).
137
Ibid.
138
Ibid.
139
Ibid.
140
220 SCRA 103 (1993).
Dealership Agreement with the corporation, signed by its chairman and
president, for the corporation to supply 20,000 bags of white cement per month
for five years at a fixed price of P9.70 per bag. Subsequently, the Board refused
to abide by the contract unless new conditions are accepted providing for new
price formula. The dealing director sued for specific performance on the contract.
The Court held that under both the Corporation Law then and the present
Corporation Code, the doctrine is that all corporate powers shall be exercised by
the board of directors, except as otherwise provided by law. It then summarized
the prevailing rules applicable when a corporate act or contract is entered into
without prior board authority: "Although is cannot completely abdicate its power
and responsibility to act for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In the absence of such
express delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same
expressly or impliedly. Implied ratification may take various forms--like silence or
acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of the benefits flowing therefrom. Furthermore, even in
the absence of express or implied authority by ratification, the President as such
may, as a general rule, bind the corporation by a contract in the ordinary course
of business, provided the same is reasonable under the circumstances. These
rules are basic, but are all general and thus quite flexible. They apply where the
President or other officer, purportedly acting for the corporation, is dealing with a
third person, i.e., a person outside the corporation."141
The Court held that "[t]he situation is quite different where a director or
officer is dealing with his own corporation," and held:

A director of a corporation holds a position of trust and

as such, he owes a duty of loyalty to his corporation. In case
his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As
corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust
relationship "is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interest of stockholders.142

Prime White Cement held that a director holds a position of trust and as
such, he owes a duty of loyalty to his corporation, and his contracts with the
corporation must always be at reasonable terms, otherwise the contract is void
or voidable at the option of the corporation. The Court found that the terms of the
Dealership Agreement were unreasonable for the corporation and that the
unfairness in the contract was a basis which renders a contract entered into by
the President, without authority from the board of directors, void or voidable,
although it may have been in the ordinary course of business.

141
Ibid, at p. 110.
142
Ibid.
 9. Comparison With Uneforceable Contract Principles
The principles applied by the Supreme Court in deciding issues pertaining
to the ultra vires acts or contracts, other than the third type which are violative of
the law or public policy, is similar to principles of Contract Law on unenforceable
contracts.
Unenforceable contracts under Philippine jurisdiction cannot be sued upon
or enforced, unless ratified, but once ratified, they have the effect of valid
contracts.143
Under Article 1403 of the Civil Code of the Philippines, unless they are
ratified, contracts entered into by "in the name of another person by one who has
given no authority or legal representation, or who has acted beyond his powers"
are deem to be unenforceable. Under Philippine jurisprudence, uneforceable
contracts are valid but cannot be enforced or effected, unless there has been
ratification, in which case the contract become valid and enforceable contracts. In
addition, unenforceable contracts, once ratified validates them from the
inception.144 Also, unenforceable contracts cannot be assailed by third persons.145
In addition, the principle of unenforceability of such contracts is deemed waived
when such contracts have been partially or fully executed by one of the parties
thereto.
In the case of the two (2) types of ultra vires contracts, i.e., those entered
into beyond the powers or purpose of the corporation, and those entered into by
unauthorized corporate officers or representatives, such contracts are similarly
located to unenforceable contracts entered into on behalf of the corporation, by
representatives who were not authorized by the corporation or acted beyond the
authorized powers granted to them. Consequently, the treatment of such ultra
vires contracts should be the same as those of similar unenforceable contracts.
This seems to be the path that has been followed by the Supreme Court as it has
applied principles pertaining to unenforceable contracts to such types of ultra
vires contracts, including the principles of estoppel and ratification, including the
fact that it has refused to disturbed contracts that have been executed, which is
equivalent to ratification.

FINAL OBSERVATIONS
What is clear from all the foregoing discussions is that in the field of
commercial transactions as they involve corporate entities, the principles of
Corporate Law are made to harmonize with other disciplines in order to sustain
the validity of contracts and transactions entered into by corporations with the
dealing public, in accordance with legitimate contractual and business
expectations that the corporations would be bound thereby, without the need of
costly and protracted verification as to the powers and authority of such
corporations, and the persons who act in their behalf. Rarely will the courts apply
pure corporate doctrines on their own merits, and courts will not apply them at all

143
PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED (Vol. IV, 1994 ed.), at p. 766.
144
Art. 1407, Civil Code of the Philippines.
145
Art. 1408, Civil Code of the Philippines.
when their application would promote injustice and permit parties to skirt
contractual obligations they clearly assumed when the contracts were drawn.
Even in the case of acts or contracts of corporations which are illegal per
se, the State has often declined to fuse public interests with private affairs.
Courts have refused to invalidate the effects of such contracts on the parties in
order to enforce the State's interests, where the contract has created private
wrongs. The State will then seek its own cause against the erring corporation,
usually in a quo warranto proceeding to have the corporation's charter declared
forfeited.

—oOo—

CORPLAW \CORPMAN.DIR\CORPORATE CONTRACT LAW \10 JAN 2003