Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18062
February 28, 1963
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.

responsibility to be assumed buy it in the event a post office

branch is opened as requested. On September 2, 1949, the
company informed the Director of Posts of the passage by its board
of directors of a resolution of the following tenor: "That the
requirement of the Bureau of Posts that the Company should
accept full responsibility for all cash received by the Postmaster be
complied with, and that a copy of this resolution be forwarded to
the Bureau of Posts." The letter further states that the company
feels that that resolution fulfills the last condition imposed by the
Director of Posts and that, therefore, it would request that an
inspector be sent to the camp for the purpose of acquainting the
postmaster with the details of the operation of the branch office.

BAUTISTA ANGELO, J.:

On May 17, 1948, the Acoje Mining Company, Inc. wrote the
Director of Posts requesting the opening of a post, telegraph and
money order offices at its mining camp at Sta. Cruz, Zambales, to
service its employees and their families that were living in said
camp. Acting on the request, the Director of Posts wrote in reply
stating that if aside from free quarters the company would provide
for all essential equipment and assign a responsible employee to
perform the duties of a postmaster without compensation from his
office until such time as funds therefor may be available he would
agree to put up the offices requested. The company in turn replied
signifying its willingness to comply with all the requirements
outlined in the letter of the Director of Posts requesting at the
same time that it be furnished with the necessary forms for the
early establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to the
company stating among other things that "In cases where a post
office will be opened under circumstances similar to the present, it
is the policy of this office to have the company assume direct
responsibility for whatever pecuniary loss may be suffered by the
Bureau of Posts by reason of any act of dishonesty, carelessness or
negligence on the part of the employee of the company who is
assigned to take charge of the post office," thereby suggesting that
a resolution be adopted by the board of directors of the company
expressing conformity to the above condition relative to the
After trial, the court a quo found that, of the amount claimed by
plaintiff totalling P13,867.24, only the sum of P9,515.25 was
supported by the evidence, and so it rendered judgment for the
plaintiff only for the amount last mentioned. The court rejected the
contention that the resolution adopted by the company is ultra

The post office branch was opened at the camp on October 13,
1949 with one Hilario M. Sanchez as postmaster. He is an
employee of the company. On May 11, 1954, the postmaster went
on a three-day leave but never returned. The company
immediately informed the officials of the Manila Post Office and the
provincial auditor of Zambales of Sanchez' disappearance with the
result that the accounts of the postmaster were checked and a
shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of
the shortage in line with the liability it has assumed having failed,
the government commenced the present action on September 10,
1954 before the Court of First Instance of Manila seeking to recover
the amount of Pl3,867.24. The company in its answer denied
liability for said amount contending that the resolution of the board
of directors wherein it assumed responsibility for the act of the
postmaster is ultra vires, and in any event its liability under said
resolution is only that of a guarantor who answers only after the
exhaustion of the properties of the principal, aside from the fact
that the loss claimed by the plaintiff is not supported by the office
record.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this Honorable
Court, without prejudice to the parties adducing other evidence to
prove their case not covered by this stipulation of facts.
vires and that the obligation it has assumed is merely that of a
guarantor.
Defendant took the present appeal.

The contention that the resolution adopted by the company dated

August 31, 1949 is ultra vires in the sense that it has no authority
to act on a matter which may render the company liable as a
guarantor has no factual or legal basis. In the first place, it should
be noted that the opening of a post office branch at the mining
camp of appellant corporation was undertaken because of a
request submitted by it to promote the convenience and benefit of
its employees. The idea did not come from the government, and
the Director of Posts was prevailed upon to agree to the request
only after studying the necessity for its establishment and after
imposing upon the company certain requirements intended to
safeguard and protect the interest of the government. Thus, after
the company had signified its willingness to comply with the
requirement of the government that it furnish free quarters and all
the essential equipment that may be necessary for the operation
of the office including the assignment of an employee who will
perform the duties of a postmaster, the Director of Posts agreed to
the opening of the post office stating that "In cases where a post
office will be opened under circumstances similar to the present, it
is the policy of this office to have the company assume direct
responsibility for whatever pecuniary loss may be suffered by the
Bureau of Posts by reason of any act of dishonesty, carelessness or
negligence on the part of the employee of the company who is
assigned to take charge of the post office," and accepting this
condition, the company, thru its board of directors, adopted
forthwith a resolution of the following tenor: "That the requirement
of the Bureau of Posts that the company should accept full
responsibility for all cash received by the Postmaster, be complied
with, and that a copy of this resolution be forwarded to the Bureau
of Posts." On the basis of the foregoing facts, it is evident that the
company cannot now be heard to complain that it is not liable for
the irregularity committed by its employee upon the technical plea
that the resolution approved by its board of directors is ultra vires.
The least that can be said is that it cannot now go back on its
plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of
appellant company is an ultra vires act cannot also be entertained
it appearing that the same covers a subject which concerns the
benefit, convenience and welfare of its employees and their
families. While as a rule an ultra vires act is one committed outside
the object for which a corporation is created as defined by the law
of its organization and therefore beyond the powers conferred
upon it by law (19 C.J.S., Section 965, p. 419), there are however

certain corporate acts that may be performed outside of the scope

of the powers expressly conferred if they are necessary to promote
the interest or welfare of the corporation. Thus, it has been held
that "although not expressly authorized to do so a corporation may
become a surety where the particular transaction is reasonably
necessary or proper to the conduct of its business,"1 and here it is
undisputed that the establishment of the local post office is a
reasonable and proper adjunct to the conduct of the business of
appellant company. Indeed, such post office is a vital improvement
in the living condition of its employees and laborers who came to
settle in its mining camp which is far removed from the postal
facilities or means of communication accorded to people living in a
city or municipality.
Even assuming arguendo that the resolution in question
constitutes an ultra vires act, the same however is not void for it
was approved not in contravention of law, customs, public order or
public policy. 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.2 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. On this point, the authorities are
overwhelming:
The weight of authority in the state courts is to the effect that a
transaction which is merely ultra vires and not malum in se or
malum prohibitum, is, if performed by one party, not void as
between the parties to all intents and purposes, and that an action
may be brought directly on the transaction and relief had according
to its terms. (19 C.J.S., Section 976, p. 432, citing Nettles v. Rhett,
C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private
corporations, one party cannot receive the benefits which are
embraced in total performance of a contract made with it by
another party and then set up the invalidity of the transaction as a
defense." (London & Lancashire Indemnity Co. of America v.
Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
The 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.

The acceptance of benefits arising from the performance by the

other party may give rise to an estoppel precluding repudiation of
the transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where the
ultra vires transaction has been executed by the other party and
the corporation has received the benefit of it, the law interposes an
estoppel, and will not permit the validity of the transaction or
contract to be questioned, and this is especially true where there is
nothing in the circumstances to put the other party to the
transaction on notice that the corporation has exceeded its powers
in entering into it and has in so doing overstepped the line of
corporate privileges. (19 C.J.S., Section 977, pp. 435-437, citing
Williams v. Peoples Building & Loan Ass'n, 97 S.W. 2d 930, 193 Ark.
118; Hays v. Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is
only that of a guarantor. On this point, we agree with the following
comment of the court a quo: "A mere reading of the resolution of
the Board of Directors dated August 31, 1949, upon which the
plaintiff based its claim would show that the responsibility of the
defendant company is not just that of a guarantor. Notice that the
phraseology and the terms employed are so clear and sweeping
and that the defendant assumed 'full responsibility for all cash
received by the Postmaster.' Here the responsibility of the
defendant is not just that of a guarantor. It is clearly that of a
principal."
WHEREFORE, the decision appealed from is affirmed. No costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon, Regala and Makalintal, JJ. concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-36207
October 26, 1932
IRINEO G. CARLOS, plaintiff-appellant,
vs.
MINDORO SUGAR CO., ET AL., defendants-appellees.

Jose Ayala for appellant.

Ross, Lawrence & Selph for appellees.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendants the
value of four bonds, Nos. 1219, 1220, 1221, and 1222, with due
and unpaid interest thereon, issued by the Mindoro Sugar Company
and placed in trust with the Philippine Trust Company which, in
turn, guaranteed them for value received. Said plaintiff appealed
from the judgment rendered by the Court of First Instance of Manila
absolving the defendants from the complaint, excepting the
Mindoro Sugar Company, which was sentenced to pay the value of
the four bonds with interest at 8 per cent per annum, plus costs.
The Mindoro Sugar Company is a corporation constituted in
accordance with the laws of the country and registered on July 30,
1917. According to its articles of incorporation, Exhibit 5, one of its
principal purposes was to acquire and exercise the franchise
granted by Act No. 2720 to George H. Fairchild, to substitute the
organized corporation, the Mindoro Company, and to acquire all
the rights and obligations of the latter and of Horace Havemeyer
and Charles J. Welch in the so-called San Jose Estate in the
Province of Mindoro. The Philippine Trust Company is another
domestic corporation, registered on October 21, 1917. In its
articles of incorporation, Exhibit A, some of its purposes are
expressed thus: "To acquire by purchase, subscription, or
otherwise, and to invest in, hold, sell, or otherwise dispose of
stocks, bonds, mortgages, and other securities, or any interest in
either, or any obligations or evidences of indebtedness, of any
other corporation or corporations, domestic or foreign. . . . Without
in any particular limiting any of the powers of the corporation, it is
hereby expressly declared that the corporation shall have power to
make any guaranty respecting the dividends, interest, stock,
bonds, mortgages, notes, contracts or other obligations of any
corporation, so far as the same may be permitted by the laws of
the Philippine Islands now or hereafter in force." Its principal
purpose, then, as its name indicates, is to engage in the trust
business.
On November 17, 1917, the board of directors of the Philippine
Trust Company, composed of Phil, C. Whitaker, chairman, and
James Ross, Otto Vorster, Charles D. Ayton, and William J.
O'Donovan, members, adopted a resolution authorizing its

president, among other things, to purchase at par and in the name

and for the use of the trust corporation all or such part as he may
deem expedient, of the bonds in the value of P3,000,000 that the
Mindoro Sugar Company was about to issue, and to resell them,
with or without the guarantee of said trust corporation, at a price
not less than par, and to guarantee to the Philippine National Bank
the payment of the indebtedness to said bank by the Mindoro
Sugar Company or Charles J. Welch and Horace Havemeyer, up to
P2,000,000. The relevant part of the resolution, Exhibit 3, reads as
follows:
Resolved that Mr. Phil. C. Whitaker, president of this company, be
and he hereby is authorized to purchase at par in the name and for
the use of this company all, or such part as he may deem
expedient, of the said P3,000,000 of 20-year 8 per cent coupon
bonds of the said Mindoro Sugar Company, and to resell or
otherwise dispose of the said bonds, with or without this
company's guaranty, at a price not less than par; and it was further
Resolved that Mr. Phil. C. Whitaker, president of the company be
and he hereby is authorized in the name of this company alone or
in connection with others, by joint and several obligations, to
guarantee to the Philippine National Bank the due and punctual
payment of any and all indebtedness owing to the said Bank by
either the Mindoro Sugar Company, the Mindoro Company, or
Charles J. Welch and Horace Havemeyer, up to P2,000,000; and it
was further
Resolved that the said president, Mr. Phil. C. Whitaker, be and he
hereby is authorized to execute in the name of this company any
and all notes, mortgages, bonds, guaranties, or instruments in
writing whatever necessary for the carrying into effect of the
authority hereby granted.
In pursuance of this resolution, on December 21, 1917, the Mindoro
Sugar Company executed in favor of the Philippine Trust Company
the deed of trust, Exhibit 6, transferring all of its property to it in
consideration of the bonds it had issued to the value of
P3,000,000, the value of each bond being $1,000, which par value,
with interest at 8 per cent per annum, the Philippine Trust
Company had guaranteed to the holders, and in consideration,
furthermore, of said trust corporation having guaranteed to the
Philippine National Bank all the obligations contracted by the
Mindoro Sugar Company, Charles J. Welch and Horace Havemeyer

up to the aforesaid amount of P2,000,000. The aforementioned

deed was approved by his Excellency, the Governor-General, upon
recommendation of the Secretary of Agriculture and Natural
Resources, and in accordance with the provisions of Act No. 2720
of the Philippine Legislature. Following are the clauses of said
Exhibit 6 material to this decision:
Whereas, for the purposes aforesaid, and in further pursuance of
said resolutions of its board of directors and of its stockholders, the
company, in order to secure the payment of said First Mortgage,
Twenty Year, Eight Per Cent, Gold Bonds, has determined to
execute and deliver to said Philippine Trust Company, as trustee, a
deed of trust of its properties hereinafter described, and the board
of directors of the Company has approved the form of this
indenture and directed that the same be executed and delivered to
said trustee; and
Whereas, all things necessary to make said bonds, when certified
by said trustee as in this indenture provided, valid, binding, legal
and negotiable obligations of the company and this indenture a
valid deed of trust to secure the payment of said bonds, have been
done and performed, and the creation and issue of said bonds, and
the execution, acknowledgment and delivery of this deed of trust
have been duly authorized;
Now, therefore, in order to secure the payment of the principal and
interest of all such bonds at any time issued and outstanding under
this indenture, according to their tenor, purport and effect, and to
secure the performance and observance of all the covenants and
conditions herein contained and to declare the terms and
conditions upon which said bonds are issued, received and held,
and for and in consideration of the premises, and of the purchase
or acceptance of such bonds by the holders thereof, and of the
sum of one dollar, United States currency, to it duly paid at or
before the ensealing and delivery of these presents, the receipt
whereof is hereby acknowledged, the Mindoro Sugar Company,
party of the first part, has sold and conveyed, and by these
presents does sell and convey to the Philippine Trust Company,
party of the second part, its successors and assigns forever;
(Description of the property.)

In consequence of this transaction, the bonds, with their coupons

were placed on the market and sold by the Philippine Trust
Company, all endorsed as follows:
This is to certify that the within bond is one of the series described
in the trust deed therein mentioned.

The lower court, without a proof to support it or an averment in

defense by the defendant Philippine Trust Company, erred in
finding hypothetically that if the guarantee made by this company
be held valid, the trust funds and deposits in its hands would
probably be endangered.
THIRD ERROR

PHILIPPINE TRUST COMPANY

by: (Sgd.) PHIL. C. WHITAKER
President
For values received, the Philippine Trust Company hereby
guarantees the payment of principal and interest of the within
bond.
Manila, Jan.2, 1918
PHILIPPINE TRUST COMPANY
by: (Sgd.)
PHIL. C. WHITAKER
President
The Philippine Trust Company sold thirteen bonds, Nos. 1219 to
1231, to Ramon Diaz for P27,300, at a net profit of P100 per bond.
The four bonds Nos. 1219, 1220, 1221, and 1222, here in litigation,
are included in the thirteen sold to Diaz.
The Philippine Trust Company paid the appellant, upon
presentation of the coupons, the stipulated interest from the date
of their maturity until the 1st of July, 1928, when it stopped
payments; and thenceforth it alleged that it did not deem itself
bound to pay such interest or to redeem the obligation because the
guarantee given for the bonds was illegal and void.
The appellant now contends that the judgment appealed from is
untenable, assigning the following errors:
FIRST ERROR
The lower court erred in sustaining the demurrer against the
amended complaint, filed by defendant J. S. Reis (Reese) and
consequently in dismissing the same with regard to this defendant.
SECOND ERROR

The lower court erred in holding that the Philippine Trust Company
has no power to guarantee the obligation of another juridical
personality, for value received.
FOURTH ERROR
The lower court erred in not recognizing the validity and effect of
the guarantee subscribed by the Philippine Trust Company for the
payment of the four bonds claimed in the complaint, endorsed
upon them, and in absolving said institution from the complaint.
FIFTH ERROR
The lower court erred in absolving the ex-directors of the Philippine
Trust Company, Phil. C. Whitaker, O. Vorster, and Charles D. Ayton,
from the complaint.
We shall not follow the order of the appellant's argument, deeming
it unnecessary, but shall decide only the third and fourth
assignments of error upon which the merits of the case depend.
For the clear understanding of this decision and to avoid erroneous
interpretations, however, we wish to state that in this decision we
shall decide only the rights of the parties with regard to the four
bonds in question and whatever we say in no wise affects or
applies to the rest of the bonds.
We shall begin by saying that the majority of the justices of this
court who took part in the case are of opinion that the only point of
law to be decided is whether the Philippine Trust Company
acquired the four bonds in question, and whether as such it bound
itself legally and acted within its corporate powers in guaranteeing
them. This question was answered in the affirmative.1awphil.net
In adopting this conclusion we have relied principally upon the
following facts and circumstances: Firstly, that the Philippine Trust
Company, although secondarily engaged in banking, was primarily

organized as a trust corporation with full power to acquire personal

property such as the bonds in question according to both section
13 (par. 5) of the Corporation Law and its duly registered by-laws
and articles of incorporation; secondly, that being thus authorized
to acquire the bonds, it was given 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:
It is not, however, ultra vires for a corporation to enter into
contracts of guaranty or suretyship where it does so in the
legitimate furtherance of its purposes and business. And it is well
settled that where a corporation acquires commercial paper or
bonds in the legitimate transaction of its business it may sell them,
and in furtherance of such a sale it may, in order to make them the
more readily marketable, indorse or guarantee their payment. (7 R.
C. L., p. 604 and cases cited.)
"Whenever a corporation has the power to take and dispose of the
securities of another corporation, of whatsoever kind, it may, for
the purpose of giving them a marketable quality, guarantee their
payment, even though the amount involved in the guaranty may
subject the corporation to liabilities in excess of the limit of
indebtedness which it is authorized to incur. A corporation which
has power by its charter to issue its own bonds has power to
guarantee the bonds of another corporation, which has been taken
in payment of a debt due to it, and which it sells or transfers in
payment of its own debt, the guaranty being given to enable it to
dispose of the bond to better advantage. And so guaranties of
payment of bonds taken by a loan and trust company in the
ordinary course of its business, made in connection with their sale,
are not ultra vires, and are binding." (14-A C. J., pp. 742-743 and
cases cited); thirdly, that although it does not clearly appear in the
deed of trust (Exhibit 6) that the Mindoro Sugar Company
transferred the bonds therein referred to, to the Philippine Trust
Company, nevertheless, in the resolution of the board of directors
(Exhibit 3), the president of the Philippine Trust Company was
expressly authorized to purchase all or some of the bonds and to
guarantee them; whence it may be inferred that subsequent
purchasers of the bonds in the market relied upon the belief that
they were acquiring securities of the Philippine Trust Company,
guaranteed by this corporation; fourthly, that as soon as
P3,000,000 worth of bonds was issued, and by the deed of trust
the Mindoro, Sugar Company transferred all its real property to the

Philippine Trust Company, the cause or consideration of the

transfer being, (1) the guarantee given by the purchaser to the
bonds, and (2) its having likewise guaranteed its obligations and
those of Welch and Havemeyer in favor of the Philippine National
Bank up to the amount of P2,000,000; fifthly, that in transferring its
real property as aforesaid the Mindoro Sugar Company was
reduced to a real state of bankruptcy, as the parties specifically
agreed during the hearing of the case, to the point of having
become a nominal corporation without any assets whatsoever;
sixthly, that such operation or transaction cannot mean anything
other than that the real intention of the parties was that the
Philippine Trust Company acquired the bonds issued and at the
same time guaranteed the payment of their par value with
interest, because otherwise the transaction would be fraudulent,
inasmuch as nobody would be answerable to the bond-holders for
their value and interest; seventhly, that the Philippine Trust
Company had been paying the appellant the interest accrued upon
the four bonds from the date of their issuance until July 1, 1928,
such payment of interest being another proof that said corporation
had really become the owner of the aforesaid bonds; and, eightly,
that the Philippine Trust Company has not adduced any evidence to
show any other conclusions.
There are other considerations leading to the same result even in
the supposition that the Philippine Trust Company did not acquire
the bonds in question, but only guaranteed them. In such a case
the guarantee of these bonds would at any rate, be valid and the
said corporation would be bound to pay the appellant their value
with the accrued interest in view of the fact that they become due
on account of the lapse of sixty (60) days, without the accrued
interest due having been paid; and the reason is that it is estopped
from denying the validity of its guarantee.
. . . On the other hand, according to the view taken by other courts,
which it must be acknowledged are in the majority, a recovery
directly upon the contract is permitted, on the ground that the
corporation, having received money or property by virtue of a
contract not immoral or illegal of itself, is estopped to deny
liability; and that the only remedy is one on behalf of the state to
punish the corporation for violating the law. (7 R. C. L., pp. 680-681
and cases cited.)
. . . The doctrine of ultra vires has been declared to be entirely the
creation of the courts and is of comparatively modern origin. 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 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. (14-A C. J., pp. 314-315.)

or otherwise, except on account of demands of the following

nature:

The doctrine of the Supreme Court of the United States together

with the English courts and some of the state courts is that no
performance upon either side can validate an ultra vires
transaction or authorize an action to be maintained directly upon
it. However, the great weight of authority in the state courts is to
the effect that a transaction which is merely ultra vires and not
malum in se or malum prohibitum although it may be made by the
state a basis for the forfeiture of the corporate charter or the
dissolution of the corporation, is, if performed by one party, not
void as between the parties to all intents and purposes, and that
an action may be brought directly upon the transaction and relief
had according to its terms. ( 14-A C. J., pp. 319-320.)

(3) Liabilities to the stockholders of the bank for dividends and

reserve profits.

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. (Coleman vs. Hotel de France Co., 29
Phil., 323.)

(1) Moneys deposited with or collected by the bank;

(2) Bills of exchange or drafts drawn against money actually on
deposit to the credit of the bank or due thereto;

This difficulty is easily obviated by bearing in mind that, as we

stated above, the banking operations are not the primary aim of
said corporation, which is engaged essentially in the trust business,
and that the prohibition of the law is not applicable to the
Philippine Trust Company, for the evidence shows that Mindoro
Sugar Company transferred all its real property, with the
improvements, to it, and the value of both, which surely could not
be less than the value of the obligation guaranteed, became a part
of its capital and assets; in other words, with the value of the real
property transferred to it, the Philippine Trust Company had
enough capital and assets to meet the amount of the bonds
guaranteed with interest thereon.
Wherefore, the decision appealed from is reversed and
Philippine Trust Company is sentenced to pay to the appellant
sum of four thousand dollars ($4,000) with interest at eight
cent (8%) per annum from July 1, 1928 until fully paid, and
costs of both instances. So ordered.

the
the
per
the

Guaranties of payment of bonds taken by a loan and trust

company in the ordinary course of its business, made in connection
with their sale, are not ultra vires, and are binding. (Broadway Nat.
Bank vs. Baker, 57 N. E., p. 603.)

Avancea, C.J., Ostrand, Villa-Real, Abad Santos and Butte, JJ.,

concur.
Malcolm and Hull, JJ., concur in the result.

It has been intimated according to section 121 of the Corporation

Law, the Philippine Trust Company, as a banking institution, could
not guarantee the bonds to the value of P3,000,000 because this
amount far exceeds its capital of P1,000,000 of which only one-half
has been subscribed and paid. Section 121 reads as follows:

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

SEC. 212. No such bank shall at any time be indebted or in any

way liable to an amount exceeding the amount of its capital stock
at such time actually paid in and remaining undiminished by losses

G.R. No. L-5377

December 29, 1954
MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,
vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.

Del Rosario and Garcia for appellant.

Vicente J. Francisco for appellees.

Fourth. That the condition mentioned in the donation is null and

void because it depends on the provisions of Article 1115 of the old
Civil Code.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of
Rizal declaring the donation made by the defendant in favor of the
minor children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life valid and binding, and ordering
said defendant to pay to said minor children the sum of
P583,813.59, with interest thereon at the rate of per cent from the
date of filing of the complaint, plus an additional amount
equivalent to 20 per cent of said sum of P538,813.59 as damages
by way of attorney's fees and the costs of action.
Plaintiffs herein are the minor children of the late Enrico Pirovano
represented by their mother and judicial guardian Estefania R.
Pirovano. They seek to enforce certain resolutions adopted by the
Board of Directors and stockholders of the defendant company
giving to said minor children of the proceeds of the insurance
policies taken on the life of their deceased father Enrico Pirovano
with the company as beneficiary. Defendant's main defense is: that
said resolutions and the contract executed pursuant thereto are
ultra vires, and, if valid, the obligation to pay the amount given is
not yet due and demandable.
The trial court resolved all the issues raised by the parties in favor
of the plaintiffs and, after considering the evidence, both oral and
documentary, arrived at the following conclusions:
First. That the contract executed between the plaintiffs and the
defendant is a renumerative donation.
Second. That said contract or donation is not ultra vires, but an
act executed within the powers of the defendant corporation in
accordance with its articles of incorporation and by-laws,
sanctioned and approved by its Board of Directors and
stockholders; and subsequently ratified by other subsequent acts
of the defendant company.
Third. That the said donation is in accordance with the trend of
modern and more enlightened legislation in its treatment of
questions between labor and capital.

Fifth. That if the condition is valid, its non-fulfillment is due to

the desistance of the defendant company from obeying and doing
the wishes and mandates of the majority of the stockholders.
Sixth. That the non-payment of the debt in favor of the National
Development Company is not due to the lack of funds, nor to lack
of authority, but the desire of the President of the corporation to
preserve and continue the Government participation in the
company.
Seventh. That due demands were made by the plaintiffs and
their attorneys and these demands were rejected for no justifiable
or legal grounds.
The important facts which need to be considered for purposes of
this appeal may be briefly stated as follows: Defendant is a
corporation duly organized in accordance with law with an
authorized capital of P500,000, divided into 5,000 shares, with a
par value of P100 each share. The stockholders were: Esteban de
la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania
de la Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion,
Antonio G. Juanco, and Gaudencio Volasote with 5 shares each.
Leonor and Estefania are daughters of Don Esteban, while the rest
his employees. Estefania de la Rama was married to the late Enrico
Pirovano and to them four children were born who are the plaintiffs
in this case.
Enrico Pirovano became the president of the defendant company
and under his management the company grew and progressed
until it became a multi-million corporation by the time Pirovano
was executed by the Japanese during the occupation. On May 13,
1941, the capital stock of the corporation was increased to
P2,000,000, after which a 100 per cent stock dividend was
declared. Subsequently, or before the outbreak of the war, new
stock dividends of 200 per cent and 33 1/3 per cent were again
declared. On December 4, 1941, the capital stock was once more
increased to P5,000,000. Under Pirovano's management, the
assets of the company grew and increased from an original paid up
capital of around P240,000 to P15,538,024.37 by September 30,
1941 (Exhibit HH).

In the meantime, Don Esteban de la Rama, who practically owned

and controlled the stock of the defendant corporation, distributed
his shareholding among his five daughters, namely, Leonor,
Estefania, Lourdes, Lolita and Conchita and his wife Natividad
Aguilar so that, at that time, or on July 10, 1946, the stockholding
of the corporation stood as follows: Esteban de la Rama, 869
shares, Leonor de la Rama, 3,375 shares, Estefania de la Rama,
3,368 shares, Lourdes de la Rama, 3,368 shares, Lolita de la Rama,
3,368 shares, Conchita de la Rama, 3,376 shares, and Natividad
Aguilar, 2,136 shares. The other stockholders, namely, Eliseo
Hervas, Tomas Concepcion, Antonio Juanco, and Jose Aguilar, who
were merely employees of Don Esteban, were given 40 shares
each, while Pio Pedrosa, Marcial P. Lichauco and Rafael Roces, one
share each, because they merely represented the National
Development Company. This Company was given representation in
the Board Of Directors of the corporation because at that time the
latter had an outstanding bonded indebtedness to the National
Development Company.
This bonded indebtedness was incurred on February 26, 1940 and
was in the amount of P7,500.00. The bond held by the National
Development Company was redeemable within a period of 20
years from March 1, 1940, bearing interest at the rate of 5 per cent
per annum. To secure said bonded indebtedness, all the assets of
the De la Rama Steamship Co., Inc., and properties of Don Esteban
de la Rama, as well as those of the Hijos de I. de la Rama and Co.,
Inc., a sister corporation owned by Don Esteban and his family,
were mortgaged to the National Development Company (Annexes
A, B, C, D of Exhibit 3, Deed of Trust). Payments made by the
corporation under the management of Pirovano reduced this
bonded indebtedness to P3,260,855.77.
Upon arrangement made with the National Development Company,
the outstanding bonded indebtedness was converted into nonvoting preferred shares of stock of the De la Rama company under
the express condition that they would bear affixed cumulative
dividend of 6 per cent per annum and would be redeemable within
15 years (Exhibits 5 and 7). This conversion was carried out on
September 23, 1949, when the National Development Company
executed a "Deed of Termination of Trust and Release of Mortgage"
in favor of the De la Rama company (Exhibit 6.) The immediate
effect of this conversion was the released from incumbrance of all
the properties Of Don Esteban and of the Hijos de I. de la Rama

and Co., Inc., which was apparently favorable to the interests of

the De la Rama company, but, on the other hand, it resulted in the
inconvenience that, as holder of the preferred stock, the National
Development Company, was given to the right to 40 per cent of
the membership of the Board of Directors of the De la Rama
company, which meant an increase in the representation of the
National Development Company from 2 to 4 of the 9 members of
said Board of Directors.
The first resolution granting to the Pirovano children the proceeds
of the insurance policies taken on his life by the defendant
company was adopted by the Board of Directors at a meeting held
on July 10, 1946, (Exhibit B). This grant was called in the resolution
as "Special Payment to Minor Heirs of the late Enrico Pirovano".
Because of its direct hearing on the issues involved in this case,
said resolution is hereunder reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO
PIROVANO
The President stated that the principal purpose for which the
meeting had been called was to discuss the advisability of making
some form of compensation to the minor heirs of the late Enrico
Pirovano, former President and General Manager of the Company.
As every member of the Board knows, said the President, the late
Enrico Pirovano who was largely responsible for the very successful
development of the activities of the Company prior to war was
killed by the Japanese in Manila sometime in 1944 leaving as his
only heirs four minor children, Maria Carla, Esteban, Enrico and
John Albert. Early in 1941, explained the President, the Company
had insured the life of Mr. Pirovano for a million pesos. Following
the occupation of the Philippines by Japanese forces the Company
was unable to pay the premiums on those policies issued by
Filipino companies and these policies had lapsed. But with regards
to the York Office of the De la Rama Steamship Co., Inc. had kept
up payment of the premiums from year to year. The payments
made on account of these premiums, however, are very small
compared to the amount which the Company will now receive as a
result of Mr. Pirovano's death. The President proposed therefore
that out of the proceeds of these policies the sum of P400,000 be
set aside for the minor children of the deceased, said sum of
money to be convertible into 4,000 shares of the stock of the
Company, at par, or 1,000 shares for each child. This proposal,
explained the President as being made by him upon suggestion of

President Roxas, but, he added, that he himself was very much in

favor of it also. On motion of Miss Leonor de la Rama duly
seconded by Mrs. Lourdes de la Rama de Osmea, the following
resolution was, thereupon, unanimously approved:
Whereas, the late Enrico Pirovano, President and General Manager
of the De la Rama Steamship Company, died in Manila sometime in
November, 1944:
Whereas, the said Enrico Pirovano was largely responsible for the
rapid and very successful development of the activities of thus
company;
Whereas, early in 1941 this company insured the life of said Enrico
Pirovano in various Philippine and American Life Insurance
companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and four minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano;lawphil.net
Whereas, said Enrico Pirovano left practically nothing to his heirs
and it is but fit proper that this company which owes so much to
the deceased should make some provision for his children;
Whereas, this company paid premium on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will receive
from the insurance companies sums of money greatly in excess of
the premiums paid by this company.
Be it resolved, That out of the proceeds to be collected from the
life insurance policies on the life of the late Enrico Pirovano, the
sum of P400,000 be set aside for equal division among the 4 minor
children of the deceased, to wit: Esteban, Maria Carla, Enrico and
John Albert, all surnamed Pirovano, which sum of money shall be
convertible into shares of stock of the De la Rama Steamship
Company, at par and, for that purpose, that the present registered
stockholders of the corporation be requested to waive their
preemptive right to 4,000 shares of the unissued stock of the
company in order to enable each of the 4 minor heirs of the
deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, to obtain 1,000 shares at par;

Resolved, further, that in view of the fact that under the provisions
of the indenture with the National Development Company, it is
necessary that action herein proposed to be confirmed by the
Board of Directors of that company, the Secretary is hereby
instructed to send a copy of this resolution to the proper officers of
the National Development Company for appropriate action. (Exhibit
B)
The above resolution, which was adopted on July 10, 1946, was
submitted to the stockholders of the De la Rama company at a
meeting properly convened, and on that same date, July 10, 1946,
the same was duly approved.
It appears that, although Don Esteban and the Members of his
family were agreeable to giving to the Pirovano children the
amount of P400,000 out of the proceeds of the insurance policies
taken on the life of Enrico Pirovano, they did not realize that when
they provided in the above referred two resolutions that said
Amount should be paid in the form of shares of stock, they would
be actually giving to the Pirovano children more than what they
intended to give. This came about when Lourdes de la Rama, wife
of Sergio Osmea, Jr., showed to the latter copies of said
resolutions and asked him to explain their import and meaning,
and it was value then that Osmea explained that because the
value then of the shares of stock was actually 3.6 times their par
value, the donation their value, the donation, although purporting
to be only P400,00, would actually amount to a total of P1,440,000.
He further explained that if the Pirovano children would given
shares of stock in lieu of the amount to be donated, the voting
strength of the five daughters of Don Esteban in the company
would be adversely affected in the sense that Mrs. Pirovano would
be adversely affected in the sense that Mrs. Pirovano would have a
voting power twice as much as that of her sisters. This caused
Lourdes de la Rama to write to the secretary of the corporation,
Atty. Marcial Lichauco, asking him to cancel the waiver she
supposedly gave of her pre-emptive rights. Osmea elaborated on
this matter at the annual meeting of the stockholders held on
December 12, 1946 but at said meeting it was decided to leave the
matter in abeyance pending further action on the part of the
members of the De la Rama family.
Osmea, in the meantime, took up the matter with Don Esteban
and, as consequence, the latter, on December 30, 1946, addressed
to Marcial Lichauco a letter stating, among other things, that "in

view of the total lack of understanding by me and my daughters of

the two Resolutions abovementioned, namely, Directors' and
Stockholders' dated July 10, 1946, as finally resolved by the
majority of the Stockholders and Directors present yesterday, that
you consider the abovementioned resolutions nullified." (Exhibit
CC).
On January 6, 1947, the Board of Directors of the De la Rama
company, as a consequence of the change of attitude of Don
Esteban, adopted a resolution changing the form of the donation to
the Pirovano children from a donation of 4,000 shares of stock as
originally planned into a renunciation in favor of the children of all
the company's "right, title, and interest as beneficiary in and to the
proceeds of the abovementioned life insurance policies", subject to
the express condition that said proceeds should be retained by the
company as a loan drawing interest at the rate of 5 per cent per
annum and payable to the Pirovano children after the company
"shall have first settled in full the balance of its present remaining
bonded indebtedness in the sum of approximately P5,000,000"
(Exhibit C). This resolution was concurred in by the representatives
of the National Development Company. The pertinent portion of the
resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano this
Company renounce as it hereby renounces, all of his right, title,
and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies in favor of Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano, subject to the
terms and conditions herein after provided;
That the proceeds of said insurance policies shall be retained by
the Company in the nature of a loan drawing interest at the rate of
5 per cent annum from the date of receipt of payment by the
Company from the various insurance companies above-mentioned
until the time the time the same amounts are paid to the minor
heirs of Enrico Pirovano previously mentioned;
That all amounts received from the above-mentioned policies shall
be divided equally among the minor heirs of said Enrico Pirovano;
That the company shall proceed to pay the proceeds of said
insurance policies plus interests that may have accrued to each of
the heirs of the said Enrico Pirovano or their duly appointed
representatives after the Company shall have first settled in full

the balance of its present remaining bonded indebtedness in the

sum of the approximately P5,000,000.
The above resolution was carried out by the company and Mrs.
Estefania R. Pirovano, the latter acting as guardian of her children,
by executing a Memorandum Agreement on January 10, 1947 and
June 17, 1947, respectively, stating therein that the De la Rama
Steamship Co., Inc., shall enter in its books as a loan the proceeds
of the life insurance policies taken on the life of Pirovano totalling
S321,500, which loan would earn interest at the rate of 5 per cent
per annum. Mrs. Pirovano, in executing the agreement, acted with
the express authority granted to her by the court in an order dated
March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution
providing therein that instead of the interest on the loan being
payable, together with the principal, only after the company shall
have first settled in full its bonded indebtedness, said interest may
be paid to the Pirovano children "whenever the company is in a
position to meet said obligation" (Exhibit D), and on February 26,
1948, Mrs. Pirovano executed a public document in which she
formally accepted the donation (Exhibit H). The Dela Rama
company took "official notice" of this formal acceptance at a
meeting held by its Board of Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors
took up at its meeting on July 25, 1949, the proposition of Mrs.
Pirovano to buy the house at New Rochelle, New York, owned by
the Demwood Realty, a subsidiary of the De la Rama company at
its original costs of $75,000, which would be paid from the funds
held in trust belonging to her minor children. After a brief
discussion relative to the matter, the proposition was approved in a
resolution adopted on the same date.
The formal transfer was made in an agreement signed on
September 5, 1949 by Mrs. Pirovano, as guardian of her children,
and by the De la Rama company, represented by its new General
Manager, Sergio Osmea, Jr. The transfer of this property was
approved by the court in its order of September 20,
1949.lawphil.net
On September 13, 1949, or two years and 3 months after the
donation had been approved in the various resolutions herein
above mentioned, the stockholders of the De la Rama company

formally ratified the donation (Exhibit E), with certain clarifying

modifications, including the resolution approving the transfer of the
Demwood property to the Pirovano children. The clarifying
modifications are quoted hereunder:
1.
That the payment of the above-mentioned donation shall
not be affected until such time as the Company shall have first
duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with The National Development Company, or fully
redeemed the preferred shares of stock in the amount which shall
be issued to the National Development Company in lieu thereof;
2.
That any and all taxes, legal fees, and expenses in any way
connected with the above transaction shall be chargeable and
deducted from the proceeds of the life insurance policies
mentioned in the resolutions of the Board of Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation, Sergio
Osmea, Jr., addressed an inquiry to the Securities and Exchange
Commission asking for opinion regarding the validity of the
donation of the proceeds of the insurance policies to the Pirovano
children. On June 20, 1950 that office rendered its opinion that the
donation was void because the corporation could not dispose of its
assets by gift and therefore the corporation acted beyond the
scope of its corporate powers. This opinion was submitted to the
Board of Directors at its meeting on July 12, 1950, on which
occasion the president recommend that other legal ways be
studied whereby the donation could be carried out. On September
14, 1950, another meeting was held to discuss the propriety of the
donation. At this meeting the president expressed the view that,
since the corporation was not authorized by its charter to make the
donation to the Pirovano children and the majority of the
stockholders was in favor of making provision for said children, the
manner he believed this could be done would be to declare a cash
dividend in favor of the stockholders in the exact amount of the
insurance proceeds and thereafter have the stockholders make the
donation to the children in their individual capacity.
Notwithstanding this proposal of the president, the board took no
action on the matter, and on March 8, 1951, at a stockholders'
meeting convened on that date the majority of the stockholders'
voted to revoke the resolution approving the donation to the
Pirovano children. The pertinent portion of the resolution reads as
follows:

Be it resolved, as it is hereby resolved, that in view of the failure of

compliance with the above conditions to which the above donation
was made subject, and in view of the opinion of the Securities and
Exchange Commissioner, the stockholders revoke, rescind and
annul, as they do thereby revoke, rescind and annul, its ratification
and approval on September 13, 1949 of the aforementioned
resolution of the Board of Directors of January 6, 1947, as amended
on June 24, 1947. (Exhibit T)
In view of the resolution declaring that the corporation failed to
comply with the condition set for the effectivity of the donation and
revoking at the same time the approval given to it by the
corporation, and considering that the corporation can no longer set
aside said donation because it had no longer set aside said
donation because it had long been perfected and consummated,
the minor children of the late Enrico Pirovano, represented by their
mother and guardian, Estefania R. de Pirovano, demanded the
payment of the credit due them as of December 31, 1951,
amounting to P564,980.89, and this payment having been refused,
they instituted the present action in the Court of First Instance of
Rizal wherein they prayed that the be granted an alternative relief
of the following tenor: (1) sentencing defendant to pay to the
plaintiff the sum of P564,980.89 as of December 31, 1951, with the
corresponding interest thereon; (2) as an alternative relief,
sentencing defendant to pay to the plaintiffs the interests on said
sum of P564,980.89 at the rate of 5 per cent per annum, and the
sum of P564,980.89 after the redemption of the preferred shares of
the corporation held by the National Development Company; and
(3) in any event, sentencing defendant to pay the plaintiffs
damages in the amount of not less than 20 per cent of the sum
that may be adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be
determined in order to reach a decision in this appeal are: (1) Is the
grant of the proceeds of the insurance policies taken on the life of
the late Enrico Pirovano as embodied in the resolution of the Board
of Directors of defendant corporation adopted on January 6, 1947
and June 24, 1947 a remunerative donation as found by the lower
court?; (2) IN the affirmative case, has that donation been
perfected before its rescission or nullification by the stockholders
of the corporation on March 8, 1951?; (3) Can defendant
corporation give by way of donation the proceeds of said insurance
policies to the minor children of the late Enrico Pirovano under the
law or its articles of corporation, or is that donation an ultra vires

act?; and (4) has the defendant corporation, by the acts it

performed subsequent to the granting of the donation, deliberately
prevented the fulfillment of the condition precedent to the
payment of said donation such that it can be said it has forfeited
its right to demand its fulfillment and has made the donation
entirely due and demandable?

Whereas, the late Enrico Pirovano President and General Manager

of the De la Rama Steamship Company, died in Manila sometime in
November, 1944;
Whereas, the said Enrico Pirovano was largely responsible for the
rapid and very successful development of the activities of this
company;

We will discuss these issues separately.

1.To determine the nature of the grant made by the defendant
corporation to the minor children of the late Enrico Pirovano, we do
not need to go far nor dig into the voluminous record that lies at
the bottom of this case. We do not even need to inquire into the
interest which has allegedly been shown by President Roxas in the
welfare of the children of his good friend Enrico Pirovano. Whether
President Roxas has taken the initiative in the move to give
something to said children which later culminated in the donation
now in dispute, is of no moment for the fact is that, from the mass
of evidence on hand, such a donation has been given the full
indorsement and encouraging support by Don Esteban de la Rama
who was practically the owner of the corporation. We only need to
fall back to accomplish this purpose on the several resolutions of
the Board of Directors of the corporations containing said grant for
they clearly state the reasons and purposes why the donation has
been given.
Before we proceed further, it is convenient to state here in passing
that, before the Board of Directors had approved its resolution of
January 6, 1947, as later amended by another resolution adopted
on June 24, 1947, the corporation had already decided to give to
the minor children of the late Enrico Pirovano the sum of P400,000
out of the proceeds of the insurance policies taken on his life in the
form of shares, and that when this form was considered
objectionable because its result and effect would be to give to said
children a much greater amount considering the value then of the
stock of the corporation, the Board of Directors decided to amend
the donation in the form and under the terms stated in the
aforesaid resolutions. Thus, in the original resolution approved by
the Board of Directors on July 10, 1946, wherein the reasons for
granting the donation to the minor children of the late Enrico
Pirovano were clearly, we find out the following revealing
statements:

Whereas, early in 1941 this company insured the life of said Enrico
Pirovano in various Philippine and American Life Insurance
companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and 4 minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano;
Whereas, the said Enrico Pirovano left practically nothing to his
heirs and it is but fit and proper that this company which owes so
much to the deceased should make some provisions for his
children;
Whereas, this company paid premiums on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will receive
from the insurance companies sums of money greatly in excess of
the premiums paid by the company,
Again, in the resolution approved by the Board of Directors on
January 6, 1947, we also find the following expressive statements
which are but a reiteration of those already expressed in the
original resolution:
Whereas, the late Enrico Pirovano, President and General Manager
of the De la Rama Steamship Co., Inc., died in Manila sometime
during the latter part of the year 1944;
Whereas, the said Enrico Pirovano was to a large extent
responsible for the rapid and very successful development and
expansion of the activities of this company;
Whereas, early in 1941, the life of the said Enrico Pirovano was
insured in various life companies, to wit:

Whereas, the said Enrico Pirovano is survived by 4 minor children,

to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to his
heirs and it is but fit and proper that this Company which owes so
much to the deceased should make some provision for his children;
Be it resolved, that out of gratitude to the late Enrico Pirovano this
Company renounce as it hereby renounces, . . . .
From the above it clearly appears that the corporation thought of
giving the donation to the children of the late Enrico Pirovano
because he "was to a large extent responsible for the rapid and
very successful development and expansion of the activities of this
company"; and also because he "left practically nothing to his heirs
and it is but fit and proper that this company which owes so much
to the deceased should make some provision to his children", and
so, the donation was given "out of gratitude to the late Enrico
Pirovano." We do not need to stretch our imagination to see that a
grant or donation given under these circumstances is remunerative
in nature in contemplation of law.
That which is made to a person in consideration of his merits or for
services rendered to the donor, provided they do not constitute
recoverable debts, or that in which a burden less than the value of
the thing given is imposed upon the donee, is also a donation."
(Art. 619, old Civil Code.)
In donations made to a person for services rendered to the donor,
the donor's will is moved by acts which directly benefit him. The
motivating cause is gratitude, acknowledgment of a favor, a desire
to compensate. A donation made to one who saved the donor's life,
or a lawyer who renounced his fees for services rendered to the
donor, would fall under this class of donations. These donations are
called remunerative donations. (Sinco and Capistrano, The Civil
Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 72-73.)
2. The next question to be determined is whether the donation has
been perfected such that the corporation can no longer rescind it
even if it wanted to. The answer to this question cannot but be in
the affirmative considering that the same has not only been
granted in several resolutions duly adopted by the Board of
Directors of the defendant corporation, and in all these corporate

acts the concurrence of the representatives of the National

Development Company, the only creditor whose interest may be
affected by the donation, has been expressly given. The
corporation has even gone further. It actually transferred the
ownership of the credit subject of donation to the Pirovano children
with the express understanding that the money would be retained
by the corporation subject to the condition that the latter would
pay interest thereon at the rate of 5 per cent per annum payable
whenever said corporation may be in a financial position to do so.
Thus, the following acts of the corporation as reflected from the
evidence bear this out:
(a) The donation was embodied in a resolution duly approved by
the Board of Directors on January 6, 19437. In this resolution, the
representatives of the National Development Company, have given
their concurrence. This is the only creditor which can be considered
as being adversely affected by the donation. The resolution of June
24, 1947 did not modify the substance of the former resolution for
it merely provided that instead of the interest on the loan being
payable, together with the principal, only after the corporation had
first settled in full its bonded indebtedness, said interest would be
paid "whenever the company is in a position to meet said
obligation."
(b) The resolution of January 6, 1947 was actually carried out when
the company and Mrs. Estefania R. Pirovano, executed a
memorandum agreement stating therein hat the proceeds of the
insurance policies would be entered in the books of the corporation
as a loan which would bear an interest at the rate of 5 per cent per
annum, and said agreement was signed by Mrs. Pirovano as judicial
guardian of her children after she had been expressly authorized
by the court to accept the donation in behalf of her children.
(c) While the donation can be considered as duly executed by the
execution of the document stated in the preceding paragraph, and
by the entry in the books of the corporation of the donation as a
loan, a further record of said execution was made when Mrs.
Pirovano executed a public document on February 26, 1948 making
similar acceptance of the donation. And this acceptance was
officially recorded by the corporation when on the same date its
Board of Directors approved a resolution taking "official notice" of
said acceptance.
(d) On July 25, 1949, the Board of Directors approved the proposal
of Mrs. Pirovano to buy the house at New Rochelle, New York,

owned by a subsidiary of the corporation at the costs of S75,000

which would be paid from the sum held in trust belonging to her
minor children. And this agreement was actually carried out in a
document signed by the general manager of the corporation and
by Mrs. Pirovano, who acted on the matter with the express
authority of the court.
(e) And on September 30, 1949, or two years and 3 months after
the donation had been executed, the stockholders of the defendant
corporation formally ratified and gave approval to the donation as
embodied in the resolutions above referred to, subject to certain
modifications which did not materially affect the nature of the
donation.
There can be no doubt from the foregoing relation of facts the
donation was a corporate act carried out by the corporation not
only with the sanction of its Board of Directors but also of its
stockholders. It is evident that the donation has reached the stage
of perfection which is valid and binding upon the corporation and
as such cannot be rescinded unless there is exists legal grounds for
doing so. In this case, we see none. The two reasons given for the
rescission of said donation in the resolution of the corporation
adopted on March 8, 1951, to wit: that the corporation failed to
comply with the conditions to which the above donation was made
subject, and that in the opinion of the Securities and Exchange
Commission said donation is ultra vires, are not, in our opinion,
valid and legal as to justify the rescission of a perfected donation.
These reasons, as we will discuss in the latter part of this decision,
cannot be invoked by the corporation to rescind or set at naught
the donation, and the only way by which this can be done is to
show that the donee has been in default, or that the donation has
not been validly executed, or is illegal or ultra vires, and such is not
the case as we will see hereafter. We therefore declare that the
resolution approved by the stockholders of the defendant
corporation on March 8, 1951 did not and cannot have the effect of
nullifying the donation in question.
3. The third question to be determined is: Can defendant
corporation give by way of donation the proceeds of said insurance
policies to the minor children of the late Enrico Pirovano under the
law or its articles of corporation, or is that donation an ultra vires
act? To answer this question, it is important for us to examine the
articles of incorporation of the De la Rama company to see this
question it is important for us to examine the articles of

incorporation of the De la Rama company to see if the act or

donation is outside of their scope. Paragraph second of said articles
provides:
Second The purposes for which said corporation is formed are:
(a) To purchase, charter, hire, build, or otherwise acquire steam or
other ships or vessels, together with equipment and furniture
therefor, and to employ the same in conveyance and carriage of
goods, wares and merchandise of every description, and of
passengers upon the high seas.
(b)To sell, let, charter, or otherwise dispose of the said vessels or
other property of the company.
(c)To carry on the business of carriers by water.
(d)To carry on the business of shipowners in all of its branches.
(e)To purchase or take on lease, lands, wharves, stores, lighters,
barges and other things which the company may deem necessary
or advisable to be purchased or leased for the necessary and
proper purposes of the business of the company, and from time to
time to sell the dispose of the same.
(f)To promote any company or companies for the purposes of
acquiring all or any of the property or liabilities of this company, or
both, or for any other purpose which may seem directly or
indirectly calculated to benefit the company.
(g)To invest and deal with the moneys of the company and
immediately required, in such manner as from time to time may be
determined.
(h)To borrow, or raise, or secure the payment of money in such
manner as the company shall think fit.
(i)Generally, to do all such other thing and to transact all business
as may be directly or indirectly incidental or conducive to the
attainment of the above object, or any of them respectively.
(j)Without in any particular limiting or restricting any of the objects
and powers of the corporation, it is hereby expressly declared and
provided that the corporation shall have power to issue bonds and

provided that the corporation shall have power to issue bonds and
other obligations, to mortgage or pledge any stocks, bonds or
other obligations or any property which may be required by said
corporations; to secure any bonds, guarantees or other obligations
by it issued or incurred; to lend money or credit to and to aid in any
other manner any person, association, or corporation of which any
obligation or in which any interest is held by this corporation or in
the affairs or prosperity of which this corporation or in the affairs or
prosperity of which this corporation has a lawful interest, and to do
such acts and things as may be necessary to protect, preserve,
improve, or enhance the value of any such obligation or interest;
and, in general, to do such other acts in connection with the
purposes for which this corporation has been formed which is
calculated to promote the interest of the corporation or to enhance
the value of its property and to exercise all the rights, powers and
privileges which are now or may hereafter be conferred by the laws
of the Philippines upon corporations formed under the Philippine
Corporation Act; to execute from time to time general or special
powers of attorney to persons, firms, associations or corporations
either in the Philippines, in the United States, or in any other
country and to revoke the same as and when the Directors may
determine and to do any and or all of the things hereinafter set
forth and to the same extent as natural persons might or could do.
After a careful perusal of the provisions above quoted we find that
the corporation was given broad and almost unlimited powers to
carry out the purposes for which it was organized among them, (1)
"To invest and deal with the moneys of the company not
immediately required, in such manner as from time to time may be
determined" and, (2) "to aid in any other manner any person,
association, or corporation of which any obligation or in which any
interest is held by this corporation or in the affairs or prosperity of
which this corporation has a lawful interest." The world deal is
broad enough to include any manner of disposition, and refers to
moneys not immediately required by the corporation, and such
disposition may be made in such manner as from time to time may
be determined by the corporations. The donation in question
undoubtedly comes within the scope of this broad power for it is a
fact appearing in the evidence that the insurance proceeds were
not immediately required when they were given away. In fact, the
evidence shows that the corporation declared a 100 per cent cash
dividend, or P2,000,000, and later on another 30 per cent cash
dividend. This is clear proof of the solvency of the corporation. It
may be that, as insinuated, Don Esteban wanted to make use of

the insurance money to rehabilitate the central owned by a sister

corporation, known as Hijos de I. de la Rama and Co., Inc., situated
in Bago, Negros Occidental, but this, far from reflecting against the
solvency of the De la Rama company, only shows that the funds
were not needed by the corporation.
Under the second broad power we have the above stated, that is,
to aid in any other manner any person in the affairs and prosperity
of whom the corporation has a lawful interest, the record of this
case is replete with instances which clearly show that the
corporation knew well its scope and meaning so much so that, with
the exception of the instant case, no one has lifted a finger to
dispute their validity. Thus, under this broad grant of power, this
corporation paid to the heirs of one Florentino Nonato, an engineer
of one of the ships of the company who died in Japan, a gratuity of
P7,000, equivalent to one-month salary for each year of service. It
also gave to Ramon Pons, a captain of one of its ships, a retirement
gratuity equivalent to one month salary for every year of service,
the same to be based upon his highest salary. And it contributed
P2,000 to the fund raised by the Associated Steamship Lines for
the widow of the late Francis Gispert, secretary of said Association,
of which the De la Rama Steamship Co., Inc., was a member along
with about 30 other steamship companies. In this instance, Gispert
was not even an employee of the corporation. And invoking this
vast power, the corporation even went to the extent of contributing
P100,000 to the Liberal Party campaign funds, apparently in the
hope that by conserving its cordial relations with that party it might
continue to retain the patronage of the administration. All these
acts executed before and after the donation in question have never
been questioned and were willingly and actually carried out.
We don't see much distinction between these acts of generosity or
benevolence extended to some employees of the corporation, and
even to some in whom the corporation was merely interested
because of certain moral or political considerations, and the
donation which the corporation has seen fit to give to the children
of the late Enrico Pirovano from the point of view of the power of
the corporation as expressed in its articles of incorporation. And if
the former had been sanctioned and had been considered valid
and intra vires, we see no plausible reasons why the latter should
now be deemed ultra vires. It may perhaps be argued that the
donation given to the children of the late Enrico Pirovano is so
large and disproportionate that it can hardly be considered a
pension of gratuity that can be placed on a par with the instances

above mentioned, but this argument overlooks one consideration:

the gratuity here given was not merely motivated by pure liberality
or act of generosity, but by a deep sense of recognition of the
valuable services rendered by the late Enrico Pirovano which had
immensely contributed to the growth of the corporation to the
extent that from its humble capitalization it blossomed into a multimillion corporation that it is today. In other words of the very
resolutions granting the donation or gratuity, said donation was
given not only because the company was so indebted to him that it
saw fit and proper to make provisions for his children, but it did so
out of a sense of gratitude. Another factor that we should bear in
mind is that Enrico Pirovano was not only a high official of the
company but was at the same time a member of the De la Rama
family, and the recipient of the donation are the grandchildren of
Don Esteban de la Rama. This we, may say, is the motivating root
cause behind the grant of this bounty.
It may be contended that a donation is different from a gratuity.
While technically this may be so in substance they are the same.
They are even similar to a pension. Thus, it was granted for
services previously rendered, and which at the time they were
rendered gave rise to no legal obligation. " (Words and Phrases,
Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176
Cal., 659.) Or stated in another way, a "Gratuity is mere bounty
given by the Government in consideration or recognition or
meritorious services and springs from the appreciation an d
graciousness of the Government", (Ilagan vs. Ilaya, G.R. No. 33507,
Dec. 20 1930) or "A gratuity is something given freely, or without
recompense, a gift, something voluntarily given in return for a
favor or services; a bounty; a tip." Wood Mercantile Co. vs. Cole,
209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533, 43 Off. Gaz. p.
4633. We do not see much difference between this definition of
gratuity and a remunerative donation contemplated in the Civil
Code. In essence they are the same. Such being the case, it may
be said that this donation is gratuity in a large sense for it was
given for valuable services rendered an ultra vires act in the light
of the following authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity
to directors is ultra vires of corporation, so that it could not be
legalized even if the approval of the shareholders; but this position
has no sound reason to support it, and is opposed to the weight of
authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky.
200; 46 L.R.A. 384).

But although business corporations cannot contribute to charity or

benevolence, yet they are not required always to insist on the full
extent of their legal rights. They are not forbidden for the
recognizing moral obligation of which strict law takes no
cognizance. They are not prohibited from establishing a reputation
for board, liberal, equitable dealing which may stand them in good
stead in competition with less fair rivals. Thus, an incorporated fire
insurance company which policies except losses from explosions
may nevertheless pay a loss from that cause when other
companies are accustomed to do so, such liberal dealing being
deemed conducive to the prosperity of the corporation." (Modern
Law of Corporations, Machen, Vol. 1, p. 81).
So, a bank may grant a five years pension to the family at one of
its officers. In all cases in this sorts, the amount of the gratuity
rests entirely within the discretion of the company, unless indeed it
be all together out of the reason and fitness. But where the
company has ceased to be going concerned, this power to make
gifts or present it at the end. (Modern Law of Corporations,
Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital. There seems on principle no
reason to doubt that gifts or gratuities wherever they are lawful
may be paid out of capital as well as out of profits. (Modern Law of
corporations, Machen, Vol. 1 p. 83.).
Whether desirable to supplement implied powers of this kind by
express provisions Enough has been said to show that the
implied powers of a corporation to give gratuities to its servants
and officers, as well as to strangers, are ample, so that there is
therefore no need to supplement them by express provisions."
(modern Law of Corporations, Machen, Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano children is
outside the scope of the powers of the defendant corporation, or
the scope of the powers that it may exercise under the law, or it is
an ultra vires act, still it may said that the same cannot be
invalidated, or declared legally ineffective for the reason alone, it
appearing that the donation represents not only the act of the
Board of Directors but of the stockholders themselves as shown by
the fact that the same has been expressly ratified in a resolution
duly approved by the latter. By this ratification, the infirmity of the
corporate act, it may has been obliterated thereby making the cat

perfectly valid and enforceable. This is specially so if the donation

is not merely executory but executed and consummated and no
creditors are prejudice, or if there are creditors affected, the latter
has expressly given their conformity.
In making this pronouncement, advertence should made of the
nature of the ultra vires act that is in question. A little digression
needs be made on this matter to show the different legal effect
that may result consequent upon the performance of a particular
ultra vires act on the part of the corporation. may authorities may
be cited interpreting or defining, extent, and scope of an ultra vires
act, but all of them are uniform and unanimous that the same may
be either an act performed merely outside the scope of the powers
granted to it by it articles of incorporation, or one which is contrary
to law or violative of any principle which will void any contract
whether done individually or collectively. In other words, a
distinction should be made between corporate acts or contracts
which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals,
or public policy or public duty, and are, like similar transactions
between the individuals void. They cannot serve as basis of a court
action, nor require validity ultra vires acts on the other hand, or
those which are not illegal and void ab initio, but are merely within
are not illegal and void ab initio, but are not merely within the
scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
Strictly speaking, an ultra vires act is one outside the scope of the
power conferred by the legislature, and although the term has
been used indiscriminately, it is properly distinguishable from acts
which are illegal, in excess or abuse of power, or executed in an
unauthorized manner, or acts within corporate powers but outside
the authority of particular officers or agents (19 C. J. S. 419).
Corporate transactions which are illegal because prohibited by
statute or against public policy are ordinarily void and
unenforceable regardless of the part performance, ratification, or
estoppel; but general prohibitions against exceeding corporate
powers and prohibitions intended to protect a particular class or
specifying the consequences of violation may not preclude
enforcement of the transaction and an action may be had for the
part unaffected by the illegality or for equitable restitution. (19
C.J.S. 421.)

Generally, a transaction within corporate powers but executed in

an irregular or unauthorized manner is voidable only, and may
become enforceable by reason of ratification or express or implied
assent by the stockholders or by reason of estoppel of the
corporation or the other party to the transaction to raise the
objection, particularly where the benefits are retained
As appears in paragraphs 960-964 supra, the general rule is that a
corporation must act in the manner and with the formalities, if any,
prescribed by its character or by the general law. However, a
corporation transaction or contract which is within the corporation
powers, which is neither wrong in itself nor against public policy,
but which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a
certain class, is voidable and is valid until avoided, not void until
validated; the parties for whose benefit the requirement was
enacted may ratify it or be estoppel to assert its invalidity, and
third persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its
granted powers. (19 C.J.S., 423-24.)
It is true that there are authorities which told that ultra vires acts,
or those performed beyond the powers conferred upon the
corporation either by law or by its articles of incorporation, are not
only voidable, but wholly void and of no legal effect, and that such
acts cannot be validated by ratification or be the basis of any
action in court; but such ruling does not constitute the weight of
authority, the reason being that they fail to make the important
distinction we have above adverted to. Because rule has been
rejected by most of the state courts and even by the modern
treaties or corporations (7 Flethcer, Cyc. Corps., 563-564). And now
it can be said that the majority of the cases hold that acts which
are merely ultra vires, or acts which are not illegal, may be ratified
by the stockholders of a corporation (Brooklyn Heights R. Co. vs.
Brooklyn City R. Co., 135 N.Y. Supp. 1001).
Strictly speaking, an act of a corporation outside of its character
powers is just as such ultra vires where all the stockholders
consent thereto as in a case where none of the stockholders
expressly or cannot be ratified so as to make it valid, even though
all the stockholders consent thereto; but inasmuch as the
stockholders in reality constitute the corporation, it should , it
would seem, be estopped to allege ultra vires, and it is generally so
held where there are no creditors, or the creditors are not injured

thereby, and where the rights of the state or the public are not
involved, unless the act is not only ultra vires but in addition illegal
and void. of course, such consent of all the stockholders cannot
adversely affect creditors of the corporation nor preclude a proper
attack by the state because of such ultra vires act. (7 Fletcher
Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under consideration is
illegal, or contrary to any of the express provision of the articles of
incorporation, nor prejudicial to the creditors of the defendant
corporation, we cannot but logically conclude, on the strength of
the authorities we have quoted above, that said donation, even if
ultra vires in the supposition we have adverted to, is not void, and
if voidable its infirmity has been cured by ratification and
subsequent acts of the defendant corporation. The defendant
corporation, therefore, is now prevented or estopped from
contesting the validity of the donation. This is specially so in this
case when the very directors who conceived the idea of granting
said donation are practically the stockholders themselves, with few
nominal exception. This applies to the new stockholder Jose
Cojuangco who acquired his interest after the donation has been
made because of the rule that a "purchaser of shares of stock
cannot avoid ultra vires acts of the corporation authorized by its
vendor, except those done after the purchase" (7 Fletcher, Cyc.
Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19 Phil.,
82.) Indeed, how can the stockholders now pretend to revoke the
donation which has been partly consummated? How can the
corporation now set at naught the transfer made to Mrs. Pirovano
of the property in New York, U.S.A., the price of which was paid by
her but of the proceeds of the insurance policies given as donation.
To allow the corporation to undo what it has done would only be
most unfair but would contravene the well-settled doctrine that the
defense of ultra vires cannot be set up or availed of in completed
transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19
C.J.S., 431).
4.
We now come to the fourth and last question that the
defendant corporation, by the acts it has performed subsequent to
the granting of the donation, deliberately prevented the fulfillment
of the condition precedent to the payment of said donation such
that it can be said it has forfeited entirely due and demandable.
It should be recalled that the original resolution of the Board of
Directors adopted on July 10, 1946 which provided for the donation

of P400,000 out of the proceeds which the De la Rama company

would collect on the insurance policies taken on the life of the late
Enrico Pirovano was, as already stated above, amended on January
6, 1947 to include, among the conditions therein provided, that the
corporation shall proceed to pay said amount, as well as the
interest due thereon, after it shall have settled in full balance of its
bonded indebtedness in the sum of P5,000,000. It should be
recalled that on September 13, 1949, or more than 2 years after
the last amendment referred too above, the stockholders adopted
another resolution whereby they formally ratified said donation but
subject to the following clarifications: (1) that the amount of the
donation shall not be effected until such time as the company shall
have first duly liquidated its present bonded indebtedness in the
amount of P3,260,855.77 to the National Development Company,
or shall have first fully redeemed the preferred shares of stock in
the amount to be issued to said company in lieu thereof, and (2)
that any and all taxes, legal fees, and expenses connected with the
transaction shall be chargeable from the proceeds of said
insurance policies.
The trial court, in considering these conditions in the light of the
acts subsequently performed by the corporation in connection with
the proceeds of the insurance policies, considered said conditions
null and void, or at most not written because in its pinion their nonfulfillment was due to a deliberate desistance of the corporation
and not to lack of funds to redeem the preferred shares of the
National Development Company. The conclusions arrived at by the
trial court on this point are as follows:
Fourth. that the condition mentioned in the donation is null and
void because it depends on the exclusive will of the donor, in
accordance with the provisions of Article 1115 of the Old Civil
Code.
Fifth. That if the condition is valid, its non-fulfillment is due to
the desistance of the defendant company from obeying and doing
the wishes and mandate of the majority of the stockholders.
Sixth. That the non-payment of the debt in favor of the National
Development Company is due to the lack of funds, nor to lack of
authority, but to the desire of the President of the corporation to
preserve and continue the Government participation in the
company.

To this views of the trial court, we fail to agree. There are many
factors we can consider why the failure to immediately redeem the
preferred shares issued to the National Development Company as
desired by the minor children of the late Enrico Pirovano cannot or
should not be attributed to a mere desire on the part of the
corporation to delay the redemption, or to prejudice the interest of
the minors, but rather to protect the interest of the corporation
itself. One of them is the text of the very resolution approved by
the National Development Company on February 18, 1949 which
prescribed the terms and conditions under which it expressed its
conformity to the conversion of the bonded indebtedness into
preferred shares of stock. The text of the resolution above
mentioned reads:
Resolved: That the outstanding bonded indebtedness of the Dela
Rama Steamship Co., Inc., in the approximate amount of
P3,260,855.77 be converted into non-voting preferred shares of
stock of said company, said shares to bear a fixed dividend of 6
percent per annum which shall be cumulative and redeemable
within 15 years. Said shares shall be preferred as to assets in the
event of liquidation or dissolution of said company but shall be
non-participating.
It is plain from the text of the above resolution that the defendant
corporation had 15 years from February 18, 1949, or until 1964,
within which to effect the redemption of the preferred shares
issued to the National Development Company. This condition
cannot but be binding and obligatory upon the donees, if they
desire to maintain the validity of the donation, for it is not only the
basis upon which the stockholders of the defendant corporation
expressed their willingness to ratify the donation, but it is also by
way which its creditor, the National Development Company, would
want it to be. If the defendant corporation is given 15 years within
which to redeem the preferred shares, and that period would
expire in 1964, one cannot blame the corporation for availing itself
of this period if in its opinion it would redound to its best interest. It
cannot therefore be said that the fulfillment of the condition for the
payment of the donation is one that wholly depends on the
exclusive will of the donor, as the lower court has concluded,
simply because it failed to meet the redemption of said shares in
her manner desired by the donees. While it may be admitted that
because of the disposition of the assets of the corporation upon the
suggestion of its general manager more than enough funds had
been raised to effect the immediate redemption of the above

shares, it is not correct to say that the management has

completely failed in its duty to pay its obligations for, according to
the evidence, a substantial portion of the indebtedness has been
paid and only a balance of about P1,805,169.98 was outstanding
when the stockholders of the corporation decided to revoke or
cancel the donation. (Exhibit P.)
But there are other good reasons why all the available funds have
not been actually applied to the redemption of the preferred
shares, one of them being the "desire of the president of the
corporation to preserve and continue the government participation
in the company" which even the lower court found it to be
meritorious, which is one way by which it could continue receiving
the patronage and protection of the government. Another reason is
that the redemption of the shares does not depend on the will of
the corporation alone but to a great extent on the will of a third
party, the National Development Company. In fact, as the evidence
shows, this Company had pledged these shares to the Philippine
National Bank and the Rehabilitation Finance Corporation as a
security to obtain certain loans to finance the purchase of certain
ships to be built for the use of the company under management
contract entered into between the corporation and the National
Development Company, and this was what prevented the
corporation from carrying out its offer to pay the sum
P1,956,513.07 on April 5, 1951. Had this offer been accepted, or
favorably acted upon by the National Development Company, the
indebtedness would have been practically liquidated, leaving
outstanding only one certificate worth P217,390.45. Of course, the
corporation could have insisted in redeeming the shares if it
wanted to even to the extent of taking a court action if necessary
to force its creditor to relinquish the shares that may be necessary
to accomplish the redemption, but such would be a drastic step
which would have not been advisable considering the policy right
along maintained by the corporation to preserve its cordial and
smooth relation with the government. At any rate, whether such
attitude be considered as a mere excuse to justify the delay in
effecting the redemption of the shares, or a mere desire on the
part of the corporation to retain in its possession more funds
available to attend to other pressing need as demanded by the
interest of the corporation, we fail to see in such an attitude an
improper motive to circumvent the early realization of the desire of
the minors to obtain the immediate payment of the donation which
was made dependent upon the redemption of said shares there
being no clear evidence that may justify such design. Anyway, a

great portion of the funds went to the stockholders themselves by

way of dividends to offset, so it appears, the huge advances that
the corporation had made to them which were entered in the books
of the corporation as loans and, therefore, they were invested for
their own benefit. As General Manager Osmea said, "we were first
confronted with the problem of the withdrawals of the family which
had to be repaid back to the National Development Company and
one of the most practical solutions to that was to declare dividends
and reduce the amounts of their withdrawals", which then totalled
about P3,000,000.
All things considered, we are of the opinion that the finding of the
lower court that the failure of the defendant corporation to comply
with the condition of the donation is merely due to its desistance
from obeying the mandate of the majority of the stockholders and
not to lack of funds, or to lack of authority, has no foundation in
law or in fact, and, therefore, its conclusion that because of such
desistance that condition should be deemed as fulfilled and the
payment of the donation due and demandable, is not justified. In
this respect, the decision of the lower court should be reversed.
Having reached the foregoing conclusion, we deem it unnecessary
to discuss the other issues raised by the parties in their briefs.
The lower court adjudicated to plaintiff an additional amount
equivalent to 20 per cent of the amount claimed as damages by
way of attorney's fees, and in our opinion, this award can be
justified under Article 2208, paragraph 2, of the new Civil Code,
which provides: "When the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest", attorney's fees nay be awarded
as damages. However, the majority believes that this award should
be reduced to 10 per cent.
Wherefore, the decision appealed from should be modified as
follows: (a) that the donation made in favor of the children of the
late Enrico Pirovano of the proceeds of the insurance policies taken
on his life is valid and binding on the defendant corporation, (b)
that said donation, which amounts to a total of P583,813.59,
including interest, as it appears in the books of the corporation as
of August 31, 1951, plus interest thereon at the rate of 5 per cent
per annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully redeemed
the preferred shares issued to the National Development Company

under the terms and conditions stated in the resolutions of the

Board of Directors of January 6, 1947 and June 24, 1947, as
amended by the resolution of the stockholders adopted on
September 13,1949; and (c) defendant shall pay to plaintiffs an
additional amount equivalent to 10 per cent of said amount of
P583,813.59 as damages by way of attorney's fees, and to pay the
costs of action.
Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo, Concepcion,
and Reyes, J. B. L., concur.
Reyes, A., concurs in the result.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-37331

March 18, 1933

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

their own behalf and in that all other stockholders of the
Balatoc Mining Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC
MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and
A. W. BEAM, defendants-appellees.
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of
the City of Manila by F. M. Harden, acting in his own behalf and that
of all other stockholders of the Balatoc Mining Co. who might join in
the action and contribute to the expense of the suit. With the
plaintiff Harden two others, J. D. Highsmith and John C. Hart,
subsequently associated themselves. The defendants are the
Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E.
Renz, John W. Haussermann, and A. W. Beam. The principal
purpose of the original action was to annul a certificate covering
600,000 shares of the stock of the Balatoc Mining Co., which have
been issued to the Benguet Consolidated Mining Co., and to secure
to the Balatoc Mining Co., the restoration of a large sum of money

alleged to have been unlawfully collected by the Benguet

Consolidated Mining Co., with legal interest, after deduction
therefrom of the amount expended by the latter company under a
contract between the two companies, bearing date of March 9,
1927. The complaint was afterwards amended so as to include a
prayer for the annulment of this contract. Shortly prior to the
institution of this lawsuit, the Benguet Consolidated Mining Co.,
transferred to H. E. Renz, as trustee, the certificate for 600,000
shares of the Balatoc Mining Co. which constitute the principal
subject matter of the action. This was done apparently to facilitate
the splitting up to the shares in the course of the sale or
distribution. To prevent this the plaintiffs, upon filing their original
complaint, procured a preliminary injunction restraining the
defendants, their agents and servants, from selling, assigning or
transferring the 600,000 shares of the Balatoc Mining Co., or any
part thereof, and from removing said shares from the Philippine
Islands. This explains the connection of Renz with the case. The
other individual defendants are made merely as officials of the
Benguet Consolidated Mining Co. Upon hearing the cause the trial
court dismissed the complaint and dissolved the preliminary
injunction, with costs against the plaintiffs. From this judgment the
plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the
financial interests involve are immense. Briefly told these facts are
as follows: The Benguet Consolidated Mining Co. was organized in
June, 1903, as a sociedad anonima in conformity with the
provisions of Spanish law; while the Balatoc Mining Co. was
organized in December 1925, as a corporation, in conformity with
the provisions of the Corporation Law (Act No. 1459). Both entities
were organized for the purpose of engaging in the mining of gold in
the Philippine Islands, and their respective properties are located
only a few miles apart in the subprovince of Benguet. The capital
stock of the Balatoc Mining Co. consists of one million shares of the
par value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties
acquired by it were largely undeveloped; and the original
stockholders were unable to supply the means needed for
profitable operation. For this reason, the board of directors of the
corporation ordered a suspension of all work, effective July 31,
1926. In November of the same year a general meeting of the
company's stockholders appointed a committee for the purpose of
interesting outside capital in the mine. Under the authority of this

resolution the committee approached A. W. Beam, then president

and general manager of the Benguet Company, to secure the
capital necessary to the development of the Balatoc property. As a
result of the negotiations thus begun, a contract, formally
authorized by the management of both companies, was executed
on March 9, 1927, the principal features of which were that the
Benguet Company was to proceed with the development and
construct a milling plant for the Balatoc mine, of a capacity of 100
tons of ore per day, and with an extraction of at least 85 per cent
of the gold content. The Benguet Company also agreed to erect an
appropriate power plant, with the aerial tramlines and such other
surface buildings as might be needed to operate the mine. In
return for this it was agreed that the Benguet Company should
receive from the treasurer of the Balatoc Company shares of a par
value of P600,000, in payment for the first P600,000 be thus
advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May
31, 1929, the Benguet Company had spent upon the development
the sum of P1,417,952.15. In compensation for this work a
certificate for six hundred thousand shares of the stock of the
Balatoc Company has been delivered to the Benguet Company,
and the excess value of the work in the amount of P817,952.15 has
been returned to the Benguet Company in cash. Meanwhile
dividends of the Balatoc Company have been enriching its
stockholders, and at the time of the filing of the complaint the
value of its shares had increased in the market from a nominal
valuation to more than eleven pesos per share. While the Benguet
Company was pouring its million and a half into the Balatoc
property, the arrangements made between the two companies
appear to have been viewed by the plaintiff Harden with
complacency, he being the owner of many thousands of the shares
of the Balatoc Company. But as soon as the success of the
development had become apparent, he began this litigation in
which he has been joined by two others of the eighty shareholders
of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is
unlawful for the Benguet Company to hold any interest in a mining
corporation and that the contract by which the interest here in
question was acquired must be annulled, with the consequent
obliteration of the certificate issued to the Benguet Company and
the corresponding enrichment of the shareholders of the Balatoc
Company.

When the Philippine Islands passed to the sovereignty of the

United States, in the attention of the Philippine Commission was
early drawn to the fact that there is no entity in Spanish law
exactly corresponding to the notion of the corporation in English
and American law; and in the Philippine Bill, approved July 1, 1902,
the Congress of the United States inserted certain provisions,
under the head of Franchises, which were intended to control the
lawmaking power in the Philippine Islands in the matter of granting
of franchises, privileges and concessions. These provisions are
found in section 74 and 75 of the Act. The provisions of section 74
have been superseded by section 28 of the Act of Congress of
August 29, 1916, but in section 75 there is a provision referring to
mining corporations, which still remains the law, as amended. This
provisions, in its original form, reads as follows: "... it shall be
unlawful for any member of a corporation engaged in agriculture or
mining and for any corporation organized for any purpose except
irrigation to be in any wise interested in any other corporation
engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus
enacted by Congress, the Philippine Commission entered upon the
enactment of a general law authorizing the creation of corporations
in the Philippine Islands. This rather elaborate piece of legislation is
embodied in what is called our Corporation Law (Act No. 1459 of
the Philippine Commission). The evident purpose of the
commission was to introduce the American corporation into the
Philippine Islands as the standard commercial entity and to hasten
the day when the sociedad anonima of the Spanish law would be
obsolete. That statute is a sort of codification of American
corporate law.
For the purposes general description only, it may be stated that
the sociedad anonima is something very much like the English joint
stock company, with features resembling those of both the
partnership is shown in the fact that sociedad, the generic
component of its name in Spanish, is the same word that is used in
that language to designate other forms of partnership, and in its
organization it is constructed along the same general lines as the
ordinary partnership. It is therefore not surprising that for purposes
of loose translation the expression sociedad anonima has not
infrequently the other hand, the affinity of this entity to the
American corporation has not escaped notice, and the expression
sociedad anonima is now generally translated by the word

corporation. But when the word corporation is used in the sense of

sociedad anonima and close discrimination is necessary, it should
be associated with the Spanish expression sociedad anonima
either in a parenthesis or connected by the word "or". This latter
device was adopted in sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted
bodily, in subsection (5) of section 13 of that Act (No. 1459) the
words which we have already quoted from section 75 of the Act of
Congress of July 1, 1902 (Philippine Bill); and it is of course obvious
that whatever meaning originally attached to this provision in the
Act of Congress, the same significance should be attached to it in
section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the
introduction of the American Corporation into Philippine law in the
place of the sociedad anonima, it was necessary to make certain
adjustments resulting from the continued co-existence, for a time,
of the two forms of commercial entities. Accordingly, in section 75
of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law "so far as
such provisions may be applicable", and giving to the sociedades
anonimas previously created in the Islands the option to continue
business as such or to reform and organize under the provisions of
the Corporation Law. Again, in section 191 of the Corporation Law,
the Code of Commerce is repealed in so far as it relates to
sociedades anonimas. The purpose of the commission in repealing
this part of the Code of Commerce was to compel commercial
entities thereafter organized to incorporate under the Corporation
Law, unless they should prefer to adopt some form or other of the
partnership. To this provision was added another to the effect that
existing sociedades anonimas, which elected to continue their
business as such, instead of reforming and reorganizing under the
Corporation Law, should continue to be governed by the laws that
were in force prior to the passage of this Act "in relation to their
organization and method of transacting business and to the rights
of members thereof as between themselves, but their relations to
the public and public officials shall be governed by the provisions
of this Act."
As already observed, the provision above quoted from section 75
of the Act Congress of July 1, 1902 (Philippine Bill), generally
prohibiting corporations engaged in mining and members of such
from being interested in any other corporation engaged in mining,

was amended by section 7 of Act No. 3518 of the Philippine

Legislature, approved by Congress March 1, 1929. The change in
the law effected by this amendment was in the direction of
liberalization. Thus, the inhibition contained in the original
provision against members of a corporation engaged in agriculture
or mining from being interested in other corporations engaged in
agriculture or in mining was so modified as merely to prohibit any
such member from holding more than fifteen per centum of the
outstanding capital stock of another such corporation. Moreover,
the explicit prohibition against the holding by any corporation
(except for irrigation) of an interest in any other corporation
engaged in agriculture or in mining was so modified as to limit the
restriction to corporations organized for the purpose of engaging in
agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not
contain any appropriate clause directly penalizing the act of a
corporation, a member of a corporation, in acquiring an interest
contrary to paragraph (5) of section 13 of the Act. The Philippine
Legislature undertook to remedy this situation in section 3 of Act
No. 2792 of the Philippine Legislature, approved on February 18,
1919, but this provision was declared invalid by this court in
Government of the Philippine Islands vs. El Hogar Filipino (50 Phil.,
399), for lack of an adequate title to the Act. Subsequently the
Legislature reenacted substantially the same penal provision in
section 21 of Act No. 3518, under a title sufficiently broad to
comprehend the subject matter. This part of Act No. 3518 became
effective upon approval by the Governor-General, on December 3,
1928, and it was therefore in full force when the contract now in
question was made.
This provision was inserted as a new section in the Corporation
Law, forming section 1990 (A) of said Act as it now stands.
Omitting the proviso, which seems not to be pertinent to the
present controversy, said provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of
this Act and its amendments not otherwise penalized therein, shall
be punished by a fine of not more than five thousand pesos and by
imprisonment for not more than five years, in the discretion of the
court. If the violation is committed by a corporation, the same
shall, upon such violation being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-General or by any
provincial fiscal by order of said Attorney-General: . . . .

Upon a survey of the facts sketched above it is obvious that there

are two fundamental questions involved in this controversy. The
first is whether the plaintiffs can maintain an action based upon
the violation of law supposedly committed by the Benguet
Company in this case. The second is whether, assuming the first
question to be answered in the affirmative, the Benguet Company,
which was organized as a sociedad anonima, is a corporation
within the meaning of the language used by the Congress of the
United States, and later by the Philippine Legislature, prohibiting a
mining corporation from becoming interested in another mining
corporation. It is obvious that, if the first question be answered in
the negative, it will be unnecessary to consider the second
question in this lawsuit.
Upon the first point it is at once obvious that the provision referred
to was adopted by the lawmakers with a sole view to the public
policy that should control in the granting of mining rights.
Furthermore, the penalties imposed in what is now section 190 (A)
of the Corporation Law for the violation of the prohibition in
question are of such nature that they can be enforced only by a
criminal prosecution or by an action of quo warranto. But these
proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs
seek to assert in this case? The defendant Benguet Company has
committed no civil wrong against the plaintiffs, and if a public
wrong has been committed, the directors of the Balatoc Company,
and the plaintiff Harden himself, were the active inducers of the
commission of that wrong. The contract, supposing it to have been
unlawful in fact, has been performed on both sides, by the building
of the Balatoc plant by the Benguet Company and the delivery to
the latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has been
done. Nobody would suggest the demolition of the mill. The
Balatoc Company is secure in the possession of that improvement,
and talk about putting the parties in status quo ante by restoring
the consideration with interest, while the Balatoc Company
remains in possession of what it obtained by the use of that
money, does not quite meet the case. Also, to mulct the Benguet
Company in many millions of dollars in favor of individuals who
have not the slightest equitable right to that money in a
proposition to which no court can give a ready assent.

The most plausible presentation of the case of the plaintiffs

proceeds on the assumption that only one of the contracting
parties has been guilty of a misdemeanor, namely, the Benguet
Company, and that the other party, the Balatoc Company, is wholly
innocent to participation in that wrong. The plaintiffs would then
have us apply the second paragraph of article 1305 of the Civil
Code which declares that an innocent party to an illegal contract
may recover anything he may have given, while he is not bound to
fulfill any promise he may have made. But, supposing that the first
hurdle can be safely vaulted, the general remedy supplied in article
1305 of the Civil Code cannot be invoked where an adequate
special remedy is supplied in a special law. It has been so held by
this court in Go Chioco vs. Martinez (45 Phil., 256, 280), where we
refused to apply that article to a case of nullity arising upon a
usurious loan. The reason given for the decision on this point was
that the Usury Act, as amended, contains all the provisions
necessary for the effectuation of its purposes, with the result that
the remedy given in article 1305 of the Civil Code is unnecessary.
Much more is that idea applicable to the situation now before us,
where the special provisions give ample remedies for the
enforcement of the law by action in the name of the Government,
and where no civil wrong has been done to the party here seeking
redress.
The view of the case presented above rest upon considerations
arising upon our own statutes; and it would seem to be
unnecessary to ransack the American decisions for analogies
pertinent to the case. We may observe, however, that the situation
involved is not unlike that which has frequently arisen in the United
States under provisions of the National Bank Act prohibiting banks
organized under that law from holding real property. It has been
uniformly held that a trust deed or mortgaged conveying property
of this kind to a bank, by way of security, is valid until the
transaction is assailed in a direct proceeding instituted by the
Government against the bank, and the illegality of such tenure
supplies no basis for an action by the former private owner, or his
creditor, to annul the conveyance. (National Bank vs. Matthews, 98
U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other
analogies point in the same direction. (South & Ala. R. Ginniss vs.
B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs
Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252;
Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)

Most suggestive perhaps of all the cases in Compaia Azucarera de

Carolina vs. Registrar (19 Porto Rico, 143), for the reason that this
case arose under a provision of the Foraker Act, a law analogous to
our Philippine Bill. It appears that the registrar had refused to
register two deeds in favor of the Compaia Azucarera on the
ground that the land thereby conveyed was in excess of the area
permitted by law to the company. The Porto Rican court reversed
the ruling of the registrar and ordered the registration of the
deeds, saying:
Thus it may be seen that a corporation limited by the law or by its
charter has until the State acts every power and capacity that any
other individual capable of acquiring lands, possesses. The
corporation may exercise every act of ownership over such lands; it
may sue in ejectment or unlawful detainer and it may demand
specific performance. It has an absolute title against all the world
except the State after a proper proceeding is begun in a court of
law. ... The Attorney General is the exclusive officer in whom is
confided the right to initiate proceedings for escheat or attack the
right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action
against the Benguet Company for the infraction of law supposed to
have been committed, we forego cny discussion of the further
question whether a sociedad anonima created under Spanish law,
such as the Benguet Company, is a corporation within the meaning
of the prohibitory provision already so many times mentioned. That
important question should, in our opinion, be left until it is raised in
an action brought by the Government.
The judgment which is the subject of his appeal will therefore be
affirmed, and it is so ordered, with costs against the appellants.
Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull,
Vickers, Imperial and Butte, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 11897
September 24, 1918
J. F. RAMIREZ, plaintiff-appellee,
vs.

THE ORIENTALIST CO., and RAMON J. FERNANDEZ,

defendants-appellants.
Jose Moreno Lacalle for appellant Fernandez.
Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.
STREET, J.:
The Orientalist Company is a corporation, duly organized under the
laws of the Philippine Islands, and in 1913 and 1914, the time of
the occurrences which gave rise to this lawsuit, was engaged in the
business of maintaining and conducting a theatre in the city of
Manila for the exhibition of cinematographic films. Under the
articles of incorporation, the company is authorized to
manufacture, buy, or otherwise obtain all accessories necessary for
conducting such a business. The plaintiff J. F. Ramirez was, at the
same time, a resident of the city of Paris, France, and was engaged
in the business of marketing films for a manufacturer or
manufacturers, there engaged in the production or distribution of
cinematographic material. In this enterprise the plaintiff was
represented in the city of Manila by his son, Jose Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist
Company, in Manila, became apprised of the fact that the plaintiff
in Paris had control of the agencies for two different marks of films,
namely, the "Eclair Films" and the "Milano Films;" and negotiations
were begun with said officials of the Orientalist Company by Jose
Ramirez, as agent of the plaintiff, for the purpose of placing the
exclusive agency of these films in the hands of the Orientalist
Company. The defendant Ramon J. Fernandez, one of the directors
of the Orientalist Company and also its treasure, was chiefly active
in this matter, being moved by the suggestions and
representations of Vicente Ocampo, manage of the Oriental
Theater, to the effect that the securing of the said films was
necessary to the success of the corporation.
Near the end of July of the year aforesaid, Jose Ramirez, as
representative of his father, placed in the hands of Ramon J.
Fernandez an offer, dated July 4, 1913, stating detail the terms
upon which the plaintiff would undertake to supply from Paris the
aforesaid films. This officer was declared to be good until the end
of July; and as only about for the Orientalist Company to act on the
matter speedily, if it desired to take advantage of said offer.
Accordingly, Ramon J. Fernandez, on July 30, had an informal

conference with all the members of the company's board of

directors except one, and with approval of those with whom he had
communicated, addressed a letter to Jose Ramirez, in Manila,
accepting the offer contained in the memorandum of July 4th for
the exclusive agency of the Eclair films. A few days later, on
August 5, he addressed another letter couched in the same terms,
likewise accepting the office of the exclusive agency for the Milano
Films.
The memorandum offer contained a statement of the price at
which the films would be sold, the quantity which the
representative of each was required to take and information
concerning the manner and intervals of time for the respective
shipments. The expenses of packing, transportation and other
incidentals were to be at the cost of the purchaser. There was
added a clause in which J. F. Ramirez described his function in such
transactions as that of a commission agent and stated that he
would see to the prompt shipment of the films, would pay the
manufacturer, and take care that the films were insured his
commission for such services being fixed at 5 per cent.
What we consider to be the most portion of the two letters of
acceptance written by R. J. Fernandez to Jose Ramirez is in the
following terms:
We willingly accepted the officer under the terms communicated
by your father in his letter dated at Paris on July 4th of the present
year.
These communications were signed in the following form, in which
it will be noted the separate signature of R. J. Fernandez, as an
individual, is placed somewhat below and to the left of the
signature of the Orientalist Company as singed by R. J. Fernandez,
in the capacity of treasurer:
THE ORIENTALIST COMPANY,
By R. J. FERNANDEZ,
Treasurer,
R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez
should at once telegraph to his father in Paris that his offer had
been accepted by the Orientalist Company and instruct him to

make a contract with the film companies, according to the tenor of

the offer, and in the capacity of attorney-in-fact for the Orientalist
Company. The idea behind the latter suggestion apparently was
that the contract for the films would have to be made directly
between the film-producing companies and the Orientalist
Company; and it seemed convenient, in order to save time, that
the Orientalist Company should clothed J. F. Ramirez with full
authority as its attorney-in-fact. This idea was never given effect;
and so far as the record shows, J. F. Ramirez himself procured the
films upon his own responsibility, as he indicated in the officer of
July 4 that he would do, with the result that the only contracting
parties in this case are J. F. Ramirez of the one part, and the
Orientalist Company, with Ramon J. Fernandez of the other.
In due time the films began to arrive in Manila, a draft for the cost
and expenses incident to each shipment being attached to the
proper bill of lading. It appears that the Orientalist Company was
without funds to meet these obligations and the first few drafts
were dealt with in the following manner: The drafts, upon
presented through the bank, were accepted in the name of the
Orientalist Company by its president B. Hernandez, and were taken
up by the latter with his own funds. As the drafts had thus been
paid by B. Hernandez, the films which had been procured by he
payment of said drafts were treated by him as his own property;
and they in fact never came into the actual possession of the
Orientalist Company as owner at all, though it is true Hernandez
rented the films to the Orientalist Company and they were
exhibited by it in the Oriental Theater under an arrangement which
was made between him and the theater's manager.
During the period between February 27, 1914, and April 30, 1914,
there arrived in the city of Manila several remittances of films from
Paris, and it is these shipments which have given occasion for the
present action. All of the drafts accompanying these films were
drawn, as on former occasions, upon the Orientalist Company; and
all were accepted in the name of B. Hernandez, except the last,
which was accepted by B. Hernandez individually. None of the
drafts thus accepted were taken up by the drawee or by B.
Hernandez when they fell due; and it was finally necessary for the
plaintiff himself to take them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19,
1914, against the Orientalist Company, and Ramon J. Fernandez.
As the films which accompanied the dishonored were liable to

deteriorate, the court, upon application of the plaintiff, and

apparently without opposition on the part of the defendants,
appointed a receiver who took charge of the films and sold them.
The amount realized from this sale was applied to the satisfaction
of the plaintiff's claim and was accordingly delivered to him in part
payment thereof. At trial judgment was given for the balance due
to the plaintiff, namely P6,018.93, with interest from May 19, 1914,
the date of the institution of the action. In the judgment of the trial
court the Orientalist Company was declared to be a principal
debtor and Ramon J. Fernandez was declared to be liable
subsidiarily as guarantor. From this judgment both of the parties
defendant appealed.
In this Court neither of the parties appellant make any question
with respect to the right of the plaintiff to recover from somebody
the amount awarded by the lower court; but each of the
defendants insists the other is liable for the whole. It results that
the real contention upon this appeal is between the two
defendants.
It is stated in the brief of the appellant Ramon J. Fernandez and the
statement is not challenged by the Orientalist Company that the
judgment has already been executed as against the company is
exclusively and primarily liable the entire indebtedness, the
question as to the liability of Ramon J. Fernandez would be
academic. But if the latter is liable as principal obligor for the
whole or any part of the debt, it will be necessary to modify the
judgment in order to adjust the rights of the defendants in
accordance with such finding.
It will be noted that the action is primarily founded upon the
liability created by the letters dated July 30th and August 5, 1913,
in connection with the plaintiff's offer of July 4, 1913; and both of
the letters mentioned are copied into the complaint as the
foundation of the action. The action is not based upon the
dishonored drafts which were accepted by B. Hernandez in the
name of the Orientalist Company; and although these drafts, as
well as the last draft, which was accepted by B. Hernandez
individually, have been introduced in evidence, this was evidently
done for the purpose of proving the amount of damages which the
plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the
question of the liability of the corporation upon the contracts

contained in the letters of July 30 and August 5, 1913, and,

secondly the question of the liability of Ramon J. Fernandez, based
upon his personal signature to the same documents.
As to the liability of the corporation a preliminary point of
importance arises upon the pleadings. The action, as already
stated, is based upon documents purporting to be signed by the
Orientalist Company, and copies of the documents are set out in
the complaint. It was therefore incumbent upon the corporation, if
it desired to question the authority of Fernandez to bind it, to deny
the due execution of said contracts under oath, as prescribed in
section 103 of the Code of Civil procedure. Said section, in the part
pertinent to the situation now under consideration, reads as
follows:
When an action is brought upon a written instrument and the
complaint contains or has annexed or has annexed a copy of such
instrument, the genuineness and due execution of the instrument
shall be deemed admitted, unless specifically denied under oath in
the answer.
No sworn answer denying the genuineness and due execution of
the contracts in question or questioning the authority of Ramon J.
Fernandez to bind the Orientalist Company was filed in this case;
but evidence was admitted without objection from the plaintiff,
tending to show that Ramon J. Fernandez had no such authority.
This evidence consisted of extracts from the minutes of the
proceedings of the company's board of directors and also of
extracts from the minutes of the proceedings of the company's
stockholders, showing that the making of this contract had been
under consideration in both bodies and that the authority to make
the same had been withheld by the stockholders. It therefore
becomes necessary for us to consider whether the administration
resulting from the failure of the defendant company to deny the
execution of the contracts under oath is binding upon it for all
purposes of this lawsuit, or whether such failure should be
considered a mere irregularity of procedure which was waived
when the evidence referred to was admitted without objection from
the plaintiff. The proper solution of this problem makes it necessary
to consider carefully the principle underlying the provision above
quoted.
That the situation was one in which an answer under oath denying
the authority of the agent should have been interposed, supposing

that the company desired to contest this point, is not open to

question. In the case of Merchant vs. International Banking
Corporation, (6 Phil. Rep., 314), it appeared that one Brown has
signed the name of the defendant bank as guarantor of a
promissory note. The bank was sued upon this guaranty and at the
hearing attempted to prove that Brown had no authority to bind
the bank by such contract. It was held that buy failing to deny the
contract under oath, the bank had admitted the genuineness and
due execution thereof, and that this admission extended not only
to the authenticity of the signature of Brown but also to his
authority. Said Justice Willard: "The failure of the defendant to deny
the genuineness and due execution of this guaranty under oath
was an admission not only of the signature of Brown, but also his
authority to make the contract in behalf of the defendant and of
the power the contract in behalf of the defendant and of the power
of the defendant to enter into such a contract.
The rule thus stated is in entire accord with the doctrine prevailing
in the United States, as will be seen by reference to the following,
among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an
action against a mining corporation upon an appeal bond. The
name of the company had been affixed to the obligation by an
agent, and no sufficient affidavit was filed by the corporation
questioning its signature or the authority of the agent to bind the
company. It was held that the plaintiff did not have to prove the
due execution of the bond and that the corporation as to be taken
as admitting the authority of the agent to make the signature.
Among other things the court said: "But it is said that the authority
of Barrett to execute the bond is distinguishable from the signing
and, although the signature must be denied under oath, the
authority of the agent need not be. Upon this we observe that the
statute manifestly refers to the legal effect of the signature, rather
than the manual act of singing. If the name of the obligor, in a
bond, is subscribed by one in his presence, and by his direction,
the effect is the same as if his name should be signed with his own
hand, and under such circumstances we do not doubt that the
obligor must deny his signature under oath, in order to put the
obligee to proof of the fact. Quit facit per aliam facit per se, and
when the name is signed by one thereunto authorized, it is as
much as the signature of the principal as if written with his own
hand. Therefore, if the principal would deny the authority of the

agent, as the validity of the signature is thereby directly attacked,

the denial must be under oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was
brought upon a promissory note purporting to have been given by
on A. B., as the treasurer of the defendant company. Said the court:
"Under the Judiciary Act of 1799, requiring the defendant to deny
on oath an instrument of writing, upon which he is sued, the plea in
this case should have been verified.
If the person who signed this note for the company, and upon
which they are sued, was not authorized to make it, let them say
so upon oath, and the onus is then on the plaintiff to overcome the
plea."

the contract was executed by one not authorized as its agent, it

must plead non est factum. (Thompson on Corporations, 1st ed.,
vol. 6, sec. 7631.)
Again, says the same author:
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 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 brought and where it intends to defend on the ground of
total want of power in the corporation to make such a contract.
(Opus citat. sec. 7619.)

It should be noted that the provision contained in section 103 of

our Code of Civil Procedure is embodied in some form or other in
the statutes of probably all of the American States, and it is not by
any means peculiar to the laws of California, though it appears to
have been taken immediately from the statutes of that State.
(Secs. 447, 448, California Code of Civil Procedure.)

In Simon vs. Calfee (80 Ark., 65), it was said:

There is really a broader question here involved than that which

relates merely to the formality of verifying the answer with an
affidavit. This question arises from the circumstance that the
answer of the corporation does not in any was challenge the
authority of Ramon J. Fernandez to bind it by the contracts in
question and does not set forth, as a special defense, any such
lack of authority in him. Upon well-established principles of
pleading lack of authority in an officer of a corporation to bind it by
a contract executed by him in its name is a defense which should
be specially pleaded and this quite apart from the requirement,
contained in section 103, that the answer setting up such defense
should be verified by oath. But is should not here escape
observation that section 103 also requires in denial
contemplated in that section shall be specific. An attack on the
instrument in general terms is insufficient, even though the answer
is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)

The rule has been applied where the question was whether
corporate officer, having admitted power to make a contract, had
in the particular instance exceeded that authority, (Merill vs.
Consumers' Coal Co., 114 N.Y., 216); and it has been held that
where the answer in a suit against a corporation on its note relies
simply on the want of power of the corporation to issue notes, the
defendant cannot afterwards object that the plaintiff has not shown
that the officer executing the note were empowered to do so.
(Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)

In the first edition of a well-known treatise on the laws of

corporations we find the following proposition:
If an action is brought against a corporation upon a contract
alleged to be its contract, if it desires to set up the defense that

Though the power of the officers of a business corporation to issue

negotiable paper in its name is not presumed, such corporation
can not avail itself of a want of power in its officers to bind it unless
the defense was made on such ground.

The reason for the rule enunciated in the foregoing authorities will,
we think, be readily appreciated. In 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. 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. Whether a particular officer actually possesses the
authority which he assumes to exercise is frequently known to very
few, and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate officers. 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. By this 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.
We are of the opinion that the failure of the defendant corporation
to make any issue in its answer with regard to the authority of
Ramon J. Fernandez to bind it, and particularly its failure to deny
specifically under oath the genuineness and due execution of the
contracts sued upon, have the effect of elimination the question of
his authority from the case, considered as a matter of mere
pleading. The statute (sec. 103) plainly says that if a written
instrument, the foundation of the suit, is not denied upon oath, it
shall be deemed to be admitted. It is familiar doctrine that an
admission made in a pleading can not be controverted by the party
making such admission; and all proof submitted by him contrary
thereto or inconsistent therewith should simply be ignored by the
court, whether objection is interposed by the opposite party or not.
We can see no reason why a constructive admission, created by
the express words of the statute, should be considered to have less
effect than any other admission.
The parties to an action are required to submit their respective
contentions to the court in their complaint and answer. These
documents supply the materials which the court must use in order
to discover the points of contention between the parties; and
where the statute says that the due execution of a document which
supplies the foundation of an action is to be taken as admitted
unless denied under oath, the failure of the defendant to make
such denial must be taken to operate as a conclusive admission, so
long as the pleadings remain that form.
It is true that it is declared in section 109 of the Code of Civil
Procedure that immaterial variances between the allegations of a

pleading and the proof shall be disregarded and the facts shall be
found according to the evidence. The same section, however,
recognizes the necessity for an amendment of the pleadings. And
judgment must be in conformity with the case made in conformity
with the case made in the pleadings and established by the proof,
and relief can not be granted that is substantially inconsistent with
either. A party can no more succeed upon a case proved but not
alleged than upon a case alleged but nor proved. This rule of
course operates with like effect upon both parties, and applies
equality to the defendants special defense as to the plaintiffs
cause of action.
Of course this Court, under section 109 of the Code of Civil
Procedure, has authority even now to permit the answer of the
defendant to be amended; and if we believed that the interests of
justice so required, we would either exercise that authority or
remand the cause for a new trial in court below. As will appear
further on in this opinion, however, we think that the interests of
justice will best be promoted by deciding the case, without more
ado, upon the issues presented in the record as it now stands.
That we may not appear to have overlooked the matter, we will
observe that two cases are cited from California in which the
Supreme Court of the State has held that where a release is
pleaded by way of defense and evidence tending to destroy its
effect is introduced without objection, the circumstance that it was
not denied under oath is immaterial. In the earlier of these cases,
Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought
against a railroad company to recover damages for the death of
the plaintiff's minor son, alleged to have been killed by the
negligence of the defendant. The defendant company pleaded by
way of defense a release purporting to be signed by the plaintiff,
and in its answer inserted a copy of the release. The execution of
the release was not denied under oath; but at the trial evidence
was submitted on behalf of the plaintiff tending to show that at the
time he signed the release, he was incompetent by reason of
drunkenness to bind himself thereby. It was held that inasmuch as
this evidence had been submitted by the plaintiff without
objection, it was proper for the court to consider it. We do not
question the propriety of that decision, especially as the issue had
been passed upon by a jury; but we believe that the decision would
have been more soundly planted if it had been said that the
incapacity of the plaintiff, due to his drunken condition, was a
matter which did not involve either the genuineness or due

execution of the release. Like the defenses of fraud, coercion,

imbecility, and mistake, it was a matter which could be proved
under the general issue and did not have to be set up in a sworn
reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat
similar explanation can, we think, be given of the case of Clark vs.
Child in which the rule declared in the earlier case was followed.
With respect to both decisions which we merely observe that upon
point of procedure which they are supposed to maintain, the
reasoning of the court is in our opinion unconvincing.
We shall now consider the liability of the defendant company on
the merits just as if that liability had been properly put in issue by
a specific answer under oath denying the authority of Fernandez go
to bind it. Upon this question it must at the outset be premised
that Ramon J. Fernandez, as treasurer, had no independent
authority to bind the company by signing its name to the letters in
question. It is declared by signing its name to the letters in
question. It is declared in section 28 of the Corporation Law that
corporate power shall be exercised, and all corporate business
conducted by the board of directors; and this principle is
recognized in the by-laws of the corporation in question which
contain a provision declaring that the power to make contracts
shall be vested in the board of directors. It is true that it is also
declared in the same by-laws that the president shall have the
power, and it shall be his duty, to sign contract; but this has
reference rather to the formality of reducing to proper form the
contract which are authorized by the board and is not intended to
confer an independent power to make contract binding on the
corporation.
The fact that the power to make corporate contract is thus vested
in the board of directors does not signify that a formal vote of the
board must always be taken before contractual liability can be
fixed upon a corporation; for the board can create liability, like an
individual, by other means than by a formal expression of its will.
In this connection the case of Robert Gair Co. vs. Columbia Rice
Packing Co. (124 La., 194) is instructive. If there appeared that the
secretary of the defendant corporation had signed an obligation on
its behalf binding it as guarantor of the performance of an
important contract upon which the name of another corporation
appeared as principal. The defendant company set up by way of
defense that is secretary had no authority to bind it by such an
engagement. The court found that the guaranty was given with the
knowledge and consent of the president and directors, and that

this consent of the president and directors, and that this consent
was given with as much observance of formality as was customary
in the transaction of the business of the company. It was held that,
so far as the authority of the secretary was concerned, the contract
was binding. In discussing this point, the court quoted with
approval the following language form one of its prior decisions:
The authority of the subordinate agent of a corporation often
depends upon the course of dealings which the company or its
director have sanctioned. It may be established sometimes without
reference to official record of the proceedings of the board, by
proof of the usage which the company had permitted to grow up in
business, and of the acquiescence of the board charged with the
duty of supervising and controlling the company's business.
It appears in evidence, in the case now before us, that on July 30,
the date upon which the letter accepting the offer of the Eclair
films was dispatched the board of directors of the Orientalist
Company convened in special session in the office of Ramon J.
Fernandez at the request of the latter. There were present the four
members, including the president, who had already signified their
consent to the making of the contract. At this meeting, as appears
from the minutes, Fernandez informed the board of the offer which
had been received from the plaintiff with reference to the
importation of films. The minutes add that terms of this offer were
approved; but at the suggestion of Fernandez it was decided to call
a special meeting of the stockholders to consider the matter and
definite action was postponed.
The stockholders meeting was convoked upon September 18,
1913, upon which occasion Fernandez informed those present of
the offer in question and of the terms upon which the films could
be procured. He estimated that the company would have to make
an outlay of about P5,500 per month, if the offer for the two films
should be accepted by it.
The following extracts from the minutes of this meeting are here
pertinent:
Mr. Fernandez informed the stockholders that, in view of the
urgency of the matter and for the purpose of avoiding that other
importers should get ahead of the corporation in this regard, he
and Messrs. B. Hernandez, Leon Monroy, and Dr. Papa met for the
purpose of considering the acceptance of the offer together with

the responsibilities attached thereto, made to the corporation by

the film manufacturers of Eclair and Milano of Paris and Italy
respectively, inasmuch as the first shipment of films was then
expected to arrive.
At the same time he informed the said stockholders that he had
already made arrangements with respect to renting said films after
they have been once exhibited in the Cine Oriental, and that the
corporation could very well meet the expenditure involved and net
a certain profit, but that, if we could enter into a contract with
about nine cinematographs, big gains would be obtained through
such a step.
The possibility that the corporation might not see fit to authorize
the contract, or might for lack of funds be unable to make the
necessary outlay, was foreseen; and in such contingency the
stockholders were informed, that the four gentlemen above
mentioned (Hernandez, Fernandez, Monroy, and Papa) "would
continue importing said films at their own account and risk, and
shall be entitled only to a compensation of 10 per cent of their
outlay in importing the films, said payment to be made in shares of
said corporation, inasmuch as the corporation is lacking available
funds for the purpose, and also because there are 88 shares of
stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to
the effect that the agencies of the Eclair and Milano films should be
accepted, if the corporation could obtain the money with which to
meet the expenditure involved, and to this end appointed a
committee to apply to the bank for a credit. The evidence shows
that an attempt was made, on behalf of the corporation, to obtain
a credit of P10,000 from the Bank of the Philippine Islands for the
purpose indicated, but the bank declined to grant his credit.
Thereafter another special meeting of the shareholders of the
defendant corporation was called at which the failure of their
committee to obtain a credit from the bank was made known. A
resolution was thereupon passed to the effect that the company
should pay to Hernandez, Fernandez, Monroy, and Papa an amount
equal to 10 per cent of their outlay in importing the films, said
payment to be made in shares of the company in accordance with
the suggestion made at the previous meeting. At the time this
meeting was held three shipment of the films had already been
received in Manila.

We believe it is a fair inference from the recitals of the minutes of

the stockholders meeting of September 18, and especially from the
first paragraph above quoted, that this body was then cognizant
that the officer had already been accepted in the name of the
Orientalist Company and that the films which were then expected
to arrive were being imported by virtue of such acceptance.
Certainly four members of the board of directors there present
were aware of this fact, as the letter accepting the offer had been
sent with their knowledge and consent. In view of this
circumstance, a certain doubt arises whether they meant to utilize
the financial assistance of the four so-called importers in order that
the corporation might bet the benefit of the contract for the films,
just as it would have utilized the credit of the bank if such credit
had been extended. If such was the intention of the stockholders
their action amounted to a virtual, though indirect, approval of the
contract. It is not however, necessary to found the judgment on
this interpretation of the stockholders proceedings, inasmuch as
we think for reasons presently to be stated, that the corporation is
bound, and we will here assume that in the end the contract were
not approved by the stockholders.
It will be observed that Ramon J. Fernandez was the particular
officer and member of the board of directors who was most active
in the effort to secure the films for the corporation. The
negotiations were conducted by him with the knowledge and
consent of other members of the board; and the contract was
made with their prior approval. As appears from the papers in this
record, Fernandez was the person to who keeping was confided the
printed stationery bearing the official style of the corporation, as
well as rubber stencil with which the name of the corporation could
be signed to documents bearing its name.
Ignoring now, for a moment, the transactions of the stockholders,
and reverting to the proceedings of the board of directors of the
Orientalist Company, we find that upon October 27, 1913, after
Fernandez had departed from the Philippine Islands, to be absent
for many months, said board adopted a resolution conferring the
following among other powers on Vicente Ocampo, the manager of
the Oriental theater, namely:
(1)

To rent a box for the films in the "Kneeler Building."

(4)

To be in charge of the films and of the renting of the same.

(5)
To advertise in the different newspapers that we are
importing films to be exhibited in the Cine Oriental.

making a corporate contract, its resolutions are at most advisory

and not in any wise binding on the board.

(6)
Not to deliver any film for rent without first receiving the
rental therefor or the guaranty for the payment thereof.

In passing upon the liability of a corporation in cases of this kind it

is always well to keep in mind the situation as it presents itself to
the third party with whom the contract is made. Naturally he can
have little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external
manifestations of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in accordance with
law, and we would be sorry to announce a doctrine which would
permit the property of a man in the city of Paris to be whisked out
of his hands and carried into a remote quarter of the earth without
recourse against the corporations whose name and authority had
been used in the manner disclosed in this case. As already
observed, it is familiar doctrine that if a corporation knowingly
permits one of its officer, or any other agent, to do acts within the
scope of an apparent authority, and thus hold him out to the public
as possessing power to do those acts, the corporation will as
against anyone who has in good faith dealt with the corporation
through such agent, be estopped from denying his authority; and
where it is said "if the corporation permits" this means the same as
"if the thing is permitted by the directing power of the
corporation."

(7)
films.

To buy a book and cards for indexing the names of the

(10)
Upon the motion of Mr. Ocampo, it was decided to give
ample powers to the Hon. R. Acua to enter into agreements with
cinematograph proprietors in the provinces for the purpose of
renting films from us.
It thus appears that the board of directors, before the financial
inability of the corporation to proceed with the project was
revealed, had already recognized the contract as being in
existence and had proceeded to take the steps necessary to utilize
the films. Particularly suggestive is the direction given at this
meeting for the publication of announcements in the newspapers
to the effect that the company was engaged in importing films. In
the light of all the circumstances of the case, we are of the opinion
that the contracts in question were thus inferentially approved by
the company's board of directors and that the company is bound
unless the subsequent failure of the stockholders to approve said
contracts had the effect of abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the
stockholders, whatever its character, must be ignored. The
functions of the stockholders of a corporation are, it must be
remembered, of a limited nature. The theory of a corporation is
that the stockholders may have all the profits but shall turn over
the complete management of the enterprise to their
representatives and agents, called directors. Accordingly, there is
little for the stockholders to do beyond electing directors, making
by-laws, and exercising certain other special powers defined bylaw. In conformity with this idea it is settled that contract between
a corporation and third person must be made by the director and
not by the stockholders. The corporation, in such matters, is
represented by the former and not by the latter. (Cook on
Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely
accordant with the provisions of section 28 of our Corporation Law
already referred to. It results that where a meeting of the
stockholders is called for the purpose of passing on the propriety of

It being determined that the corporation is bound by the contract

in question, it remains to consider the character of the liability
assumed by R. J. Fernandez, in affixing his personal signature to
said contract. The question here is whether Fernandez is liable
jointly with the Orientalists Company as a principal obligor, or
whether his liability is that of a guarantor merely.
As appears upon the face of the contracts, the signature of
Fernandez, in his individual capacity, is not in line with the
signature of the Orientalist Company, but is set off to the left of the
company's signature and somewhat who sign contracts in some
capacity other than that of principal obligor to place their signature
alone would justify a court in holding that Fernandez here took
upon himself the responsibility of a guarantor rather than that of a
principal obligor. We do, however, think, that the form in which the
contract is signed raises a doubt as to what the real intention was;
and we feel justified, in looking to the evidence to discover that
intention. In this connection it is entirely clear, from the testimony

of both Ramirez and Ramon J. Fernandez, that the responsibility of

the latter was intended to be that of guarantor. There is, to be sure,
a certain difference between these witnesses as to the nature of
this guaranty, inasmuch as Fernandez would have us believe that
his name was signed as a guaranty that the contract would be
approved by the corporation, while Ramirez says that the name
was put on the contract for the purpose of guaranteeing, not the
approval of the contract, but its performance. We are convinced
that the latter was the real intention of the contracting parties.
We are not unmindful of the force of that rule of law which declares
that oral evidence is admissible to show the character in which the
signature was affixed. This conclusion is perhaps supported by the
language of the second paragraph of article 1281 of the Civil Code,
which declares that if the words of a contract should appear
contrary to the evident intention of the parties, the intention shall
prevail. But the conclusion reached is, we think, deducible from the
general principle that in case of ambiguity parol evidence is
admissible to show the intention of the contracting parties.
It should be stated in conclusion that as the issues in this case
have been framed, the only question presented to this court is: To
what extent are the signatory parties to the contract liable to the
plaintiff J. F. Ramirez? No contentious issue is raised directly
between the defendants, the Orientalist Company and Ramon H.
Fernandez; nor does the present the present action involve any
question as to the undertaking of Fernandez and his three
associates to effect the importation of the films upon their own
account and risk. Whether they may be bound to hold the company
harmless is a matter upon which we express no opinion.
The judgment appealed from is affirmed, with costs equally against
the two appellant. So ordered.
Torres, Johnson, Malcolm, Avancea and Fisher, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-32991

June 29, 1972
SALVADOR P. LOPEZ, President of the University of the
Philippines; BOARD OF REGENTS, University of the
Philippines; and OSEAS DEL ROSARIO, Officer-in-Charge,
College of Education, University of the Philippines,
petitioners,
vs.
HON. VICENTE ERICTA, Judge of the Court of First Instance
of Rizal, Branch XVIII (Quezon City), and DR. CONSUELO S.
BLANCO, respondents.
Office of the Solicitor General Felix Q. Antonio, Assistant Solicitor
General Jaime M. Lantin and Special Counsel Jose Espinosa for
petitioners.
Sison, Dominguez & Magno for respondents.
MAKALINTAL, J.:
This case presents the question of whether or not respondent Dr.
Consuelo S. Blanco was duly elected Dean of the College of
Education, University of the Philippines, in the meeting of the
Board of Regents on July 9, 1970, at which her ad interim
appointment by University President Salvador P. Lopez, one of the
petitioners here, was submitted for consideration.
The question was originally ventilated in a petition for certiorari
filed by Dr. Blanco in the Court of First Instance of Quezon City,
presided by respondent Judge Vicente Ericta, who decided the
question affirmatively on December 3, 1970. The dispositive
portion of the decision was amended three days later, or on
December 6, to read as follows:
WHEREFORE, the Court renders judgment:
(1)
Declaring petitioner, CONSUELO S. BLANCO, the duly
elected Dean of the College of Education, University of the
Philippines, and as such entitled to occupy the position with a
three-year term of office from May 1, 1970 to April 30, 1973;
(2)
Declaring null and void the appointment of respondent
Oseas A. del Rosario as Officer-in-Charge of the College of
Education, University of the Philippines; and

(3)
Issuing a permanent
injunction (a)
commanding
respondent Oseas A. del Rosario to desist from further exercising
the functions and duties pertaining to the Office of the Dean of the
College of Education, University of the Philippines, and (b)
commanding respondent Board of Regents from further proceeding
in the matter of the appointment or election of another person as
Dean of said college.
The case is before this Court on appeal by certiorari taken by the
President and the Board of Regents of the University and by Oseas
A. del Rosario, respondents below, the last as officer-in-charge
appointed to discharge the duties and functions of the office of
Dean of the College of Education. 1 The petition for review was
filed on January 5, 1971. On January 11, 1971 this Court, pursuant
to its resolution of January 7, issued a writ of preliminary injunction
to stop the immediate execution of the judgment appealed from,
as ordered by respondent Judge.
The facts and circumstances surrounding the ad interim
appointment of Dr. Consuelo S. Blanco and the action taken
thereon by the Board of Regents have a material bearing on the
question at issue. The first such appointment was extended on
April 27, 1970, "effective May 1, 1970 until April 30, 1971, unless
sooner terminated and subject to the appproval of the Board of
Regents and to pertinent University regulations." Pursuant thereto
Dr. Blanco assumed office as ad interim Dean on May 1, 1970.
The only provisions of the U.P. Charter (Act No. 1870) which may
have a bearing on the question at issue read as follows:
SEC. 7. A quorum of the Board of Regents shall consist a majority
of all the members holding office at the time the meeting of the
Board is called. All processes against the Board of Regents shall be
served on the president or secretary thereof.
SEC. 10. The body of instructors of each college shall constitute its
faculty, and as presiding officer of each faculty, there shall be a
dean elected from the members of such faculty by the Board of
Regents on nomination by the President of the University.
Article 78 of the Revised Code of the University provides:
Art. 78. For each college or school, there shall be a Dean or
Director who shall be elected by the Board of Regents from the

members of the faculty of the University unit concerned, on

nomination by the President of the University.
The Board of Regents met on May 26, 1970, and President Lopez
submitted to it the ad interim appointment of Dr. Blanco for
reconsideration. The minutes of that meeting disclose that "the
Board voted to defer action on the matter in view of the objections
cited by Regent Kalaw (Senator Eva Estrada Kalaw) based on the
petition against the appointment, addressed to the Board, from a
majority of the faculty and from a number of alumni ..." The
"deferment for further study" having been approved, the matter
was referred to the Committee on Personnel, which was thereupon
reconstituted with the following composition: Regent Ambrosio F.
Tangco, chairman; Regent Pio Pedrosa and Regent Liceria B.
Soriano, members. The opinion was then expressed by the
Chairman of the Board that in view of its decision to defer action,
Dr. Blanco's appointment had lapsed, but (on the President's
query) that there should be no objection to another ad interim
appointment in favor of Dr. Blanco pending final action by the
Board.
Accordingly, on the same day, May 26, 1970, President Lopez
extended another ad interim appointment to her, effective from
May 26, 1970 to April 30, 1971, with the same conditions as the
first, namely, "unless sooner terminated, and subject to the
approval of the Board of Regents and to pertinent University
regulations."
The next meeting of the Board of Regents was held on July 9, 1970.
The minutes show:
2. Deanship of the College, the President having issued an ad
interim appointment for Dr. Consuelo Blanco as Dean effective May
26, 1970:
Note: The Personnel Committee, to which this case was referred,
recommended that the Board request the President of the
University to review his nomination for the Deanship of the College
of Education in the light of the testimonies received and
discussions held during the Commitee's meeting on June 4 and
June 11, 1970 on this matter.

Chairman Tangco asked that the documents received by the

Committee on the matter be entered in the official record, the
same attached hereto as Appendix "A" pages 57 to 179.
Board action: Following some discussion on what Regent Tangco
explained to be the rationale or intention (i.e., that the President
would discuss with Dr. Consuelo S. Blanco a proposal to withdraw
her appointment as Dean) behind the wording of the Personnel
Committee's recommendation and in view of some uncertainty
over whether the Board would be acting upon the recommendation
as "diplomatically" stated in the agenda or as really intended
according to Regent Tangco's explanation, the Personnel
Committee withdrew its recommendation as stated in the Agenda.
The Chairman took a roll-call vote on the appointment of Dr. Blanco
as Dean. The Chairman having ruled that Dr. Blanco had not
obtained the necessary number of votes, the Board agreed to
expunge the result of the voting, and, on motion of Regent
Agbayani duly seconded, suspended action on the ad interim
appointment of Dr. Blanco. The Chair stated that this decision of
the Board would in effect render the case subject to further
thinking and give the Board more time on the question of the
deanship the of the College of Education, and, since the Board had
not taken action on the appointment of Dr. Blanco either adversely
or favorably, her ad interim appointment as Dean effective May 26,
1970 terminated as of July 9, 1970.
The roll-call voting on which the Chairman of the Board of Regents
based his ruling aforesaid gave the following results: five (5) votes
in favor of Dr. Blanco's ad interim appointment, three (3) votes
against, and four (4) abstentions all the twelve constituting the
total membership of the Board of the time. 2 The next day, July 10,
1970, Dr. Blanco addressed a letter to the Board requesting "a
reconsideration of the interpretation made by the Board as to the
legal effect of the vote of five in favor, three against and four
abstentions on my ad interim appointment." On August 18, 1970
Dr. Blanco wrote the President of the University, protesting the
appointment of Oseas A. del Rosario as Officer-in-Charge of the
College of Education. Neither communication having elicited any
official reply, Dr. Blanco went to the Court of First Instance of
Quezon City on a petition for certiorari and prohibition with
preliminary injunction, the decision wherein is the subject of the
present appeal.

Considerable arguments have been adduced by the parties on the

legal effect and implications of the 5-3-4 vote of the Board of
Regents. Authorities, mostly judicial precedents in the American
jurisdictions, are cited in support of either side of the belabored
question as to whether an abstention should be counted as an
affirmative or as a negative vote or a particular proposition that is
being voted on. Thus it is submitted, on the part of the petitioners,
that if the abstentions were considered as affirmative votes a
situation might arise wherein a nominee (for the office of Dean as
in this case) is elected by only one affirmative vote with eleven
members of the Board abstaining; and, on the part of the
respondent, that according to the prevailing view "an abstention
vote should be recorded in the affirmative on the theory that
refusal to vote indicates acquiescence in the action of those who
vote;" ... that "the silence of the members present, but abstaining,
is construed to be acquiescence so far as any construction is
necessary." A logician could make a creditable case for either
proposition. It does seem absurd that a minority even only one
of the twelve members of the Board of Regents who are present
could elect a Dean just because the others abstain. On the other
hand, there is no lack of logic either in saying that a majority vote
of those voting will be sufficient to decide an issue on the ground
that if construction is at all necessary the silence of the members
who abstain should be construed as an indication of acquiescence
in the action of those who vote affirmatively. This apparent
dichotomy, indeed, accounts for the conflict in the American court
decisions, from which both parties here have drawn extensively in
support of their respective positions.
In the present case, however, this Court does not find itself
confronted with an ineluctable choice between the two legal
theories. It should be noted that an abstention, according to the
respondents' citations, is counted as an affirmative vote insofar as
it may be construed as an acquiescence in the action of those who
vote affirmatively. This manner of counting is obviously based on
what is deemed to be a presumption as to the intent of the one
abstaining, namely, to acquiesce in the action of those who vote
affirmatively, but which presumption, being merely prima facie,
would not hold in the face of clear evidence to the contrary. It is
pertinent, therefore, to inquire into the facts and circumstances
which attended the voting by the members of the Board of Regents
on the ad interim appointment of Dr. Blanco in order to determine
whether or not such a construction would govern. The transcript of

the proceedings in the meeting of July 9, 1970 show the following

statements by the Regents who participated in the discussion:

Regent Tangco: Mr. Chairman, I was going to inhibit myself from the
start.

Regent Tangco: Mr. Chairman, I would like to put on record that this
statement here is a compromise statement. The Committee, after
hearing the testimonies and going over the materials presented to
the Committee, was in favor of recommending to the Board that
the nomination of Professor Blanco cannot be accepted by the
Board, but it was felt that it should be presented in a more
diplomatic way to avoid any embarrassment on the part of both
the appointee and the President. And so means were studied as to
how it could be done and it was felt that it could be done in such a
way that the appointee could request relief from the appointment,
that it would be the best to save embarrassment all around. And so
the final decision was to ask the President to review the matter,
but with the understanding that he will talk this over with Dean
Blanco and for the appointment to be withdrawn. So actually
although this statement here is not in that light, again that is the
decision of the Committee. Inasmuch as apparently either the
meaning of the decision was not made clear or maybe was not
understood very well, I would like to put that on the record.
Regent Kalaw: I would like to take note of the comments of Dr.
Tangco here on a previous agreement. I understand that while the
Committee recommended the disapproval of the appointment of
Dr. Blanco, the Committee felt that it was more tactful and
diplomatic to present the motion to this level but premised by the
findings of the Committee that the President would make an
agreement with Dean Blanco to make a withdrawal . . . .

Regent Pedrosa:
And I am inhibiting myself . We are only
two members now; Dr. Soriano is not here, so that we leave the
votation on this matter to the other members of the Board.
Regent Kalaw: Mr. Chairman, what is the votation for?
Chairman:
The question before this Board is the Comittee
recommendation. Incidentally, if the Board accepts the Committee
recommendation it is also a lack of confirmation of the ad interim
appointment of Dean Blanco . . . .
Chairman: There is only one more question before this Board to
discuss fully, I believe. The question is, the Chairman asks the
Board to vote on the Committee action in the form of a
recommendation as presented in the Agenda. Regent Tangco, the
Chairman of that Committee, says that this is merely a polite
cover, a diplomatic cover, according to Regent Kalaw, for the
reaction of the Committee, and Regent Tangco requests that we act
not on the Committee recommendation in this form as presented in
the Agenda but in terms of the gentleman's agreement.
Chairman: In brief, Regent Tangco informs the Board of the action
that the Committee was to request the President to call Dr. Blanco
and prevail upon her to withdraw.
Regent Escobar: On what basis?

Regent Tangco: Mr. Chairman, I wish to just make a correction that

the decision was to ask the President for her to request relief and
not to consult. I want to put that on record now. It was only that we
wanted to avoid anything on this on the record of the Board to
save embarrassment. But inasmuch as that statement has been
made, I want to make it of record that the agreement was for the
President to ask her to submit or better ask her to the withdrawal.
Regent Pedrosa:
Mr. Chairman, in order to cut this matter
once and for all, may I suggest that the members of the Committee
inhibit themselves from voting in this matter. I don't think it would
affect the majority vote or whatever the rest of the members of the
Board decide.

Regent Tangco: On the testimonies presented to us and also to

avoid further embarrassment on the part of the appointee. The
decision of the Committee was to ask Dean Blanco because there
will be too much embarrassment which I think is not going to gain
any matter one way or the other.
Chairman: We have to make a ruling. I think that we cannot act on
the gentlemen's agreement because we do not have that
gentlemen's agreement before us.
Regent Pedrosa:
Mr. Chairman, may I interrupt you. In view
of the fact that I have announced that I would desist from
participating in the Board and Regent Tangco has done likewise

then I presume the President will not also participate. Why doesn't
the Board proceed to the decision of whether . . . .
Chairman: Yes, I am saying, Mr. Regent, there is a ruling that this
Board will have to act on the Committee recommendation
presented
here,
unless
the
Committee
withdraws
this
recommendation.
Regent Tangco: The Committee is so doing, Mr. Chairman.
Chairman: The Committee will withdraw this recommendation, in
which case the issue is simply we only have to act on the issue of
to confirm or not to confirm the ad interim appointment issued to
Dr. Blanco.
Chairman: The Committee is withdrawing this recommendation.
Regent Silva: Per se, as it is written. But I think the Committee, if
I get it right, is actually putting a recommendation for nonconfirmation.
Regent Kalaw: Since the Committee is withdrawing the
recomendation and the Board would act on it per se, I think Regent
Silva is right. (Emphasis supplied)

" Leocadio (Substituting for Regent Soriano)

" Pedrosa
" Virata
Regent Leonides Virata, who was not a member of the Personnel
Committee, made the following explanation before casting his
vote:
A. I abstain, but I want to say this. There must be some other way
of solving this problem. I am at sea in this, because although I have
been reading all these documents here, but a decision is being
asked now that I am not ready myself.
After the result of the voting was known the Board Chairman
Secretary Corpuz, announced that "the vote is not a majority ...
(and that) there is no ruling in the Code of the University on the
counting of votes and the treatment of abstention."
What transpired immediately afterwards appears in the transcript
of the proceedings, as follows:
Regent Agbayani: Mr. Chairman, could I ask for another one-minute
recess?
(ONE-MINUTE RECESS AT THIS POINT)

The voting which followed shows the following result:

Affirmative votes:
Regent Fonacier
" Escobar
" Barican
" Lopez
" Agbayani
Negative votes:
Regent Kalaw
" Silva
" Corpuz
Abstentions:
Regent Tangco

Chairman: The meeting is resumed. Mr. Regent? (Addressing

Regent Agbayani)
Regent Agbayani: Mr. Chairman, I move that we do not proceed
with the action now on this matter.
Chairman: To suspend in effect the action of the Board?
Regent Agbayani: The result brings us back to the previous status,
that no action has been taken.
Chairman: There is a motion to suspend action; that is to say, to
suspend the voting of the Board on this matter with the effect,
first, to return the case to its original status to render the case
subject to further thinking and second, that the Board has not
confirmed the appointment. The appointment, in other words, will
be good from May 26 up to today.

Regent Agbayani: Mr. Chairman, the Board did not confirm exactly.
It cannot be said that the Board confirmed or did not confirm, but
the appointment terminates. The ad interim appointment
terminates when the Board meets, just like in Congress, where the
ad interim appointment is good only up to the first day of the
session.
Chairman: So in effect, suspending action on this matter now, the
Board in effect gives itself time to study the question not of Dean
Blanco but the question of the deanship of the College, and the
Board has not taken action on the confirmation either adversely or
favorably, but that the ad interim appointment has terminated
today.
Regent Escobar:
Mr. Chairman, does it mean that all the
deliberations regarding to this matter should be erased from the
record? Because the record of the voting is there.
Chairman: Well, it follows.
Regent Escobar:
It follows suit, because we are now asking
for a reconsideration of any deliberations to the effect that if there
was a voting it should be banned from appearing in the record.
Regent Silva: We have made statements here today.
Chairman: The record of the voting, which is incomplete by the way
because there was no circulation to consider, will not appear in the
record.
Regent Silva: The result of the votes; the deliberations regarding
this matter.
Regent Agbayani: I have no objection.
Chairman: The record of the voting will not appear. Any objection
to the motion for reconsideration? No objection, approved.
From the foregoing record of the meeting of the Board of Regents it
is very clear: (1) that the Personnel Committee, to which the
matter of Dr. Blanco's appointment had been referred for study,
was for recommending that it be rejected; (2) that, however, the
rejection should be done in a diplomatic way "to avoid any
embarrassment on the part of both the appointee and the

President;" and (3) that the "final decision" of the committee was
to ask the President of the University to talk to Dr. Blanco "for the
appointment to be withdrawn." That decision, as announced by
Regent Tangco, Chairman of the Personnel Committee, was
restated and clarified by Regent Kalaw, and then reiterated first by
Regent Tangco and then by the Chairman. On that note Regent
Pedrosa suggested that the members of the Personnel Committee,
as well as the President, should inhibit themselves from voting.
When the matter was actually submitted to a vote, however, the
definition of the issue became somewhat equivocal. Regent Tangco
announced
that
the
committee
was
withdrawing
its
recommendation, whereupon the Chairman stated that the issue
was "to confirm or not to confirm the ad interim appointment
issued to Dr. Blanco." This was then followed by a remark from
Regent Silva that the withdrawal by the committee referred to the
recommendation " per se, as it is written," but that the committee,
he thought, was "actually putting a recommendation for nonconfirmation." Regent Kalaw thereupon expressed her concurrence
with Regent Silva's opinion.
The votes of abstention, viewed in their setting, can in no way be
construed as votes for confirmation of the appointment. There can
be no doubt whatsoever as to the decision and recommendation of
the three members of the Personnel Committee: it was for rejection
of the appointment. If the committee opted to withdraw the
recommendation it was on the understanding (also referred to in
the record as gentlemen's agreement) that the President would
talk to Dr. Blanco for the purpose of having her appointment
withdrawn in order to save them from embarrassment. No
inference can be drawn from this that the members of the
Personnel Committee, by their abstention, intended to acquiesce in
the action taken by those who voted affirmatively. Neither, for that
matter, can such inference be drawn from the abstention that he
was abstaining because he was not then ready to make a decision.
All arguments on the legal question of how an abstention should be
treated, all authorities cited in support of one or the other position,
become academic and purposeless in the face of the fact that
respondent Dr. Blanco was clearly not the choice of a majority of
the members of the Board of Regents, as unequivocally
demonstrated by the transcript of the proceedings. This fact
cannot be ignored simply because the Chairman, in submitting the
question to the actual vote, did not frame it as accurately as the

preceding discussion called for, such that two of the Regents

present (Silva and Kalaw) had to make some kind of clarification.
In any event, in the same meeting of July 9, 1970, before it
adjourned, the Board of Regents resolved, without a vote of
dissent, to cancel the action which had been taken, including the
result of the voting, and "to return the case to its original status
to render the case subject to further thinking." In effect, as
announced by the Chairman, "the Board has not acted on the
confirmation either adversely or favorably, but that the ad interim
appointment has terminated." Indeed the formal decision of the
Board was that all deliberations on the matter should not appear in
the record. And it cannot be seriously argued that the Board had no
authority to do what it did: the meeting had not yet been
adjourned, the subject of the deliberations had not yet been
closed, and as in the case of any deliberative body the Board had
the right to reconsider its action. No title to the office of Dean of
the College of Education had yet vested in respondent Blanco at
the time of such reconsideration.
One of the prayers of Dr. Blanco in her petition below is that she be
declared duly elected as Dean of the College of Education and, as
such, legally entitled to the said position with a 3-year tenure of
office as provided in the Revised Code of the University of the
Philippines (Art. 79, Ch. 6, Title Two). Obviously this prayer is not in
order inasmuch as she has not been elected to said position. On
the other hand, Dr. Blanco does not ask that she be recognized as
Dean by virtue of her ad interim appointment dated May 26, 1970,
effective up to April 30, 1971. Aside from the fact that the point
has become moot, since the tenure has expired, it is seriously to
be doubted whether such an appointment is authorized under the
law and regulations. It should be noted that both under the Charter
(See. 10) and under the Revised Code of the University (Art. 78)
the Dean of a college is elected by the Board of Regents on
nomination by the President of the University. In other words the
President's function is only to nominate, not to extend an
appointment, even if only ad interim; and the power of the Board
of Regents is not merely to confirm, but to elect or appoint. At any
rate the ad interim appointment extended to Dr. Blanco on May 26,
1970, although made effective until April 30, 1971, was subject to
the following condition: "unless sooner terminated and subject to
the approval of the Board of Regents." The Board, as has been
shown, not only did not elect Dr. Blanco in its meeting of July 9,
1970, but declared the appointment terminated as of that day.

WHEREFORE, the decision appealed from is reversed and set aside;

the petition of respondent Consuelo S. Blanco for certiorari and
prohibition before respondent Court is ordered dismissed; and the
writ of preliminary injunctton issued by this Court is made
permanent, without pronouncement as to costs.
Concepcion, C.J., Zaldivar, Castro, Fernando, Teehankee and
Makasiar, JJ., concur.
Reyes, J.B.L. and Antonio, JJ., took no part.
Separate Opinions
BARREDO, J., concurring:
I would like to reserve my opinion as to whether or not the
announcement of Secretary Corpuz, as chairman of the Board of
Regents, that "the vote is not a majority" is correct from the legal
standpoint. To start with, the Secretary who was then presiding
counted his own negative vote. In the absence of a rule clearly
authorizing him to vote, I am inclined to believe he should have
done so only in case of a tie. And, of course, it would have been
better, if the President of the University who proposed the
appointment of Dean Blanco did not also vote.
Now, with respect to the question as to how the recorded
abstentions should be counted, while I see the point in the
explanation in the main opinion that abstentions may be
considered as presumptively affirmative votes only if there are no
circumstances indicating the view of those abstaining to be
otherwise, I am not prepared to draw the conclusion that the
remarks of Regents Pedrosa and Virata appearing in the minutes
may not be interpreted as evidence of nothing more than their
feeling that the matter be left entirely to the decision of those who
would vote, such that if the majority were to vote in favor, they
would not have any further objection to the result of such voting.
It is indeed regretable that the action of the board was not as clear
and categorical as should be expected of the Board of Regents of
the state university. If such a simple matter as the election of a
dean cannot be decided by the corresponding university
authorities in a non-controversial manner, is there hope that more
important and complicated matters requiring deeper study and
consideration and affecting the fundamental policies of the
institution and the various curricula to be adopted can be settled

and decided forthrightly and without equivocation? I am frankly

disappointed, being an alumnus of the University, that a thing that
should have been dealt with with no other consideration in mind
than the fitness of the candidate had to be treated with
"diplomacy" and halfway propositions, as if there was fear that the
outcome would not be considered by all concerned as fully just and
fair. I realize I am not supposed to render judgment here on how
the University should be run or how its officials should conduct
themselves, but I feel that it is within the scope of my authority to
express myself on a matter of public interest that had to reach this
Court only because simple things have not been done the simple
way.
I agree, however, with the main opinion insofar as it holds that the
approval without dissent of the motion for reconsideration of
Regent Agbayani had the result of terminating the second
proposed appointment of Dean Blanco. I would say that this move
was what saved the situation from being more complicated. In
other words, on the basis of the action taken by the board on July
9, 1970, I vote that Dean Blanco ceased to be Dean of the College
of Education on that day.
It is on this understanding that I concur in the judgment in this
case reversing the decision of the trial court, dismissing the
petition for certiorari and prohibition filed by Dean Blanco with said
court, and making the writ of preliminary injunction issued by the
Court in this case permanent, without costs.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-27155
May 18, 1978
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO
GUECO
and
THE
PHILIPPINE
AMERICAN
GENERAL
INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Corua, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.

ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which
affirmed the judgment of the Court of First Instance of Manila in
Civil Case No. 34185, ordering petitioner, as third-party defendant,
to pay respondent Rita Gueco Tapnio, as third-party plaintiff, the
sum of P2,379.71, plus 12% interest per annum from September
19, 1957 until the same is fully paid, P200.00 attorney's fees and
costs, the same amounts which Rita Gueco Tapnio was ordered to
pay the Philippine American General Insurance Co., Inc., to be paid
directly to the Philippine American General Insurance Co., Inc. in
full satisfaction of the judgment rendered against Rita Gueco
Tapnio in favor of the former; plus P500.00 attorney's fees for Rita
Gueco Tapnio and costs. The basic action is the complaint filed by
Philamgen (Philippine American General Insurance Co., Inc.) as
surety against Rita Gueco Tapnio and Cecilio Gueco, for the
recovery of the sum of P2,379.71 paid by Philamgen to the
Philippine National Bank on behalf of respondents Tapnio and
Gueco, pursuant to an indemnity agreement. Petitioner Bank was
made third-party defendant by Tapnio and Gueco on the theory
that their failure to pay the debt was due to the fault or negligence
of petitioner.
The facts as found by the respondent Court of Appeals, in affirming
the decision of the Court of First Instance of Manila, are quoted
hereunder:
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco
Tapnio as principal, in favor of the Philippine National Bank Branch
at San Fernando, Pampanga, to guarantee the payment of
defendant Rita Gueco Tapnio's account with said Bank. In turn, to
guarantee the payment of whatever amount the bonding company
would pay to the Philippine National Bank, both defendants
executed the indemnity agreement, Exh. B. Under the terms and
conditions of this indemnity agreement, whatever amount the
plaintiff would pay would earn interest at the rate of 12% per
annum, plus attorney's fees in the amount of 15 % of the whole
amount due in case of court litigation.
The original amount of the bond was for P4,000.00; but the amount
was later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was indebted to
the bank in the sum of P2,000.00, plus accumulated interests

unpaid, which she failed to pay despite demands. The Bank wrote a
letter of demand to plaintiff, as per Exh. C; whereupon, plaintiff
paid the bank on September 18, 1957, the full amount due and
owing in the sum of P2,379.91, for and on account of defendant
Rita Gueco's obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and written,
upon defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts. She
claims, however, when demand was made upon her by plaintiff for
her to pay her debt to the Bank, that she told the Plaintiff that she
did not consider herself to be indebted to the Bank at all because
she had an agreement with one Jacobo-Nazon whereby she had
leased to the latter her unused export sugar quota for the 19561957 agricultural year, consisting of 1,000 piculs at the rate of
P2.80 per picul, or for a total of P2,800.00, which was already in
excess of her obligation guaranteed by plaintiff's bond, Exh. A. This
lease agreement, according to her, was with the knowledge of the
bank. But the Bank has placed obstacles to the consummation of
the lease, and the delay caused by said obstacles forced 'Nazon to
rescind the lease contract. Thus, Rita Gueco Tapnio filed her thirdparty complaint against the Bank to recover from the latter any
and all sums of money which may be adjudged against her and in
favor of the plaitiff plus moral damages, attorney's fees and costs.
Insofar as the contentions of the parties herein are concerned, we
quote with approval the following findings of the lower court based
on the evidence presented at the trial of the case:
It has been established during the trial that Mrs. Tapnio had an
export sugar quota of 1,000 piculs for the agricultural year 19561957 which she did not need. She agreed to allow Mr. Jacobo C.
Tuazon to use said quota for the consideration of P2,500.00 (Exh.
"4"-Gueco). This agreement was called a contract of lease of sugar
allotment. At the time of the agreement, Mrs. Tapnio was indebted
to the Philippine National Bank at San Fernando, Pampanga. Her
indebtedness was known as a crop loan and was secured by a
mortgage on her standing crop including her sugar quota allocation
for the agricultural year corresponding to said standing crop. This
arrangement was necessary in order that when Mrs. Tapnio
harvests, the P.N.B., having a lien on the crop, may effectively
enforce collection against her. Her sugar cannot be exported
without sugar quota allotment Sometimes, however, a planter

harvest less sugar than her quota, so her excess quota is utilized
by another who pays her for its use. This is the arrangement
entered into between Mrs. Tapnio and Mr. Tuazon regarding the
former's excess quota for 1956-1957 (Exh. "4"-Gueco).
Since the quota was mortgaged to the P.N.B., the contract of lease
had to be approved by said Bank, The same was submitted to the
branch manager at San Fernando, Pampanga. The latter required
the parties to raise the consideration of P2.80 per picul or a total of
P2,800.00 (Exh. "2-Gueco") informing them that "the minimum
lease rental acceptable to the Bank, is P2.80 per picul." In a letter
addressed to the branch manager on August 10, 1956, Mr. Tuazon
informed the manager that he was agreeable to raising the
consideration to P2.80 per picul. He further informed the manager
that he was ready to pay said amount as the funds were in his
folder which was kept in the bank.
Explaining the meaning of Tuazon's statement as to the funds, it
was stated by him that he had an approved loan from the bank but
he had not yet utilized it as he was intending to use it to pay for
the quota. Hence, when he said the amount needed to pay Mrs.
Tapnio was in his folder which was in the bank, he meant and the
manager understood and knew he had an approved loan available
to be used in payment of the quota. In said Exh. "6-Gueco", Tuazon
also informed the manager that he would want for a notice from
the manager as to the time when the bank needed the money so
that Tuazon could sign the corresponding promissory note.
Further Consideration of the evidence discloses that when the
branch manager of the Philippine National Bank at San Fernando
recommended the approval of the contract of lease at the price of
P2.80 per picul (Exh. 1 1-Bank), whose recommendation was
concurred in by the Vice-president of said Bank, J. V. Buenaventura,
the board of directors required that the amount be raised to 13.00
per picul. This act of the board of directors was communicated to
Tuazon, who in turn asked for a reconsideration thereof. On
November 19, 1956, the branch manager submitted Tuazon's
request for reconsideration to the board of directors with another
recommendation for the approval of the lease at P2.80 per picul,
but the board returned the recommendation unacted upon,
considering that the current price prevailing at the time was P3.00
per picul (Exh. 9-Bank).

The parties were notified of the refusal on the part of the board of
directors of the Bank to grant the motion for reconsideration. The
matter stood as it was until February 22, 1957, when Tuazon wrote
a letter (Exh. 10-Bank informing the Bank that he was no longer
interested to continue the deal, referring to the lease of sugar
quota allotment in favor of defendant Rita Gueco Tapnio. The result
is that the latter lost the sum of P2,800.00 which she should have
received from Tuazon and which she could have paid the Bank to
cancel off her indebtedness,
The court below held, and in this holding we concur that failure of
the negotiation for the lease of the sugar quota allocation of Rita
Gueco Tapnio to Tuazon was due to the fault of the directors of the
Philippine National Bank, The refusal on the part of the bank to
approve the lease at the rate of P2.80 per picul which, as stated
above, would have enabled Rita Gueco Tapnio to realize the
amount of P2,800.00 which was more than sufficient to pay off her
indebtedness to the Bank, and its insistence on the rental price of
P3.00 per picul thus unnecessarily increasing the value by only a
difference of P200.00. inevitably brought about the rescission of
the lease contract to the damage and prejudice of Rita Gueco
Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of
the position adopted by the board of directors of the Philippine
National Bank in refusing to approve the lease at the rate of P2.80
per picul and insisting on the rate of P3.00 per picul, if only to
increase the retail value by only P200.00 is shown by the fact that
all the accounts of Rita Gueco Tapnio with the Bank were secured
by chattel mortgage on standing crops, assignment of leasehold
rights and interests on her properties, and surety bonds, aside from
the fact that from Exh. 8-Bank, it appears that she was offering to
execute a real estate mortgage in favor of the Bank to replace the
surety bond This statement is further bolstered by the fact that
Rita Gueco Tapnio apparently had the means to pay her obligation
fact that she has been granted several value of almost P80,000.00
for the agricultural years from 1952 to 56.
Its motion for the reconsideration of the decision of the Court of
Appeals having been denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000
piculs of sugar quota allocation of respondent Rita Gueco Tapnio by
Jacobo C. Tuazon was due to the unjustified refusal of petitioner to

approve said lease contract, and its unreasonable insistence on the

rental price of P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and
prices of sugar quota in the possession of the petitioner, the
latter's Board of Directors correctly fixed the rental of price per
picul of 1,000 piculs of sugar quota leased by respondent Rita
Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio,
it has the right, both under its own Charter and under the
Corporation Law, to safeguard and protect its rights and interests
under the deed of assignment, which include the right to approve
or disapprove the said lease of sugar quota and in the exercise of
that authority, its
Board of Directors necessarily had authority to determine and fix
the rental price per picul of the sugar quota subject of the lease
between private respondents and Jacobo C. Tuazon. It argued
further that both under its Charter and the Corporation Law,
petitioner, acting thru its Board of Directors, has the perfect right
to adopt a policy with respect to fixing of rental prices of export
sugar quota allocations, and in fixing the rentals at P3.00 per picul,
it did not act arbitrarily since the said Board was guided by
statistics of sugar price and prices of sugar quotas prevailing at the
time. Since the fixing of the rental of the sugar quota is a function
lodged with petitioner's Board of Directors and is a matter of
policy, the respondent Court of Appeals could not substitute its
own judgment for that of said Board of Directors, which acted in
good faith, making as its basis therefore the prevailing market
price as shown by statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it
shall suffer a great injustice because as a creditor, it shall be
deprived of a just claim against its debtor (respondent Rita Gueco
Tapnio) as it would be required to return to respondent Philamgen
the sum of P2,379.71, plus interest, which amount had been
previously paid to petitioner by said insurance company in behalf
of the principal debtor, herein respondent Rita Gueco Tapnio, and
without recourse against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in
proceedings of this nature is limited to reviewing only errors of law,

accepting as conclusive the factual fin dings of the Court of

Appeals upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul
between Rita Gueco Tapnio and Jacobo C. Tuazon was executed on
April 17, 1956. This contract was submitted to the Branch Manager
of the Philippine National Bank at San Fernando, Pampanga. This
arrangement was necessary because Tapnio's indebtedness to
petitioner was secured by a mortgage on her standing crop
including her sugar quota allocation for the agricultural year
corresponding to said standing crop. The latter required the parties
to raise the consideration to P2.80 per picul, the minimum lease
rental acceptable to the Bank, or a total of P2,800.00. Tuazon
informed the Branch Manager, thru a letter dated August 10, 1956,
that he was agreeable to raising the consideration to P2.80 per
picul. He further informed the manager that he was ready to pay
the said sum of P2,800.00 as the funds were in his folder which
was kept in the said Bank. This referred to the approved loan of
Tuazon from the Bank which he intended to use in paying for the
use of the sugar quota. The Branch Manager submitted the
contract of lease of sugar quota allocation to the Head Office on
September 7, 1956, with a recommendation for approval, which
recommendation was concurred in by the Vice-President of the
Bank, Mr. J. V. Buenaventura. This notwithstanding, the Board of
Directors of petitioner required that the consideration be raised to
P3.00 per picul. Tuazon, after being informed of the action of the
Board of Directors, asked for a reconsideration thereof. On
November 19, 1956, the Branch Manager submitted the request for
reconsideration and again recommended the approval of the lease
at P2.80 per picul, but the Board returned the recommendation
unacted, stating that the current price prevailing at that time was
P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank
that he was no longer interested in continuing the lease of sugar
quota allotment. The crop year 1956-1957 ended and Mrs. Tapnio
failed to utilize her sugar quota, resulting in her loss in the sum of
P2,800.00 which she should have received had the lease in favor of
Tuazon been implemented.
It has been clearly shown that when the Branch Manager of
petitioner required the parties to raise the consideration of the
lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they
readily agreed. Hence, in his letter to the Branch Manager of the

Bank on August 10, 1956, Tuazon informed him that the minimum
lease rental of P2.80 per picul was acceptable to him and that he
even offered to use the loan secured by him from petitioner to pay
in full the sum of P2,800.00 which was the total consideration of
the lease. This arrangement was not only satisfactory to the
Branch Manager but it was also approves by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco
Tapnio could have realized the amount of P2,800.00, which was
more than enough to pay the balance of her indebtedness to the
Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota
for the crop year 1956-1957 was due to the disapproval of the
lease by the Board of Directors of petitioner. The issue, therefore, is
whether or not petitioner is liable for the damage caused.
As observed by the trial court, time is of the essence in the
approval of the lease of sugar quota allotments, since the same
must be utilized during the milling season, because any allotment
which is not filled during such milling season may be reallocated by
the Sugar Quota Administration to other holders of allotments. 3
There was no proof that there was any other person at that time
willing to lease the sugar quota allotment of private respondents
for a price higher than P2.80 per picul. "The fact that there were
isolated transactions wherein the consideration for the lease was
P3.00 a picul", according to the trial court, "does not necessarily
mean that there are always ready takers of said price. " The
unreasonableness of the position adopted by the petitioner's Board
of Directors is shown by the fact that the difference between the
amount of P2.80 per picul offered by Tuazon and the P3.00 per
picul demanded by the Board amounted only to a total sum of
P200.00. Considering that all the accounts of Rita Gueco Tapnio
with the Bank were secured by chattel mortgage on standing
crops, assignment of leasehold rights and interests on her
properties, and surety bonds and that she had apparently "the
means to pay her obligation to the Bank, as shown by the fact that
she has been granted several sugar crop loans of the total value of
almost P80,000.00 for the agricultural years from 1952 to 1956",
there was no reasonable basis for the Board of Directors of
petitioner to have rejected the lease agreement because of a
measly sum of P200.00.
While petitioner had the ultimate authority of approving or
disapproving the proposed lease since the quota was mortgaged to

the Bank, the latter certainly cannot escape its responsibility of

observing, for the protection of the interest of private respondents,
that degree of care, precaution and vigilance which the
circumstances justly demand in approving or disapproving the
lease of said sugar quota. The law makes it imperative that every
person "must in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe
honesty and good faith, 4 This petitioner failed to do. Certainly, it
knew that the agricultural year was about to expire, that by its
disapproval of the lease private respondents would be unable to
utilize the sugar quota in question. In failing to observe the
reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, petitioner is consequently liable
for the damages caused on private respondents. Under Article 21
of the New Civil Code, "any person who wilfully causes loss or
injury to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for the
damage." The afore-cited provisions on human relations were
intended to expand the concept of torts in this jurisdiction by
granting adequate legal remedy for the untold number of moral
wrongs which is impossible for human foresight to specifically
provide in the statutes.
A corporation is civilly liable in the same manner as natural
persons for torts, because "generally speaking, the rules governing
the liability of a principal or master for a tort committed by an
agent or servant are the same whether the principal or master be a
natural person or a corporation, and whether the servant or agent
be a natural or artificial person. All of the authorities agree that a
principal or master is liable for every tort which he expressly
directs or authorizes, and this is just as true of a corporation as of a
natural person, A corporation is liable, therefore, whenever a
tortious act is committed by an officer or agent under express
direction or authority from the stockholders or members acting as
a body, or, generally, from the directors as the governing body."
WHEREFORE, in view of the foregoing, the decision of the Court of
Appeals is hereby AFFIRMED.
Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.
Separate Opinions
BARREDO, J., concurring:

concurs on the basis of Article 19 of the Civil Code, or at least, of

equity. He reserves his opinion on the matter of torts relied upon in
the main opinion.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22450
December 3, 1924
YU CHUCK, MACK YUENG, and DING MOON, plaintiffsappellees,
vs.
"KONG LI PO," defendant-appellant.
J. W. Ferrier for appellant.
G. E. Campbell for appellees.
OSTRAND, J.:
The defendant is a domestic corporation organized in accordance
with the laws of the Philippine Islands and engaged in the
publication of a Chinese newspaper styled Kong Li Po. Its articles of
incorporation and by-laws are in the usual form and provide for a
board of directors and for other officers among them a president
whose duty it is to "sign all contracts and other instruments of
writing." No special provision is made for a business or general
manager.
Some time during the year 1919 one C. C. Chen or T. C. Chen was
appointed general business manager of the newspaper. During the
month of December of that year he entered into an agreement
with the plaintiffs by which the latter bound themselves to do the
necessary printing for the newspaper for the sum of P580 per
month as alleged in the complaint. Under this agreement the
plaintiffs worked for the defendant from January 1, 1920, until
January 31, 1921, when they were discharged by the new
manager, Tan Tian Hong, who had been appointed in the
meantime, C. C. Chen having left for China. The letter of dismissal
stated no special reasons for the discharge of the plaintiffs.
The plaintiffs thereupon brought the present action alleging,
among other things, in the complaint that their contract of
employment was for a term of three years from the first day of

January, 1920; that in the case of their discharge by the defendant

without just cause before the expiration of the term of the contract,
they were to receive full pay for the remaining portion of the term;
that they had been so discharged without just cause and therefore
asked judgment for damages in the sum of P20,880.
In its amended answer the defendant denies generally and
specifically the allegations of the complaint and sets up five special
defenses and counterclaims. The first of these is to the effect that
C. C. Chen, the person whose name appears to have been signed
to the contract of employment was not authorized by the
defendant to execute such a contract in its behalf. The second
special defense and counterclaim is to the effect that during the
month of January, 1921, the plaintiffs purposely delayed the
issuance of defendant's newspaper on three separate and distinct
occasions causing damage and injury to the defendant in the
amount of P300. Under the third special defense and counterclaim
it is alleged that the plaintiffs failed, neglected, and refused to
prepare extra pages for the January 1, 1921, issue of the
defendant's newspaper and thus compelled the defendant to
secure the preparation of said extra pages by other persons at a
cost of P110. In the fourth special defense and counterclaim the
defendant alleged that the plaintiffs neglected and failed to correct
errors in advertisements appearing in defendant's newspaper,
although their attention was specifically called to such errors and
they were requested to make the corrections, as a result of which
certain advertisers withdrew their patronage from the paper and
refused to pay for the advertisements, thus causing a loss to the
defendant of P160.50. For its fifth special defense and counterclaim
the defendant alleged that the plaintiffs neglected and refused to
do certain job printing such neglect and refusal causing injury and
damage to the defendant in the sum of P150.
At the trial of the case the plaintiffs presented in evidence Exhibit A
which purports to be a contract between Chen and the plaintiffs
and which provides that in the event the plaintiffs should be
discharged without cause before the expirations of the term of
three years from January 1, 1920, they would be given full pay for
the unexpired portion of the term "even if the said paper has to fall
into bankruptcy." The contract is signed by the plaintiffs and also
bears the signature "C. C. Chen, manager of Kong Li Po." The
authenticity of the latter signature is questioned by the defendant,
but the court below found that the evidence upon this point

preponderate in favor of the plaintiffs and there appears to be no

sufficient reason to disturb this finding.
The trial court further found that the contract had been impliedly
ratified by the defendant and rendered judgment in favor of the
plaintiffs for the sum of P13,340, with interest from the date of the
filing of the complaint and the costs. From this judgment the
defendant appeals to this court and makes eighteen assignments
of error. The fourth and seventeenth assignments relate to
defendant's special defense and counterclaims; the sum and
substance of the other assignments is that the contract on which
the action is based was not signed by C. C. Chen; that, in any
event, C. C. Chen had no power or authority to bind the defendant
corporation by such contract; and that there was no ratification of
the contract by the corporation.
Before entering upon a discussion of the questions raised by the
assignments of error, we may draw attention to a matter which as
not been mentioned either by counsel or by the court below, but
which, to prevent misunderstanding, should be briefly explained: It
is averred in the complaint that it is accompanied by a copy of the
contract between the parties (Exhibit A) which copy, by the terms
of the complaint, is made a part thereof. The copy is not set forth
in the bill of exceptions and aside from said avernment, there is no
indication that the copy actually accompanied the complaint, but
an examination of the record of the case in the Court of First
Instance shows that a translation of the contract was attached to
the complaint and served upon the defendant. As this translation
may be considered a copy and as the defendant failed to deny its
authenticity under oath, it will perhaps be said that under section
103 of the Code of Civil Procedure the omission to so deny it
constitutes an admission of the genuineness and due execution of
the document as well as of the agent's authority to bind the
defendant. (Merchant vs. International Banking Corporation, 6 Phil.,
314.)
In ordinary circumstances that would be true. But this case
appears to have been tried upon the theory that the rule did not
apply; at least, it was wholly overlooked or disregarded by both
parties. The plaintiffs at the beginning of the trial presented a
number of witnesses to prove the due execution of the document
as well as the agent's authority; no objections were made to the
defendant's evidence in refutation and no exceptions taken; and
the matter is not mentioned in the decision of the trial court.

The object of the rule is "to relieve a party of the trouble and
expense of proving in the first instance an alleged fact, the
existence or nonexistence of which is necessarily within the
knowledge of the adverse party, and of the necessity (to his
opponent's case) of establishing which such adverse party is
notified by his opponent's pleading." (Nery Lim-Chingco vs.
Terariray, 5 Phil., at p. 124.)
The plaintiff may, of course, waive the rule and that is what he
must be considered to have done in the present case by
introducing evidence as to the execution of the document and
failing to object to the defendant's evidence in refutation; all this
evidence is now competent and the case must be decided
thereupon. Moreover, the question as to the applicability of the
rule is not even suggested in the briefs and is not properly this
court. In these circumstances it would, indeed, be grossly unfair to
the defendant if this court should take up the question on its own
motion and make it decisive of the case, and such is not the law.
Nothing of what has here been said is in conflict with former
decisions of this court; it will be found upon examination that in all
cases where the applicability of the rule has been sustained the
party invoking it has relied on it in the court below and conducted
his case accordingly.
The principal question presented by the assignments of error is
whether Chen had the power to bind the corporation by a contract
of the character indicated. It is conceded that he had no express
authority to do so, but the evidence is conclusive that he, at the
time the contract was entered into, was in effect the general
business manager of the newspaper Kong Li Po and that he, as
such, had charge of the printing of the paper, and the plaintiff
maintain that he, as such general business manager, had implied
authority to employ them on the terms stated and that the
defendant corporation is bound by his action. The general rule is
that the power to bind a corporation by contract lies with its board
of directors or trustees, but this power may either expressly or
impliedly be delegated to other officers or agents of the
corporation, and it is well settled that except where the authority of
employing servants and agent is expressly vested in the board of
directors or trustees, an officer or agent who has general control
and management of the corporation's business, or a specific part
thereof, may bind the corporation by the employment of such
agent and employees as are usual and necessary in the conduct of

such business. But the contracts of employment must be

reasonable. (14a C. J., 431.)
In regard to the length of the term of employment, Corpus Juris
says:
In the absence of express limitations, a manager has authority to
hire an employee for such a period as is customary or proper under
the circumstances, such as for a year, for the season, or for two
season. But unless he is either expressly authorized, or held out as
having such authority, he cannot make a contract of employment
for a long future period, such as for three years, although the
contract is not rendered invalid by the mere fact that the
employment extends beyond the term of the manager's own
employment. . . . (14a C. J., 431.)
From what has been said, there can be no doubt that Chen, as
general manager of the Kong Li Po, had implied authority to bind
the defendant corporation by a reasonable and usual contract of
employment with the plaintiffs, but we do not think that the
contract here in question can be so considered. Not only is the
term of employment unusually long, but the conditions are
otherwise so onerous to the defendant that the possibility of the
corporation being thrown into insolvency thereby is expressly
contemplated in the same contract. This fact in itself was, in our
opinion, sufficient to put the plaintiffs upon inquiry as to the extent
of the business manager's authority; they had not the rights to
presume that he or any other single officer or employee of the
corporation had implied authority to enter into a contract of
employment which might bring about its ruin.
Neither do we think that the contention that the corporation
impliedly ratified the contract is supported by the evidence. The
contention is based principally on the fact that Te Kim Hua, the
president of the corporation for the year 1920, admitted on the
witness stand that he saw the plaintiffs work as printers in the
office of the newspaper. He denied, however, any knowledge of the
existence of the contract and asserted that it was never presented
neither to him nor to the board of directors. Before a contract can
be ratified knowledge of its existence must, of course, be brought
home to the parties who have authority to ratify it or
circumstances must be shown from which such knowledge may be
presumed. No such knowledge or circumstances have been shown
here. That the president of the corporation saw the plaintiffs

working in its office is of little significance; there were other

printers working there at that time and as the president had
nothing to do with their employment, it was hardly to be expected
that be would inquire into the terms of their contracts. Moreover, a
ratification by him would have been of no avail; in order to validate
a contract, a ratification by the board of directors was necessary.
The fact that the president was required by the by-laws to sign the
documents evidencing contracts of the corporation, does not mean
that he had power to make the contracts.
In his decision his Honor, the learned judge of the court below
appears to have placed some weight on a notice inserted in the
January 14th issue of the Kong Li Po by T. C. Chen and which, in
translation, reads as follows:
To Whom It May Concern: Announcement is hereby given that
thereafter all contracts, agreements and receipts are considered to
be null and void unless duly signed by T. C. Chen, General Manager
of this paper.
(Sgd.) CHEN YOU MAN
General Manager of this paper
(The evidence shows that Chen You Man and T. C. Chen is one and
the same person.)
His Honor evidently overestimated the importance of this notice. It
was published nearly a month after the contract in question is
alleged to have been entered into and can therefore not have been
one of the circumstances which led the plaintiffs to think that Chen
had authority to make the contract. It may further be observed
that the notice confers no special powers, but is, in effect, only an
assertion by Chen that he would recognize no contracts,
agreements, and receipts not duty signed by him. It may be
presumed that the contracts, agreements, and receipts were such
as were ordinarily made in the course of the business of managing
the newspaper. There is no evidence to show that the notice was
ever brought to the attention of the officers of the defendant
corporation.
The defendant's counterclaims
established by the evidence.

have

not

been

sufficiently

The judgment appealed from is reversed and the defendant

corporation is absolved from the complaint. No costs will be
allowed. So ordered.
Johns, Avancea and Romualdez, JJ., concur.
Separate Opinions:
STREET, J., concurring:
I concur in the opinion of the court written by Mr. Justice Ostrand
and wish to add an observation of my own on one or two points. In
the first place I find nothing in the opinion of the court inconsistent
with the decision in Ramirez vs. Orientalist Co. and Fernandez (38
Phil., 634). In the case we held that where a corporation wishes to
raise the question as to the authority of an officer who has signed a
contract purporting to bind the corporation, it should plead the lack
of authority by way of special defense. In this case the defendant
raised the point property in its answer. This is something that was
not done in the Ramirez case. Upon the issue thus presented the
parties submitted their proof, and no notice was taken by any one
of the failure of the defendant to verify its plea on this point by the
oath of some proper officer. If the plaintiffs had raised a question
as to the lack of the affidavit in the court below, as it might have
done by objecting to testimony or moving to strike this special
defense out of the answer, the oversight could have been
corrected at once. On the contrary the parties proceeded on the
mutual assumption that the point was property raised, and the
oversight should be ignored in this court. In the Ramirez case we
held that the omission of the defendant to submit such special
defense under oath might be cured by amendment even in this
court, and we might here permit the amendment of the answer, if
necessary to the administration of justice; but this step must be
considered wholly superfluous in view of the course things have
taken.
On the principal point in the case, namely, whether one C. C. Chen
or T. C. Chen, who was running the Kong Li Po, had authority to
bind the corporation to the plaintiffs by a contract for the term of
three years, I find that the authorities fully support the proposition
quoted in the opinion from Corpus Juris to the effect that a
manager cannot make a contract of employment for a long period,
such as for three years, unless expressly authorized or held out by
the corporation as having such authority. The distinction here, as I
see it, is not so much a distinction between the reasonable and the

unreasonable as it is between the usual and unusual, or the

ordinary and extraordinary. There must be a limit somewhat upon
the authority of a manager with respect to the duration of
contracts which he makes for the corporation, and my eye has
fallen upon no decision in which contract for the period of three
years, or longer, has been upheld on the bare fact that the contract
was made by a manager, though there are case in which contracts
for the period of only one year have been sustained.
As sustaining the position taken by the court, the following
authorities will be found instructive: Laird vs. Michigan Lubricator
Co. (17 L. R. A., 177 [with note]); Caldwell vs. Mutual Reserve Fund
Life Association (53 App. Div. [N. Y.], 245; Carney vs. New York Life
Ins. Co. (162 N. Y., 453; 49 L. R. A. 471 [with note]); Vogel vs. St.
Louis Museum (8 Mo. App. 587); Manross vs. Uncle Sam Oil Co. (88
Kan., 237; Anno. Cas., 1914B [with note]). In Gamacho vs.
Hamilton Bank-Note & Engraving Co. (37 N. Y. Supp., 725), it was
said:
. . . In the absence of proof of what exact authority belongs to a
person descriptively styled a 'general manager,' there is no rule by
which a court can be guided in determining what the power of such
an official really are, except such as the evidence in a particular
case may furnish of what the person has done in the general
course of the business of the corporation. That the words 'general
manager' would import that the person bearing that title is a
general executive officer for the ordinary business of the
corporation is all that may properly be inferred; and this would
justify, in connection with proof of acts done, a conclusion that all
ordinary contracts made by such an official are authorized by the
corporation. But no presumption of law can be indulged in that,
because as person acts as such a manager, he has the power to
bind his principal to contracts of an extraordinary nature, and of
such a character as would involved the corporation in enormous
obligations and for long periods of time. If a general manager,
simply by virtue of his being charged with the ordinary conduct of
the business, would have the right to bind his principal to a
contract for services for three years, involving the obligation to pay
thousands of dollars of salary to an employee, why may not that
power extend indefinitely, so that he may make contracts for all
employees for indefinite periods, and thus assume to himself a
power which it cannot be supposed was ever intended to be lodged
in him? . . .

MALCOLM, J., dissenting:

It is to be regretted that the prevailing opinion either neglects
entirely or merely makes passing mention of certain points and
facts, which demonstrate completely the tenability of plaintiffs'
action, and the correctness of the judgment rendered in their favor
by judge of First Instance M. V. del Rosario. To elucidate
1. The action was brought by certain printers on the Chinese
newspaper Kong Li Po to recover on a written contract made a part
of the complaint. The answer of the defendant made certain
allegations, but failed to deny specifically under oath the
genuineness and due execution of the instrument sued on. The
resulting rule is as set forth in Merchant vs. International Banking
Corporation ([1906], 6 Phil., 314 and many other cases, that failure
by the defendant to deny under oath the execution of the
instrument sued on, a copy of which is attached to the complaint,
when such instrument purports to be signed by an agent of the
defendant corporation, is an admission, not only of the
genuineness of the signature, but also of the authority of the agent
to sign it for the defendant and the power of the defendant to
enter into such a contract, citing section 103 of the Code of Civil
Procedure, Bausman vs. Credit Guarantee Co. ([1891], 47 Minn.,
377), and Knight vs. Whitmore ([1899], 125 Cal. 198). The case for
the plaintiffs is thus premised on a written instrument which the
defendant admits to be genuine, and as to which the defendant
admits the authority of the agent to accomplish and the power of
the defendant to make.
2. Not only is the foregoing true, but the defendant corporation
held T. C. Chen out to the public as the business manager of the
newspaper Kong Li Po and clothes him with apparent authority to
bind the corporation. The president of the corporation admitted as
much on the witness stand, while public announcement was made
as follows:
To Whom It May Concern: Announcement is hereby given that
hereafter all contracts, agreements and receipts are considered to
be null and void unless duly signed by T. C. Chen, General Manager
of this paper.
(Sgd.) CHEN YOU MAN
General Manager of this paper

The action of the business manager was thus ratified by his

superior officers and they are now in estoppel to deny such
ratification. As held in the case of Macke vs. Camps ([1907], 7 Phil.,
553), one who clothes another with apparent authority as his agent
and holds him out to the public as such, cannot be permitted to
deny the authority of such person to act as his agent in good faith
and in the honest belief that he is what he appears to be. Unless
the contrary appears, the authority of an agent must be presumed
to include all the necessary and usual means of carrying his
agency into effect, citing section 333, subsection 1, of the Code of
Civil Procedure, and various cases. See also article 1259, 1311, and
1313 of the Civil Code.

the plaintiff. The power solution of this problem makes it necessary

to consider carefully the principle underlying the provision above
quoted.

The case of Ramirez vs. Orientalist Co. and Fernandez ([1918], 38

Phil., 634, 641) is markedly similar to the instant one in the two
respects here mentioned. In the opinion in the cited case. Mr.
Justice Street, speaking for the court, said:

The reason for the rule enunciated in the foregoing authorities will,
we think, be readily appreciated. In 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. 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. Whether as particular officer actually possesses the
authority which he assumes to exercise is frequently known to very
few, and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate officers. 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. By this 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:

As to the liability of the corporation a preliminary point of

importance arises upon the pleadings. The action, as already
stated, is based upon documents purporting to be signed by the
Orientalist Company, and copies of the documents are set out in
the complaint. It was therefore incumbent upon the corporation, if
it desired to question the authority of Fernandez to bind it, to deny
the due execution of said contracts under oath, as prescribed in
section 103 of the Code of Civil Procedure.
No sworn answer denying the genuineness and due executed of
the contracts in question or questioning the authority of Ramon J.
Fernandez to bind the Orientalist Company was filed in this case;
but evidence was admitted without objection from the plaintiff,
tending to show that Ramon J. Fernandez had no such authority.
This evidence consisted of extracts from the minutes of the
proceedings of the company's board of directors and also of
extracts from the minutes of the proceedings of the company's
stock-holders, showing that the making of this contract had been
under consideration in both bodies and that the authority to make
the same had been withheld by the stockholders. It therefore
becomes necessary for us to consider whether the admission
resulting from the failure of the defendant company to deny the
execution of the contracts under oath is binding upon it for all
purposes of this lawsuit, or whether such failure should be
considered a mere irregularity of procedure which was waived
when the evidence referred to was admitted without objection from

That the situation was one in which an answer under oath denying
the authority of the agent should have been interposed, supposing
that the company desired to contest this point, is not open to
question.
Then after citing Merchant vs. International Banking Corporation,
supra, and other cases approvingly, the writer of the opinion
continued:

We are of the opinion that the failure of the defendant corporation

to make any issue in its answer with regard to the authority of
Ramon J. Fernandez to bind it, and particularly its failure to deny
specifically under oath the genuineness and due execution of the

contracts sued upon, have the effect of eliminating the question of

his authority from the case, considered as a matter of mere
pleading.
We shall now consider the liability of the defendant company on
the merits just as if that liability had been properly put in issue by
a specific answer under oath denying the authority of Fernandez to
bind it. Upon this question it must at the outset be premised that
Ramon J. Fernandez, as treasurer, had no independent authority to
bind the company by signing its name to the letters in question. It
is declared in section 28 of the Corporation Law that corporate
powers shall be exercised, and all corporate business conducted by
the board of directors: and this principle is recognized in the bylaws of the corporation in question which contain a provision
declaring that the power to make contracts shall be vested in the
board of directors. It is true it is also declared in the same by-laws
that the president shall have the power, and it shall be his duty, to
sign contracts; but this bas reference rather to the formality of
reducing to proper form the contracts which are authorized by the
board and is not intended to confer an independent power to make
contracts binding on the corporation.
In passing upon the liability of a corporation in case of this kind it is
always well to keep in mind the situation as it presents itself to the
third party with whom the contract is made. Naturally he can have
little or no information as to what occurs in corporate meetings;
and he must necessarily rely upon the external manifestations of
corporate consent. The integrity of commercial transactions can
only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law; and we
would be sorry to announce a doctrine which would permit the
property of a man in the City of Paris be whisked out of his hands
and carried into a remote quarter of the earth without recourse
against the corporation whose name and authority had been used
in the manner disclosed in this case. As already observed, it is
familiar doctrine that if a corporation knowingly permits one of its
officers, or any other agent, to do acts within the scope of an
apparent authority, and thus holds him out to the public as
possessing power to do those acts, the corporate will, as against
any one who has in good faith dealt with the corporation through
such agent, be estopped from denying his authority; and where it
is said "if the corporation permits" this means the same as "if the
thing is permitted by the directing power of the corporation."

It being determined that the corporation is bound by the contracts

in question, it remains to consider the character of the liability
assumed by Ramon J. Fernandez, in affixing his personal signature
to said contracts.
3. The court really decides the case is favor of the appellant on a
legal point which was not raised in the lower court which was not
assigned as an error in this court, and which was not argued in the
brief of the appellant. This point is that the contract of employment
made by the business manager of Kong Li Po with the plaintiffs was
unusually long and onerous and was not binding on the
corporation. The legal rule so announced, while having much to
commend it, abstractly, can only be applied in the Philippines to
the instant case, concretely. Our understanding of the meager
demand for technical employees on newspapers in the Philippines,
and particularly for technical employees on Chinese newspapers, is
that a contract extending over a period of three years and calling
for the payment of a salary of P480 per month for three persons,
which contract was entered into a written instrument by the
business manager of the paper, presumably under genuine power
but at any rate under apparent power, and which contract was
ratified by the officers of the corporation, is not invalid. To continue
the quotation from volume 14a Corpus Juris, pages 431, 432,
where it stops in the prevailing opinion: The contract is not
rendered invalid "where there is no abuse of the manager's
authority and no fraud practiced, and where the contract is definite
in terms, duly accepted, and the work entered upon." (McGuire vs.
Old Sweet Spring Co. [1913], 73 W. Va. 321.) Volume 2, Thompson
on Corporation, sections 1576 to 1583 can be read with profit.
For three fundamental reasons, therefore, it is my firm opinion that
the contract sued on should be held valid and enforcible and that
as was done in the lower court, the plaintiff should obtain redress
pursuant to this contract. My vote is for straight affirmance.
Villamor, J., concurs.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18805
August 14, 1967
THE
BOARD
OF
LIQUIDATORS
representing
THE
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES,
plaintiff-appellant,

vs.
HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE
DECEASED
CASIMIRO
GARCIA,
and
LEONOR
MOLL,
defendants-appellees.
Simeon M. Gopengco and Solicitor General for plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.;
Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendantsappellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was
chartered as a non-profit governmental organization on May 7,
1940 by Commonwealth Act 518 avowedly for the protection,
preservation and development of the coconut industry in the
Philippines. On August 1, 1946, NACOCO's charter was amended
[Republic Act 5] to grant that corporation the express power "to
buy, sell, barter, export, and in any other manner deal in, coconut,
copra, and dessicated coconut, as well as their by-products, and to
act as agent, broker or commission merchant of the producers,
dealers or merchants" thereof. The charter amendment was
enacted to stabilize copra prices, to serve coconut producers by
securing advantageous prices for them, to cut down to a minimum,
if not altogether eliminate, the margin of middlemen, mostly
aliens.
General manager and board chairman was Maximo M. Kalaw;
defendants Juan Bocar and Casimiro Garcia were members of the
Board; defendant Leonor Moll became director only on December
22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on copra
trading activities. Amongst the scores of contracts executed by
general manager Kalaw are the disputed contracts, for the delivery
of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons,
$167.00: per ton, f. o. b., delivery: August and September, 1947.
This contract was later assigned to Louis Dreyfus & Co. (Overseas)
Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons
$145.00 per long ton, f.o.b., Philippine ports, to be shipped:

September-October, 1947. This contract was also assigned to Louis

Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50
per ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons,
$160.00 per ton, c.i.f., Los Angeles, California, delivery: November,
1947.
(e) September 9, 1947: Franklin Baker Division of General Foods
Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York,
to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for
3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery:
November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00
per ton, delivery: November and December, 1947. This contract
was assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: December, 1947 and
January, 1948. This contract was assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: January, 1948. This contract
was assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from
fulfilling these contracts. Nature supervened. Four devastating
typhoons visited the Philippines: the first in October, the second
and third in November, and the fourth in December, 1947. Coconut
trees throughout the country suffered extensive damage. Copra
production decreased. Prices spiralled. Warehouses were
destroyed. Cash requirements doubled. Deprivation of export
facilities increased the time necessary to accumulate shiploads of
copra. Quick turnovers became impossible, financing a problem.
When it became clear that the contracts would be unprofitable,
Kalaw submitted them to the board for approval. It was not until
December 22, 1947 when the membership was completed.
Defendant Moll took her oath on that date. A meeting was then
held. Kalaw made a full disclosure of the situation, apprised the

board of the impending heavy losses. No action was taken on the

contracts. Neither did the board vote thereon at the meeting of
January 7, 1948 following. Then, on January 11, 1948, President
Roxas made a statement that the NACOCO head did his best to
avert the losses, emphasized that government concerns faced the
same risks that confronted private companies, that NACOCO was
recouping its losses, and that Kalaw was to remain in his post. Not
long thereafter, that is, on January 30, 1948, the board met again
with Kalaw, Bocar, Garcia and Moll in attendance. They
unanimously approved the contracts hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the
contracts, as follows:
Buyers

Tons Delivered
Undelivered
Pacific Vegetable Oil
2,386.45
4,613.55
Spencer Kellog
None
1,000
Franklin Baker
1,000
500
Louis Dreyfus
800
2,200
Louis Dreyfus
1,150
850
(Adamson contract of July 30, 1947)
Louis Dreyfus
1, 755
245
(Adamson Contract of August 14, 1947)
TOTALS
7, 091.45
9,
408.55
The buyers threatened damage suits. Some of the claims were
settled, viz: Pacific Vegetable Oil Co., in copra delivered by
NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00;
Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue
before the Court of First Instance of Manila, upon claims as follows:
For the undelivered copra under the July 30 contract (Civil Case
4459); P287,028.00; for the balance on the August 14 contract
(Civil Case 4398), P75,098.63; for that per the September 12
contract reduced to judgment (Civil Case 4322, appealed to this
Court in L-2829), P447,908.40. These cases culminated in an outof-court amicable settlement when the Kalaw management was
already out. The corporation thereunder paid Dreyfus P567,024.52

representing 70% of the total claims. With particular reference to

the Dreyfus claims, NACOCO put up the defenses that: (1) the
contracts were void because Louis Dreyfus & Co. (Overseas) Ltd.
did not have license to do business here; and (2) failure to deliver
was due to force majeure, the typhoons. To project the utter
unreasonableness of this compromise, we reproduce in haec verba
this finding below:
However, in similar cases brought by the same claimant [Louis
Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for nondelivery of copra also involving a claim of P345,654.68 wherein
defendant set up same defenses as above, plaintiff accepted a
promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the
same proportion, the claim of Dreyfus against NACOCO should
have been compromised for only P10,000.00, if at all. Now, why
should defendants be held liable for the large sum paid as
compromise by the Board of Liquidators? This is just a sample to
show how unjust it would be to hold defendants liable for the
readiness with which the Board of Liquidators disposed of the
NACOCO funds, although there was much possibility of successfully
resisting the claims, or at least settlement for nominal sums like
what happened in the Syjuco case.
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the
above sum of P1,343,274.52 from general manager and board
chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro
Garcia and Leonor Moll. It charges Kalaw with negligence under
Article 1902 of the old Civil Code (now Article 2176, new Civil
Code); and defendant board members, including Kalaw, with bad
faith and/or breach of trust for having approved the contracts. The
fifth amended complaint, on which this case was tried, was filed on
July 2, 1959. Defendants resisted the action upon defenses
hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the
complaint without costs as well as defendants' counterclaims,
except that plaintiff was ordered to pay the heirs of Maximo Kalaw
the sum of P2,601.94 for unpaid salaries and cash deposit due the
deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's
counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but

adversely decided by, the court below, arrest our attention. On
appeal, defendants renew their bid. And this, upon established
jurisprudence that an appellate court may base its decision of
affirmance of the judgment below on a point or points ignored by
the trial court or in which said court was in error.6
1. First of the threshold questions is that advanced by defendants
that plaintiff Board of Liquidators has lost its legal personality to
continue with this suit.
Accepted in this jurisdiction are three methods by which a
corporation may wind up its affairs: (1) under Section 3, Rule 104,
of the Rules of Court [which superseded Section 66 of the
Corporation Law]7 whereby, upon voluntary dissolution of a
corporation, the court may direct "such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets
and pay the debts of the corporation;" (2) under Section 77 of the
Corporation Law, whereby a corporation whose corporate existence
is terminated, "shall nevertheless be continued as a body
corporate for three years after the time when it would have been
so dissolved, for the purpose of prosecuting and defending suits by
or against it and of enabling it gradually to settle and close its
affairs, to dispose of and convey its property and to divide its
capital stock, but not for the purpose of continuing the business for
which it was established;" and (3) under Section 78 of the
Corporation Law, by virtue of which the corporation, within the
three year period just mentioned, "is authorized and empowered to
convey all of its property to trustees for the benefit of members,
stockholders, creditors, and others interested."8
It is defendants' pose that their case comes within the coverage of
the second method. They reason out that suit was commenced in
February, 1949; that by Executive Order 372, dated November 24,
1950,
NACOCO,
together
with
other
government-owned
corporations, was abolished, and the Board of Liquidators was
entrusted with the function of settling and closing its affairs; and
that, since the three year period has elapsed, the Board of
Liquidators may not now continue with, and prosecute, the present
case to its conclusion, because Executive Order 372 provides in
Section 1 thereof that

Sec.1. The National Abaca and Other Fibers Corporation, the

National Coconut Corporation, the National Tobacco Corporation,
the National Food Producer Corporation and the former enemyowned or controlled corporations or associations, . . . are hereby
abolished. The said corporations shall be liquidated in accordance
with law, the provisions of this Order, and/or in such manner as the
President of the Philippines may direct; Provided, however, That
each of the said corporations shall nevertheless be continued as a
body corporate for a period of three (3) years from the effective
date of this Executive Order for the purpose of prosecuting and
defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of
and, convey its property in the manner hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even
where it may be found impossible within the 3 year period to
reduce disputed claims to judgment, nonetheless, "suits by or
against a corporation abate when it ceases to be an entity capable
of suing or being sued" (Fisher, The Philippine Law of Stock
Corporations, pp. 390-391). Corpus Juris Secundum likewise is
authority for the statement that "[t]he dissolution of a corporation
ends its existence so that there must be statutory authority for
prolongation of its life even for purposes of pending litigation"9 and
that suit "cannot be continued or revived; nor can a valid judgment
be rendered therein, and a judgment, if rendered, is not only
erroneous, but void and subject to collateral attack." 10 So it is,
that abatement of pending actions follows as a matter of course
upon the expiration of the legal period for liquidation, 11 unless the
statute merely requires a commencement of suit within the added
time. 12 For, the court cannot extend the time alloted by statute.
We, however, express the view that the executive order abolishing
NACOCO and creating the Board of Liquidators should be examined
in context. The proviso in Section 1 of Executive Order 372,
whereby the corporate existence of NACOCO was continued for a
period of three years from the effectivity of the order for "the
purpose of prosecuting and defending suits by or against it and of
enabling the Board of Liquidators gradually to settle and close its
affairs, to dispose of and convey its property in the manner
hereinafter provided", is to be read not as an isolated provision but
in conjunction with the whole. So reading, it will be readily
observed that no time limit has been tacked to the existence of the
Board of Liquidators and its function of closing the affairs of the
various government owned corporations, including NACOCO.

By Section 2 of the executive order, while the boards of directors of

the various corporations were abolished, their powers and
functions and duties under existing laws were to be assumed and
exercised by the Board of Liquidators. The President thought it best
to do away with the boards of directors of the defunct corporations;
at the same time, however, the President had chosen to see to it
that the Board of Liquidators step into the vacuum. And nowhere in
the executive order was there any mention of the lifespan of the
Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusion. Thus, liquidation by the
Board of Liquidators may, under section 1, proceed in accordance
with law, the provisions of the executive order, "and/or in such
manner as the President of the Philippines may direct." By Section
4, when any property, fund, or project is transferred to any
governmental instrumentality "for administration or continuance of
any project," the necessary funds therefor shall be taken from the
corresponding special fund created in Section 5. Section 5, in turn,
talks of special funds established from the "net proceeds of the
liquidation" of the various corporations abolished. And by Section,
7, fifty per centum of the fees collected from the copra
standardization and inspection service shall accrue "to the special
fund created in section 5 hereof for the rehabilitation and
development of the coconut industry." Implicit in all these, is that
the term of life of the Board of Liquidators is without time limit.
Contemporary history gives us the fact that the Board of
Liquidators still exists as an office with officials and numerous
employees continuing the job of liquidation and prosecution of
several court actions.
Not that our views on the power of the Board of Liquidators to
proceed to the final determination of the present case is without
jurisprudential support. The first judicial test before this Court is
National Abaca and Other Fibers Corporation vs. Pore, L-16779,
August 16, 1961. In that case, the corporation, already dissolved,
commenced suit within the three-year extended period for
liquidation. That suit was for recovery of money advanced to
defendant for the purchase of hemp in behalf of the corporation.
She failed to account for that money. Defendant moved to dismiss,
questioned the corporation's capacity to sue. The lower court
ordered plaintiff to include as co-party plaintiff, The Board of
Liquidators, to which the corporation's liquidation was entrusted by
Executive Order 372. Plaintiff failed to effect inclusion. The lower
court dismissed the suit. Plaintiff moved to reconsider. Ground:

excusable negligence, in that its counsel prepared the amended

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

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

against the heirs of Kalaw.

claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes,
there declared:

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which

was overruled, and in their nineteenth special defense, that
plaintiff's action is personal to the deceased Maximo M. Kalaw, and
may not be deemed to have survived after his death.18 They say
that the controlling statute is Section 5, Rule 87, of the 1940 Rules
of Court.19 which provides that "[a]ll claims for money against the
decedent, arising from contract, express or implied", must be filed
in the estate proceedings of the deceased. We disagree.

Plaintiffs argue with considerable cogency that contrasting the

correlated provisions of the Rules of Court, those concerning claims
that are barred if not filed in the estate settlement proceedings
(Rule 87, sec. 5) and those defining actions that survive and may
be prosecuted against the executor or administrator (Rule 88, sec.
1), it is apparent that actions for damages caused by tortious
conduct of a defendant (as in the case at bar) survive the death of
the latter. Under Rule 87, section 5, the actions that are abated by
death are: (1) claims for funeral expenses and those for the last
sickness of the decedent; (2) judgments for money; and (3) "all
claims for money against the decedent, arising from contract
express or implied." None of these includes that of the plaintiffsappellants; for it is not enough that the claim against the deceased
party be for money, but it must arise from "contract express or
implied", and these words (also used by the Rules in connection
with attachments and derived from the common law) were
construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,

The suit here revolves around the alleged negligent acts of Kalaw
for having entered into the questioned contracts without prior
approval of the board of directors, to the damage and prejudice of
plaintiff; and is against Kalaw and the other directors for having
subsequently approved the said contracts in bad faith and/or
breach of trust." Clearly then, the present case is not a mere action
for the recovery of money nor a claim for money arising from
contract. The suit involves alleged tortious acts. And the action is
embraced in suits filed "to recover damages for an injury to person
or property, real or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos,
L-18107, August 30, 1962. There, plaintiffs sought to recover
damages from defendant Llemos. The complaint averred that
Llemos had served plaintiff by registered mail with a copy of a
petition for a writ of possession in Civil Case 4824 of the Court of
First Instance at Catbalogan, Samar, with notice that the same
would be submitted to the Samar court on February 23, 1960 at
8:00 a.m.; that in view of the copy and notice served, plaintiffs
proceeded to the said court of Samar from their residence in Manila
accompanied by their lawyers, only to discover that no such
petition had been filed; and that defendant Llemos maliciously
failed to appear in court, so that plaintiffs' expenditure and trouble
turned out to be in vain, causing them mental anguish and undue
embarrassment. Defendant died before he could answer the
complaint. Upon leave of court, plaintiffs amended their complaint
to include the heirs of the deceased. The heirs moved to dismiss.
The court dismissed the complaint on the ground that the legal
representative, and not the heirs, should have been made the
party defendant; and that, anyway, the action being for recovery of
money, testate or intestate proceedings should be initiated and the

"to include all purely personal obligations other than those which
have their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that
survive against a decedent's executors or administrators, and they
are: (1) actions to recover real and personal property from the
estate; (2) actions to enforce a lien thereon; and (3) actions to
recover damages for an injury to person or property. The present
suit is one for damages under the last class, it having been held
that "injury to property" is not limited to injuries to specific
property, but extends to other wrongs by which personal estate is
injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also
171 A.L.R., 1395). To maliciously cause a party to incur
unnecessary expenses, as charged in this case, is certainly injury
to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts
comparable to those of the present. No cogent reason exists why
we should break away from the views just expressed. And, the
conclusion remains: Action against the Kalaw heirs and, for the
matter, against the Estate of Casimiro Garcia survives.

The preliminaries out of the way, we now go to the core of the

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

value decrease. Above all, NACOCO's limited funds necessitated a

quick turnover. Copra contracts then had to be executed on short
notice at times within twenty-four hours. To be appreciated then
is the difficulty of calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into
copra trading.
Long before the disputed contracts came into being, Kalaw
contracted by himself alone as general manager for forward
sales of copra. For the fiscal year ending June 30, 1947, Kalaw
signed some 60 such contracts for the sale of copra to divers
parties. During that period, from those copra sales, NACOCO
reaped a gross profit of P3,631,181.48. So pleased was NACOCO's
board of directors that, on December 5, 1946, in Kalaw's absence,
it voted to grant him a special bonus "in recognition of the signal
achievement rendered by him in putting the Corporation's business
on a self-sufficient basis within a few months after assuming office,
despite numerous handicaps and difficulties."
These previous contract it should be stressed, were signed by
Kalaw without prior authority from the board. Said contracts were
known all along to the board members. Nothing was said by them.
The aforesaid contracts stand to prove one thing: Obviously,
NACOCO board met the difficulties attendant to forward sales by
leaving the adoption of means to end, to the sound discretion of
NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed
by NACOCO's general manager and submitted to the board after
their consummation, not before. These agreements were not
Kalaw's alone. One at least was executed by a predecessor way
back in 1940, soon after NACOCO was chartered. It was a contract
of lease executed on November 16, 1940 by the then general
manager and board chairman, Maximo Rodriguez, and A. Soriano y
Cia., for the lease of a space in Soriano Building On November 14,
1946, NACOCO, thru its general manager Kalaw, sold 3,000 tons of
copra to the Food Ministry, London, thru Sebastian Palanca. On
December 22, 1947, when the controversy over the present
contract cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and Ulpiana
Isberto covering a warehouse of the latter. On the same date, the
board gave its nod to a contract for renewal of the services of Dr.
Manuel L. Roxas. In fact, also on that date, the board requested
Kalaw to report for action all copra contracts signed by him "at the

meeting immediately following the signing of the contracts." This

practice was observed in a later instance when, on January 7,
1948, the board approved two previous contracts for the sale of
1,000 tons of copra each to a certain "SCAP" and a certain
"GNAPO".

Kalaw continued to say that "the Corporation has been closing

contracts for the sale of copra generally with a margin of P5.00 to
P7.00 per hundred kilos."
We now lift the following excerpts from the minutes of that same
board meeting of July 29, 1947:

And more. On December 19, 1946, the board resolved to ratify the
brokerage commission of 2% of Smith, Bell and Co., Ltd., in the
sale of 4,300 long tons of copra to the French Government. Such
ratification was necessary because, as stated by Kalaw in that
same meeting, "under an existing resolution he is authorized to
give a brokerage fee of only 1% on sales of copra made through
brokers." On January 15, 1947, the brokerage fee agreements of 11/2% on three export contracts, and 2% on three others, for the
sale of copra were approved by the board with a proviso
authorizing the general manager to pay a commission up to the
amount of 1-1/2% "without further action by the Board." On
February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on
the sale of 2,000 tons of copra was favorably acted upon by the
board. On March 19, 1947, a 2% brokerage commission was
similarly approved by the board for Pacific Trading Corporation on
the sale of 2,000 tons of copra.

521. In connection with the buying and selling of copra the Board
inquired whether it is the practice of the management to close
contracts of sale first before buying. The General Manager replied
that this practice is generally followed but that it is not always
possible to do so for two reasons:

It is to be noted in the foregoing cases that only the brokerage fee

agreements were passed upon by the board, not the sales
contracts themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling fixed by
the board.
Knowledge by the board is also discernible from other recorded
instances.

The General Manager explained that in this connection a certain

amount of speculation is unavoidable. However, he said that the
Nacoco is much more conservative than the other big exporters in
this respect.

When the board met on May 10, 1947, the directors discussed the
copra situation: There was a slow downward trend but belief was
entertained that the nadir might have already been reached and
an improvement in prices was expected. In view thereof, Kalaw
informed the board that "he intends to wait until he has signed
contracts to sell before starting to buy copra.
In the board meeting of July 29, 1947, Kalaw reported on the copra
price conditions then current: The copra market appeared to have
become fairly steady; it was not expected that copra prices would
again rise very high as in the unprecedented boom during JanuaryApril, 1947; the prices seemed to oscillate between $140 to $150
per ton; a radical rise or decrease was not indicated by the trends.

(1) The role of the Nacoco to stabilize the prices of copra requires
that it should not cease buying even when it does not have actual
contracts of sale since the suspension of buying by the Nacoco will
result in middlemen taking advantage of the temporary inactivity
of the Corporation to lower the prices to the detriment of the
producers.
(2) The movement of the market is such that it may not be
practical always to wait for the consummation of contracts of sale
before beginning to buy copra.

Settled jurisprudence has it that where similar acts have been

approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without
formal authorization of the board of directors. 26 In varying
language, existence of such authority is established, by proof of
the course of business, the usage and practices of the company
and by the knowledge which the board of directors has, or must be
presumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation. 27 So also, authority to act for
and bind a corporation may be presumed from acts of recognition
in other instances where the power was in fact exercised.
Thus, when, in the usual course of business of a corporation, an
officer has been allowed in his official capacity to manage its
affairs, his authority to represent the corporation may be implied
from the manner in which he has been permitted by the directors
to manage its business.

In the case at bar, the practice of the corporation has been to allow
its general manager to negotiate and execute contracts in its copra
trading activities for and in NACOCO's behalf without prior board
approval. If the by-laws were to be literally followed, the board
should give its stamp of prior approval on all corporate contracts.
But that board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts.
4. But if more were required, we need but turn to the board's
ratification of the contracts in dispute on January 30, 1948, though
it is our (and the lower court's) belief that ratification here is
nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification
by a corporation of an unauthorized act or contract by its officers
or others relates back to the time of the act or contract ratified,
and is equivalent to original authority;" and that " [t]he corporation
and the other party to the transaction are in precisely the same
position as if the act or contract had been authorized at the time."
The language of one case is expressive: "The adoption or
ratification of a contract by a corporation is nothing more or less
than the making of an original contract. The theory of corporate
ratification is predicated on the right of a corporation to contract,
and any ratification or adoption is equivalent to a grant of prior
authority." 31
Indeed, our law pronounces that "[r]atification cleanses the
contract from all its defects from the moment it was constituted."
32 By corporate confirmation, the contracts executed by Kalaw are
thus purged of whatever vice or defect they may have. 33
In sum, a case is here presented whereunder, even in the face of
an express by-law requirement of prior approval, the law on
corporations is not to be held so rigid and inflexible as to fail to
recognize equitable considerations. And, the conclusion inevitably
is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in
terms of "bad faith and/or breach of trust" in the board's
ratification of the contracts without prior approval of the board.
For, in reality, all that we have on the government's side of the

scale is that the board knew that the contracts so confirmed would
cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the
contracts without need of prior approval. Everybody, including
Kalaw himself, thought so, and for a long time. Doubts were first
thrown on the way only when the contracts turned out to be
unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote
bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it means
breach of a known duty thru some motive or interest or ill will; it
partakes of the nature of fraud.34 Applying this precept to the
given facts herein, we find that there was no "dishonest purpose,"
or "some moral obliquity," or "conscious doing of wrong," or
"breach of a known duty," or "Some motive or interest or ill will"
that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted
for personal reasons, or to serve their own private interests, or to
pocket money at the expense of the corporation. 35 We have had
occasion to affirm that bad faith contemplates a "state of mind
affirmatively operating with furtive design or with some motive of
self-interest or ill will or for ulterior purposes." 36 Briggs vs.
Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with
approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the
following: "Upon a close examination of all the reported cases,
although there are many dicta not easily reconcilable, yet I have
found no judgment or decree which has held directors to account,
except when they have themselves been personally guilty of some
fraud on the corporation, or have known and connived at some
fraud in others, or where such fraud might have been prevented
had they given ordinary attention to their duties. . . ." Plaintiff did
not even dare charge its defendant-directors with any of these
malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts
would contravene basic dictates of fairness. They did not think of
raising their voice in protest against past contracts which brought
in enormous profits to the corporation. By the same token, fair
dealing disagrees with the idea that similar contracts, when
unprofitable, should not merit the same treatment. Profit or loss
resulting from business ventures is no justification for turning one's

back on contracts entered into. The truth, then, of the matter is

that in the words of the trial court the ratification of the
contracts was "an act of simple justice and fairness to the general
manager and the best interest of the corporation whose prestige
would have been seriously impaired by a rejection by the board of
those contracts which proved disadvantageous."
The directors are not liable."
6. To what then may we trace the damage suffered by NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then on
our copra-producing regions. Result: Copra production was
impaired, prices spiralled, warehouses destroyed. Quick turnovers
could not be expected. NACOCO was not alone in this misfortune.
The record discloses that private traders, old, experienced, with
bigger facilities, were not spared; also suffered tremendous losses.
Roughly estimated, eleven principal trading concerns did run losses
to about P10,300,000.00. Plaintiff's witness Sisenando Barretto,
head of the copra marketing department of NACOCO, observed
that from late 1947 to early 1948 "there were many who lost
money in the trade." 39 NACOCO was not immune from such usual
business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the
suits filed by Louis Dreyfus & Co. by pleading in its answers force
majeure as an affirmative defense and there vehemently asserted
that "as a result of the said typhoons, extensive damage was
caused to the coconut trees in the copra producing regions of the
Philippines and according to estimates of competent authorities, it
will take about one year until the coconut producing regions will be
able to produce their normal coconut yield and it will take some
time until the price of copra will reach normal levels;" and that "it
had never been the intention of the contracting parties in entering
into the contract in question that, in the event of a sharp rise in the
price of copra in the Philippine market produce by force majeure or
by caused beyond defendant's control, the defendant should buy
the copra contracted for at exorbitant prices far beyond the buying
price of the plaintiff under the contract." 40
A high regard for formal judicial admissions made in court
pleadings would suffice to deter us from permitting plaintiff to stray
away therefrom, to charge now that the damage suffered was

because of Kalaw's negligence, or for that matter, by reason of the

board's ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with
ease, met its contractual obligations. Stock accessibility was no
problem. NACOCO had 90 buying agencies spread throughout the
islands. It could purchase 2,000 tons of copra a day. The various
contracts involved delivery of but 16,500 tons over a five-month
period. Despite the typhoons, NACOCO was still able to deliver a
little short of 50% of the tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum
absque injuria. Conjunction of damage and wrong is here absent.
There cannot be an actionable wrong if either one or the other is
wanting. 43
7. On top of all these, is that no assertion is made and no proof is
presented which would link Kalaw's acts ratified by the board
to a matrix for defraudation of the government. Kalaw is clear of
the stigma of bad faith. Plaintiff's corporate counsel 44 concedes
that Kalaw all along thought that he had authority to enter into the
contracts, that he did so in the best interests of the corporation;
that he entered into the contracts in pursuance of an overall policy
to stabilize prices, to free the producers from the clutches of the
middlemen. The prices for which NACOCO contracted in the
disputed agreements, were at a level calculated to produce profits
and higher than those prevailing in the local market. Plaintiff's
witness, Barretto, categorically stated that "it would be foolish to
think that one would sign (a) contract when you are going to lose
money" and that no contract was executed "at a price unsafe for
the Nacoco." 45 Really, on the basis of prices then prevailing,
NACOCO envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either.
Kalaw invariably consulted with NACOCO's Chief Buyer, Sisenando
Barretto, or the Assistant General Manager. The dailies and
quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He
could not be expected to predict the coming of unpredictable
typhoons. And even as typhoons supervened Kalaw was not
remissed in his duty. He exerted efforts to stave off losses. He
asked the Philippine National Bank to implement its commitment to
extend a P400,000.00 loan. The bank did not release the loan, not

even the sum of P200,000.00, which, in October, 1947, was

approved by the bank's board of directors. In frustration, on
December 12, 1947, Kalaw turned to the President, complained
about the bank's short-sighted policy. In the end, nothing came out
of the negotiations with the bank. NACOCO eventually faltered in
its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as
simple negligence, would seem to be supported by the fact that
even as the contracts were being questioned in Congress and in
the NACOCO board itself, President Roxas defended the actuations
of Kalaw. On December 27, 1947, President Roxas expressed his
desire "that the Board of Directors should reelect Hon. Maximo M.
Kalaw as General Manager of the National Coconut Corporation."
47 And, on January 7, 1948, at a time when the contracts had
already been openly disputed, the board, at its regular meeting,
appointed Maximo M. Kalaw as acting general manager of the
corporation.
Well may we profit from the following passage from Montelibano
vs. Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962:
"They (the directors) hold such office charged with the duty to act
for the corporation according to their best judgment, and in so
doing they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation
should be operated at a loss during a business depression, or
closed down at a smaller loss, is a purely business and economic
problem to be determined by the directors of the corporation, and
not by the court. It is a well-known rule of law that questions of
policy of management are left solely to the honest decision of
officers and directors of a corporation, and the court is without
authority to substitute its judgment for the judgment of the board
of directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable by
the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48
Kalaw's good faith, and that of the other directors, clinch the case
for defendants. 49
Viewed in the light of the entire record, the judgment under review
must be, as it is hereby, affirmed.
Without costs. So ordered.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and

Angeles, JJ., concur.
Fernando, J., took no part.
Concepcion, C.J. and Dizon, J., are on leave.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-27694

October 24, 1928

ZAMBOANGA TRANSPORTATION COMPANY, INC., plaintiffappellee,

vs.
THE BACHRACH MOTOR CO., INC., defendant-appellant.
G.R. No. L-27997

October 24, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
ZAMBOANGA TRANSPORTATION COMPANY, INC., defendantappellant.
Gibbs and McDonough and Roman Ozaeta for appellant in case No.
27694 and for appellee in case No. 27997.
C. A. Sobral and Jose Erquiaga for appellee in case No. 27694 and
for appellant in case No. 27997.
VILLA-REAL, J.:
We are here concerned with two appeals, one taken by the
defendant the Bachrach Motor Co., Inc., from the judgment of the
Court of First Instance of Zamboanga in civil case No. 1286 of said
court (G.R. No. 27694) holding that the chattel mortgage executed
by the president and general manager of the plaintiff corporation,
the Zamboanga Transportation Co., Inc., is null and void, and
ordering the register of deeds of said province to cancel the

registration of said mortgage at the instance of said defendant, the

Bachrach Motor Co., Inc., with costs; and the other by the
defendant Zamboanga Transportation Co., Inc., from the judgment
of the Court of First Instance of Manila in civil case No. 28123 (G.R.
No. 27997) ordering said defendant Zamboanga Transportation
Co., Inc., the sum of P18,298.58, with 10 per cent interest on the
sum of P6,254.81, from May 19, 1925, and legal interest on the
balance of said sum from May 23, 1925, when the complaint was
filed, plus the costs, and dismissing all the counterclaims and cross
complaints set up by the defendant corporation.
In support of its appeal, the Bachrach Motor Co., Inc., assigns the
following alleged errors as committed by the Court of First Instance
of Zamboanga in its judgment to wit:
1. The trial court erred in not finding that Mr. Jose Erquiaga,
president, general manager, director, stockholder, auditor,
attorney and legal adviser, and principal witness of the Zamboanga
Transportation Co., Inc., personified and practically constituted that
corporation at the time he signed the chattel mortgage in question
in its behalf;
2. The trial court erred in not finding that the so-called board of
directors of the Zamboanga Transportation Co., Inc., was composed
of "dummy" directors, who were mere puppets in the hands of the
said Jose Erquiaga;
3. The trial court erred in not finding that the pretended resolution
of the said so-called board of directors dated of May 20, 1925
(Exhibit FF), purporting to disapprove the chattel mortgage in
question was mere contrivance of the said Jose Erquiaga, framed
up for the purpose of attempting to avoid the obligation of said
mortgage;
4. Trial court erred in holding that the chattel mortgage in question
was void and of no effect because it had not been previously
approved by the Public Utility Commission;
5. The trial court erred in not dismissing plaintiff's complaint.
In support of its appeal the Zamboanga Transportation Co., Inc., in
turn assigns the following alleged errors as committed by the Court
of First Instance of Manila, to wit:

1. The Manila trial court erred in holding that chattel mortgage in

question was valid and binding upon the corporation
notwithstanding the fact that it was disapproved by a resolution of
its board of directors and that it had not been previously approved
by the Public Utility Commission as required by law;
2. In not finding that Jose Erquiaga, president and general manager
of the corporation, executed and signed said mortgage upon the
express condition that it would not be valid unless it was ratified by
a resolution of the board of directors, as required by the by-laws of
the corporation and that it was agreed that in case said mortgage
was not approved by said board of directors, Bachrach would be at
liberty to foreclose the other two previous mortgage which were
the real basis of the debt represented by the mortgage in question;
3. In not finding as a fact that all previous contracts of any kind
signed by Jose Erquiaga, as president or general manager or by his
predecessors in office, affecting the company, had to be submitted
for approval or ratification by the board of directors, as shown by
the minutes kept by the secretary of the corporation, and that
Bachrach was in possesssion of and knew the by-laws of the
company at least since 1923;
4. In not finding that it was verbally agreed between the said Jose
Erquiaga and E. M. Bachrach that the chattel mortgage in question
would not be registered in the offices of the register of deeds
concerned until it was approved by the board of directors of the
mortgagor and by the Public Utility Commission;
5. In not finding that it was also agreed between said Jose
Erquiaga, E. M. Bachrach, and Mons. Jose Clos, Bishop of
Zamboanga, in connection with the execution of the agreement of
February 14, 1925, that the mortgagee would not foreclose said
mortgage before the return of the Bishop of Zamboanga from his
trip to Rome calculated to last six months, and without first giving
the bishop opportunity to pay the whole amount of the mortgage
with a ten per cent rebate;
6. In utterly disregarding the testimony, in support of mortgagor's
contention, of the Right Rev. Jose Clos, Bishop of Zamboanga, and
in not admitting his deposition, as corrected by deponent,
notwithstanding the fact that said deposition was obtained at
mortgagee's request, and the questions made to the bishop were

made by mortgagee's attorney in the absence of the mortgagor or

his attorney;
7. In not finding as a fact that at least two of the directors, Jose
Camins and Ciriaco Bernal, were big stackholders owning nearly
twenty thousand pesos of stock each and were not dummy
directors who were mere puppets in the hands of said Jose
Erquiaga, president and general manager of the corporation;
8. In finding that the mortgator took advantage of the alleged
benefits of the mortgage in question with the full knowledge of said
board of directors and that the validity of the mortgage was not
disputed until after the mortgagee began proceedings for the
foreclosure of said mortgage, when as a matter of fact the
mortgagor filed the action in the Zamboanga court asking that the
mortgage, be declared null and void as soon as he discovered that
the mortgage had been registered with the register of deeds of
Zamboanga, contrary to what had been stipulated, and before the
mortgator had any notice that the mortgagee was going to
foreclose said mortgage;
9. In finding that the execution of the chattel mortgage in question
was merely a novation of the two previous mortgages in favor of
the mortgagee and of the mortgage in favor of the Bishop of
Zamboanga;
The complaint filed by the Zamboanga Transportation Co., Inc.,
against the Bachrach Motor Co., Inc., in the Court of First Instance
of Zamboanga seeks the annulment of a chattel mortgage
executed on Febuary 14, 1925 (Exhibit B and C), by the plaintiff's
president and general manager in favor of the Bachrach Motor Co.,
Inc. 1awph!l.net
The complaint filed by the Bachrach Motor Co., Inc., against the
Zamboanga Transportation Co., Inc., in the Court of First Instance
of Manila seeks the foreclosure of said chattel mortgage.
By their respective assignments of error both appellants raise
questions of fact as well as of law, rendering it necessary to make
our findings of facts.
The preponderance of the evidence established the following
pertinent and essential facts:
Both appellants are corporations created and organized under the
laws of the Philippine Islands. The Zamboanga Transportation Co.,

Inc., is managed by a board of directors composed of five

stockholders elected at a general annual meeting of the
stockholders. The directors for the year 1925 were elected at the
general meeting of the stockholders on January 26th of that year,
as appears from the following copy of the minutes:
MINUTES OF THE GENERAL MEETING OF STOCKHOLDERS OF THE
ZAMBOANGA TRANSPORTATION CO., INC., HELD ON JANUARY 26,
1925, IN THE OFFICES OF THE COMPANY AT NO. 20 CORCUERA
STREET, ZAMBOANGA, P. I.
The meeting was called to order with the Vice-President, Mr. Jose
Erquiaga, in the absence of the President, Mr. Jose Longa, as
chairman at 5 o'clock in the afternoon of this 26th day of January
1925, the following stockholders being present either personally or
by proxy:
Shares
Carlos Camins, in his own behalf
1
Jose Erquiaga, in his own behalf
466
Valera C. de Erquiaga, for Jose Erquiaga
1800
Eduardo Montenegro, for Jose Erquiaga
1000
Mons. Jose Clos, Bishop of Zamboanga, for Jose Erquiaga
2,410
Mission of the society of Jesus, for Jose Erquiaga
115
Melecio Ramos, for Jose Erquiaga
40
Jose Arguirre, for Jose Erquiaga
200
Ciriaco Bernal, in his own behalf
1,854
Superior of the Jesuit Fathers, for Jose Erquiaga
200
Dolores C. de Longa, for G. J. Cristobal
1950
G. J. Cristobal, in his own behalf
1
Total
10, 017
There being a total of 10,017 shares represented, which constitute
a majority or quorum according to the by-laws, the following
business was considered:
Upon motion of Mr. G. J. Cristobal, seconded by Mr. Ciriaco Bernal,
the minutes of the previous general meeting were read and
approved. The Manager's Annual Report of the condition of the
business and the accounts corresponding thereto for 1924 were
submitted for consideration. After the reading and examination of

said report and accounts, on motion of Mr. C. Camins, seconded by

Mr. G. J. Cristobal, said report was approved.

February 17, 1923 (Exhibit 2) and December 4, 1923 (Exhibit 1),

respectively.

Immediately afterwards they proceeded to the election of the

directors for the year 1925, the following being elected:

During the last five years the Zamboanga Transportation Co., Inc.,
found itself in financial straits and on several occasions appealed
to Mons. Jose Clos, Bishop of Zamboanga for loans of money. As
the latter, who was the principal stock holder of the Zamboanga
Transportation Co. Inc., was leaving for Rome in February 1925 and
could not continue to loan money to said corporation to pay the
installments stipulated in the chattel mortgages Exhibits 1 and 2,
and in view of the fact that the hypothecated trucks were in a bad
state or repair, and that the mortgagee required more security,
additional agreements were entered between Mons. Clos and the
Bachrach Motor Co., Inc. These agreements, in which the
Zamboanga Trasportation Co., Inc., intervened and took part, are
evidence in the letter quoted below:

Votes
Mr. Jose Erquiaga
10,505
Mr. C. Camins
10,500
Mr. Jose Camins
10,055
Mr. G.J. Cristobal
9,755
Mr. Ciriaco Bernal
9,270
There being no further business the meeting adjourned at 6:30
p.m.
I certify that the foregoing minutes are correct, and that the same
were approved at the abovementioned general meeting.

February 14, 1925

(Sgd.) JOSE ERQUIAGA
President ad interim
(Sgd.) C. CAMINS
Secretary
For nearly ten years the two associations have had business
relations with each other, the Zamboanga Transportation Co., Inc.,
purchasing trucks, automobiles, repair and accessory parts for use
in the business of transportation in which it is engaged, from the
Bachrach Motor Co., Inc. Payments were made by installments, and
for the security of the vendor the Bachrach Motor Co., Inc., the
purchaser, the Zamboanga Transportation Co., Inc., executed in its
favor several chattel mortgages.
From the year 1920 Jose Erquiaga, one of the stockholders and
directors of the Zamboanga Transportation Co., Inc., has been also
its attorney and legal adviser. In March 1924, he was appointed
general manager, and in January 1925 was elected president.
Lastly, he also acted as auditor.
In February 1925, the Zamboanga Transportation Co., Inc., owed
the Bachrach Motor Co., Inc., the sum of P44,095.78, which was
the balance due on the purchase price of several White trucks and
accessory parts, bought on the installments plan from the latter.
This balance was secured by two chattel mortgages, executed on

The RIGHT REVEREND JOSE CLOS

Bishop of Zamboanga
Manila, P.I.
MOST REVEREND SIR: The purpose of this letter is to set forth in
writing certain conditions and stipulations connected with the
transfer to us of certain securities now held by you consisting of a
mortgage made and executed in your favor by the Zamboanga
Transportation Co., Inc., covering certain equipment, business
credits, privileges, etc., as set forth therein.
1. You agree to release, and hereby do release and cancel said
mortgage made and executed in your favor by the Zamboanga
Transporation Co. under date of January 10th, 1925.
2. The Zamboanga Transportation Co. is to be permitted to execute
in our favor a new mortgage covering all property, business credits
and privileges mentioned and set forth therein, excepting the
second mortgage on property mortgaged by the Zamboanga
Transportation Company to the Standard Oil Company. This is in
addition to and to be included with property already mortgaged to
us by the Zamboanga Transportation Company for which purpose
an entirely new document, bearing a new schedule of payments
inclusive of interest thereon to dates of maturity, will be made and

executed in our favor by the said Zamboanga Transportation

Company.
3. For and in consideration of the release and cancellation of the
mortgage to us the property mentioned therein by the Zamboanga
Transportation Company, we agree to accept a reduced schedule of
payments for a period of six months from date, after which period
the former schedule of payments will be taken up and resumed as
set forth in our memorandum of January 10th. It is further agreed
that such payments instead of falling due on the 15th of each
month shall become due and payable on the 1st day of the
succeeding month as set forth and made of record in the new
notes and mortgages to be made and executed in our favor by the
Zamboanga Transportation Company. We also agree to permit the
transfer of trucks and equipment now mortgage to us by the
Zamboanga Transportation Company or such portion thereof as
may be necessary for their purpose to Dansalan, Lanao.
4. As a further consideration, we also agree to permit you to
liquidate the entire indebtedness of the Zamboanga Transportation
Company by paying to us at any time that may be convenient for
you to do so the entire amount due less a discount of 10 per cent
as outlined in our letter of December 26, 1924; such discount,
however, is to be based on the amount actually due by the
Zamboanga Transportation Company at that time inclusive of
balance due by them on their current account.
5. It is further stipulated and agreed that the President and General
Manager of the Zamboanga Transportation Company will furnish us
a copy of the Resolution of the board of directors authorizing him
to execute this new mortgage in our favor.
Kindly confirm and ratify this agreement by signing with us at the
bottom of this letter.
Very truly yours,
THE BACHRACH MOTOR CO., INC.
By (Sgd.) E.M. BACHRACH
Conforme:
THE ZAMBOANGA TRANSPORATION CO., INC.
By (Sgd.) JOSE ERQUIAGA

I agree to and accept conditions outlined.

(Sgd.) JOSE CLOS
In pursuance of said agreement the new chattel mortgage (Exhibits
B and C) was executed on February 14, 1925 by the Zamboanga
Transportation Co., Inc., represented by its president, general
manager, and attorney Jose Erquiaga. In this last mortgage the
same goods were pledged that had been hypothecated by the
Zamboanga Transporatation Co., Inc., to the Bachrach Motor Co.,
by virtue of instruments Exhibits 1 and 2, and to Mons. Jose Clos
Bishop of Zamboanga, by the virtue of the deed Exhibit 3.
In a letter written on February 28, 1925, Jose Erquiaga submitted
said mortgage deed to the board of directors through its secretary,
and upon his return to Zamboanga from Manila, discussed said
mortgage with directors Carlos Camins and Ciriaco Bernal, who
expressed their satisfaction with the advantages obtained by their
president and general manager.
The Zamboanga Transportation Co., Inc., partially complied with
the conditions of said mortgage deed, paying the Bachrach Motor
Co., Inc., on March 1 and April 1, 1925.
During the latter half of the month of April 1925, the mortgagor
received a letter dated April 13, 1925, through its president and
general manager, Jose Erquiaga, from the mortgagee, enclosing
the cancellation of the two former chattel mortgages Exhibits 1
and 2, in order to be recorded in the registries of deeds of Cebu
and Zamboanga, respectively, where said mortgages were
registered. On April 27, 1925, said president and general manager,
Jose Eraquiaga, sent the mortgage letter (Exhibits HH and 14) in
which, replying to the latter's communication dated April 13, 1925,
he informed it that said cancellations could not be registered,
because the new chattel mortgage had not been approved by the
mortgagor's board of directors, according to the express stipulation
of the parties, and that as soon as it was approved it would be
submitted to the Public Utility Commission for approval in
conformity with the law.
On May 3, 1925, the Zamboanga Transportation Co., Inc., through
its general manager, Jose Erquiaga, addressed the letter marked
Exhibit C to the Bachrach Motor Co., Inc., which, among other
things, said the following:

This is to inform you that on account of our Dansalan's Branch

failure to send us any money so far, we are utterly unable, for the
present, to make our remittances to you in accordance with our
last contract.
In view of all this and having in mind the fact that you hold now a
mortgage practically on all our business and your credit is perfectly
secured we would request that during this period of business
depression we be allowed to make smaller payments and
furthermore that we be authorized by you to sell our equipments in
Cebu and Dansalan, or part of it, upon the condition that any
amount obtained from such sales, will be paid to you to apply to
our monthly payments as per contract. Should you not be satisfied
with this letter, I request that you send a man of your confidence
down here to examine our business and report to you.
I will try to be in Manila by twelve of this month, passing thru Cebu
and will take this matter with you personally. In this connection, I
may tell you that I have already advanced some of my personal
funds to help the company. Inasmuch as Bishop Clos who holds a
second mortgage on our properties, is not here at present and he
is not expected to be back until August, it is requested that no
action be taken by you until he returns.
Expecting to see you personally within a few days and hoping a
favorable consideration, I am,
Yours very truly,
ZAMBOANGA TRANSPORTATION CO., INC.
By (Sgd.) JOSE ERQUIAGA
President and General Manager
When, as announced in the foregoing letter, Jose Erquiaga
interviewed E.M. Bachrach, president of Bachrach Motor Co., Inc.,
in the latter's office in Manila on May 6 and 12, 1925, in order to
secure his consent to the sale of some trucks in Cebu and
Dansalan, the same being included in those mortgaged, in order to
apply the proceeds to the payment of the unpaid debt, said E.M.
Bachrach asked Jose Erquiaga why the board of directors of the
Zamboanga Transportation had not approved the mortgage yet,
and without waiting for an answer, denied his request saying that
the mortgagor was "at their mercy" and that they did not care
whether the board of directors approved the mortgage or not,

adding, "You cannot impose conditions now." After this interview

Jose Erquiaga returned to Zamboanga and immediately made
special efforts to have the mortgagor's board of directors meet and
take definite action on said mortgage, which was done, said
mortgage being rejected by the resolution of May 20, 1925. At that
time the mortgagor discovered that the mortgagee had registered
the chattel mortgage in question in the registry of deeds of
Zamboanga, by a letter dated February 17, 1924, addressed to the
register of deeds of Zamboanga, without the knowledge or consent
of said mortgagor, and without having first registered the
cancellations of the two previous mortgages which included part of
the goods affected by the mortgage in question, as required by the
law, which cancellations, as stated, were sent to the mortgagor
only two months afterwards with the communication of April 13,
1925. This discovery was the cause of the resolution adopted by
the board of directors of the Zamboanga Transprotation Co., Inc.,
dated May 21, 1925, directing its attorney to institute an action for
the annulment of said mortgage, which was done on May 21, 1925,
the complaint being registered in the Court of First Instance of
Zamboanga as No. 2186.
The Bachrach Motor Co., Inc., acting through its president, filed a
complaint against the Zamboanga Transportation Co., Inc., in the
Court of First Instance of Manila on May 23, 1925, and by means of
a bond fixed by the court, obtained through the sheriff of
Zamboanga, possession of all the chattels described in the chattel
mortgages (Exhibits B and C) and their sale at public auction in
conformity with the provision of section 14 of the Chattel Mortgage
Law, and having been the highest bidder they were awarded to it
for the sum of P35,000, which amount was reduced to P34,642.63
after deducting the expenses of the auction and the sheriff's fees,
which amounted to P357.37. The aforesaid sum of P34,642.63
having been applied to the defendant's account, there remained a
balance of P18,298.58 which is the amount owed by the
Zamboanga Transportation Co., Inc., to the Bachrach Motor Co.,
Inc., icluding the stipulated penalty.
The Zamboanga Transportation Co., Inc., tried to prove that at the
time the chattel mortgage was executed there existed an oral
agreement between the parties, which contained the following
stipulations: (1) That the mortgage would not be valid until it was
approved by resolution of the board of directors of the mortgagor;
(2) that it would not be recorded in the proper registry of deeds
until such approval was obtained; (3) that after the mortgagor's

board of directors had approved it, the approval of the Public Utility
Commission as required by Act No. 3108 would also be requested;
(4) that should the mortgagor's board of directors disapproved said
mortgage, the mortgagee would have a right to foreclose the two
previous mortgages at any time; (5) that even if the mortgage be
approved by the mortgagor's board of directors, the mortgagee
would not foreclose said mortgage in case of violation of the
condition until after the return of the Bishop of Zamboanga from
his trip to Rome, which, it was calculated would take about six
months and without first giving said Bishop the option to pay the
whole debt to the mortgagee with a 10 per cent discount; (6) that
notwithstanding the fact that said mortgage is not valid without
the approval of the board of directors of the Zamboanga
Transportation Co., Inc., its conditions would go into effect
immediately after being signed by Jose Erquiaga, as president of
the mortgagor, the sum and the amount of the monthly payments
being suspended from the date; (7) that in view of this stipulation
Jose Erquiaga, as president and general manager of the mortgagor,
made two payments in accordance with the terms of said
mortgage, but without the knowledge of the board of directors and
before the formal disapproval of the said mortgage by resolution
dated May 20, 1925.
In view of the facts recited above as proven at the trial, partly by a
preponderance of the evidence and partly by the admission of the
parties, the following questions of law are raised:
(1) Whether the chattel mortgage evidenced by Exhibits B and C,
dated February 14, 1925, and executed by Jose Erquiaga,
president, general manager, attorney, and auditor of the
Zamboanga Transaportation Co., Inc., in behalf thereof is valid and
binding upon said corporation, after payments have been made to
the Bachrach Motor Co., Inc., by virtue thereof, notwithstanding the
fact that it was disapproved by the mortgagor's board of directors
four months after its execution.
(2) If so, whether said mortgage was effective notwithstanding the
fact that the authorization and approval of the Public Utility
Commission were not obtained until after and action for annulment
had been instituted by the Zamboanga Transportation Co., Inc., on
May 21, 1925, and almost a year after said mortgage had been
executed.
With regard to the first question, we have seen that Jose Erquiaga
is one of the largest stockholders of the Zamboanga Transportation

Co., Inc., and represented the greatest majority of the stock at the
general meeting of stockholders held on January 26, 1925 at which
he was elected president. In addition to this office, he acted as
general manager, auditor, and attorney of legal adviser of said
corporation. In this manifold capacity Jose Erquiaga entered into
the chattel mortgage contract here in question with the Bachrach
Motor Co., Inc., by virtue of which the Zamboanga Transportaion
Co., Inc., obtained greater advantages; and upon his return to
Zamboanga after having entered into said contract, he discussed
the new chattel mortgage with the directors of said corporation,
Carlos Camins and Ciriaco Bernal, who expresed their president
and general manager, and the Zamboanga Transportation Co., Inc.,
availed itself fo these advantages, making two payments under the
new contract to the Bachrach Motor Co., Inc.: The first on March 1,
1925, and the second on the first of April of the same year.
While it is true that said last chattel mortgage contract was not
approved by the board of directors of the Zamboanga
Transportation Co., Inc., whose approval was necessary in order to
validate it according to the by-laws of said corporation, the broad
powers vested in Jose Erquiaga as president, general manager,
auditor, attorney or legal adviser, and one of the largest
shareholders; the approval of his act in connection with said
chattel mortgage contract in question, with which two other
directors expressed satisfaction, one of which is also one of the
largest shareholders, who together with the president constitute a
majority: The payments made under said contract with the
knowledge of said three directors are equivalent to a tacit approval
by the board of directors of said chattel mortgage contract and
binds the Zamboanga Transportation Co., Inc. In truth and in fact
Jose Erquiaga, in his multiple capacity, was and is the factotum of
the corporation and may be said to be the corporation itself.
In the case of Halley First National Bank vs. G. V. B. Min. Co. (89
Fed., 439), the following rule was laid down:
Where the chief officers of a corporation are in reality its owners,
holding nearly all of its stock, and are permitted to manage the
business by the directors, who are only interested nominally or to a
small extent, and are controlled entirely by the officers, the acts of
such officers are binding on the corporation, which cannot escape
liability as to third persons dealing with it in good faith on the
pretense that such acts were ultra vires.

We therefore conclude that when the president of a corporation,

who is one of the principal stockholders and at the same time its
general manager, auditor, attorney or legal adviser, is empowered
by its by-laws to enter into chattel mortgage contracts, subject to
the approval of the board of directors, and enters into such
contracts with the tacit approval of two other members of the
board of directors, one of whom is also a principal shareholder,
both of whom, together with the president, form a majority, and
said corporation takes advantage of the benefits afforded by said
contract, such acts are equivalent to an implied ratification of said
contract by the board of directors and binds the corporation even if
not formally approved by said board of directors as required by the
by-laws of the aforesaid corporation.
With respect to the second question, having arrived at the
conclusion that the chattel mortgage deed, which is the subject
matter of this litigation, is valid and effective, the lack of previous
authorization and approval of the Public Utility Commission, while
it, indeed, rendered said contract ineffective, was cured by the
nunc pro tunc authorization and approval granted by said
Commission, and the contract was made effective from its
execution, for, as this court held in the case of Zamboanga
Transportation Co., vs. Public Utility Commission (50 Phil., 237),
although the authorization and approval of said Commission were
needed to render said chattel mortgage contract effective, they

were not necessary for the intrinsic validity of said contract so long
as the legal elements necessary to give it juridical life are present.
In consideration of the premises, we are of the opinion and so hold,
that while a chattel mortgage contract entered into by a public
service corporation is ineffective without the authorization and
approval of the Public Utility Commission, it may be valid if it
contains all the material and formal requisites demanded by the
law for its validity, and said Public Utility Commission may make it
retroactive by nunc pro tunc authorization and approval.
Wherefore, the judgment appealed from in the case of Zamboanga
Transporatation Co., Inc., vs. Bachrach Motor Co., Inc., of the Court
of First Instance of Zamboanga, G.R. No. 27694, is reversed with
costs against the appellee, and the judgment in the case of
Bachrach Motor Co., Inc., vs. Zamboanga Transportation Co., Inc.,
rendered by the Court of First Instance of Manila, is affirmed, with
the costs against the appellant. So ordered.
Avancena, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez,
JJ., concur.