Moral Damages

1. ABS-CBN vs. CA

G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs. HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION, INC., and
VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse
and set aside the decision 1 of 31 October 1996 and the resolution 2 of 10 March 1997 of the Court of Appeals in CA-
G.R. CV No. 44125. The former affirmed with modification the decision 3 of 28 April 1993 of the Regional Trial Court
(RTC) of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to reconsider the
decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A") whereby Viva gave
ABS-CBN an exclusive right to exhibit some Viva films. Sometime in December 1991, in accordance
with paragraph 2.4 [sic] of said agreement stating that —.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films for TV telecast
under such terms as may be agreed upon by the parties hereto, provided, however, that such right
shall be exercised by ABS-CBN from the actual offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo Santos-
Concio, a list of three(3) film packages (36 title) from which ABS-CBN may exercise its right of first
refusal under the afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-CBN,
however through Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we can purchase" (Exh.
"3" - Viva) and therefore did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by
Mrs. Concio are not the subject of the case at bar except the film ''Maging Sino Ka Man."

For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" - Viva) is hereby quoted:

6 January 1992

Dear Vic,

This is not a very formal business letter I am writing to you as I would like to express my difficulty in
recommending the purchase of the three film packages you are offering ABS-CBN.

From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I
hope you will understand my position. Most of the action pictures in the list do not have big action stars
in the cast. They are not for primetime. In line with this I wish to mention that I have not scheduled for
telecast several action pictures in out very first contract because of the cheap production value of
these movies as well as the lack of big action stars. As a film producer, I am sure you understand what
I am trying to say as Viva produces only big action pictures.

In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in
our non-primetime slots. We have to cover the amount that was paid for these movies because as you
very well know that non-primetime advertising rates are very low. These are the unaired titles in the
first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been rejected because of the ruling
of MTRCB to have them aired at 9:00 p.m. due to their very adult themes.

As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the other
Viva movies produced last year. I have quite an attractive offer to make.

Thanking you and with my warmest regards.

(Signed)

Charo Santos-Concio

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio, with a list
consisting of 52 original movie titles (i.e. not yet aired on television) including the 14 titles subject of
the present case, as well as 104 re-runs (previously aired on television) from which ABS-CBN may
choose another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing rights over this
package of 52 originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio Lopez III, met at
the Tamarind Grill Restaurant in Quezon City to discuss the package proposal of Viva. What transpired
in that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del
Rosario allegedly agreed that ABS-CRN was granted exclusive film rights to fourteen (14) films for a
total consideration of P36 million; that he allegedly put this agreement as to the price and number of
films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June
8, 1992). On the other hand, Del Rosario denied having made any agreement with Lopez regarding
the 14 Viva films; denied the existence of a napkin in which Lopez wrote something; and insisted that
what he and Lopez discussed at the lunch meeting was Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to make a counter
proposal which came in the form of a proposal contract Annex "C" of the complaint (Exh. "1"·- Viva;
Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for Finance
discussed the terms and conditions of Viva's offer to sell the 104 films, after the rejection of the same
package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a handwritten note from Ms.
Concio, (Exh. "5" - Viva), which reads: "Here's the draft of the contract. I hope you find everything in
order," to which was attached a draft exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3)
a counter-proposal covering 53 films, 52 of which came from the list sent by defendant Del Rosario
and one film was added by Ms. Concio, for a consideration of P35 million. Exhibit "C" provides that
ABS-CBN is granted films right to 53 films and contains a right of first refusal to "1992 Viva Films."
The said counter proposal was however rejected by Viva's Board of Directors [in the] evening of the
same day, April 7, 1992, as Viva would not sell anything less than the package of 104 films for P60
million pesos (Exh. "9" - Viva), and such rejection was relayed to Ms. Concio.
 On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and meetings
defendant Del Rosario and Viva's President Teresita Cruz, in consideration of P60 million, signed a
letter of agreement dated April 24, 1992. granting RBS the exclusive right to air 104 Viva-produced
and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of
the present case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer for a writ of
preliminary injunction and/or temporary restraining order against private respondents Republic Broadcasting
Corporation 5 (hereafter RBS ), Viva Production (hereafter VIVA), and Vicente Del Rosario. The complaint was
docketed as Civil Case No. Q-92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films subject of the controversy, starting with the film Maging
Sino Ka Man, which was scheduled to be shown on private respondents RBS' channel 7 at seven o'clock in the
evening of said date

On 17 June 1992, after appropriate proceedings, the RTC issued an

order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35 million bond. ABS-
CBN moved for the reduction of the bond, 8 while private respondents moved for reconsideration of the order and
offered to put up a counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set up a cross-claim
against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction upon the posting by RBS
of a P30 million counterbond to answer for whatever damages ABS-CBN might suffer by virtue of such dissolution.
However, it reduced petitioner's injunction bond to P15 million as a condition precedent for the reinstatement of the
writ of preliminary injunction should private respondents be unable to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the possibility of an
amicable settlement. In the meantime, RBS prayed for and was granted reasonable time within which to put up a P30
million counterbond in the event that no settlement would be reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a counterbond, which the
RTC approved in its Order of 15 October 1992.13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15 October 1992 Orders,
which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a petition17challenging
the RTC's Orders of 3 August and 15 October 1992 and praying for the issuance of a writ of preliminary injunction to
enjoin the RTC from enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order18 to enjoin the airing, broadcasting,
and televising of any or all of the films involved in the controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition in CA -G.R. No. 29300
for being premature. ABS-CBN challenged the dismissal in a petition for review filed with this Court on 19 January
1993, which was docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209. Thereafter, on 28 April
1993, it rendered a decision 20 in favor of RBS and VIVA and against ABS-CBN disposing as follows:

WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is rendered in
favor of defendants and against the plaintiff.
 (1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the surety
which issued defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for "Maging Sino
Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of
reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the offer. The alleged agreement
between Lopez III and Del Rosario was subject to the approval of the VIVA Board of Directors, and said agreement
was disapproved during the meeting of the Board on 7 April 1992. Hence, there was no basis for ABS-CBN's demand
that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990 Film
Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles
acceptable to them, which would have made the 1992 agreement an entirely new contract.

On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as no reversible error was
committed by the Court of Appeals in its challenged decision and the case had "become moot and academic in view
of the dismissal of the main action by the court a quo in its decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there was a perfected
contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to exhibit the subject films. Private
respondents VIVA and Del Rosario also appealed seeking moral and exemplary damages and additional attorney's
fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract between ABS-CBN
and VIVA had not been perfected, absent the approval by the VIVA Board of Directors of whatever Del Rosario, it's
agent, might have agreed with Lopez III. The appellate court did not even believe ABS-CBN's evidence that Lopez III
actually wrote down such an agreement on a "napkin," as the same was never produced in court. It likewise rejected
ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was
entered into between Appellant ABS-CBN and appellant VIVA under Exhibit "A" in 1990, and that
parag. 1.4 thereof provides:

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films
for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN within a period of
fifteen (15) days from the actual offer in writing (Records, p. 14).

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subject to
such terms as may be agreed upon by the parties thereto, and that the said right shall be exercised
by ABS-CBN within fifteen (15) days from the actual offer in writing.

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the price of the film
right to the twenty-four (24) films, nor did it specify the terms thereof. The same are still left to be
agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick
off ten (10) films, and the draft contract Exhibit "C" accepted only fourteen (14) films, while parag. 1.4
of Exhibit "A'' speaks of the next twenty-four (24) films.
 The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88;
Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by Mr. Del Rosario to
ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated January 6,
1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by rejecting the offer of
VIVA.. As aptly observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-
CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day period from February
27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter of Mrs. Concio, still
the fifteen (15) day period within which ABS-CBN shall exercise its right of first refusal has already
expired.22

Accordingly, respondent court sustained the award of actual damages consisting in the cost of print advertisements
and the premium payments for the counterbond, there being adequate proof of the pecuniary loss which RBS had
suffered as a result of the filing of the complaint by ABS-CBN. As to the award of moral damages, the Court of Appeals
found reasonable basis therefor, holding that RBS's reputation was debased by the filing of the complaint in Civil Case
No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent court also held that exemplary
damages were correctly imposed by way of example or correction for the public good in view of the filing of the
complaint despite petitioner's knowledge that the contract with VIVA had not been perfected, It also upheld the award
of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No, Q-92-1209, RBS was "unnecessarily
forced to litigate." The appellate court, however, reduced the awards of moral damages to P2 million, exemplary
damages to P2 million, and attorney's fees to P500, 000.00.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it was "RBS and not
VIVA which was actually prejudiced when the complaint was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, contending that the Court
of Appeals gravely erred in

. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND

PRIVATE RESPONDENT VIVA NOTWITHSTANDING PREPONDERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE CONTRARY.

II

. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE

RESPONDENT RBS.

III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE RESPONDENT

RBS.

IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under the 1990 Film
Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that we give credence to Lopez's
testimony that he and Del Rosario met at the Tamarind Grill Restaurant, discussed the terms and conditions of the
second list (the 1992 Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin. It
also asserts that the contract has already been effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court of Appeals' pronouncements were not supported by
law and jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of
Appeals, 23 which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco
Realty Company v. Bormaheco. Inc.26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the premium on the
counterbond of its own volition in order to negate the injunction issued by the trial court after the parties had ventilated
their respective positions during the hearings for the purpose. The filing of the counterbond was an option available
to RBS, but it can hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had another
available option, i.e., move for the dissolution or the injunction; or if it was determined to put up a counterbond, it could
have presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss or injury is
also required to exercise the diligence of a good father of a family to minimize the damages resulting from the act or
omission. As regards the cost of print advertisements, RBS had not convincingly established that this was a loss
attributable to the non showing "Maging Sino Ka Man"; on the contrary, it was brought out during trial that with or
without the case or the injunction, RBS would have spent such an amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary damages. The
controversy involving ABS-CBN and RBS did not in any way originate from business transaction between them. The
claims for such damages did not arise from any contractual dealings or from specific acts committed by ABS-CBN
against RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not warranted where the record is bereft of any proof that a
party acted maliciously or in bad faith in filing an action. 27 In any case, free resort to courts for redress of wrongs is a
matter of public policy. The law recognizes the right of every one to sue for that which he honestly believes to be his
right without fear of standing trial for damages where by lack of sufficient evidence, legal technicalities, or a different
interpretation of the laws on the matter, the case would lose ground. 28 One who makes use of his own legal right
does no injury. 29 If damage results front the filing of the complaint, it is damnum absque injuria. 30 Besides, moral
damages are generally not awarded in favor of a juridical person, unless it enjoys a good reputation that was debased
by the offending party resulting in social humiliation.31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or equitable
justification. In sustaining the trial court's award, the Court of Appeals acted in clear disregard of the doctrines laid
down in Buan v. Camaganacan 32 that the text of the decision should state the reason why attorney's fees are being
awarded; otherwise, the award should be disallowed. Besides, no bad faith has been imputed on, much less proved
as having been committed by, ABS-CBN. It has been held that "where no sufficient showing of bad faith would be
reflected in a party' s persistence in a case other than an erroneous conviction of the righteousness of his cause,
attorney's fees shall not be recovered as cost." 33

On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA absent any
meeting of minds between them regarding the object and consideration of the alleged contract. It affirms that the ABS-
CBN's claim of a right of first refusal was correctly rejected by the trial court. RBS insist the premium it had paid for
the counterbond constituted a pecuniary loss upon which it may recover. It was obliged to put up the counterbound
due to the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid
claim against RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the premium
paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to be more expensive, as
the loss would be equivalent to the cost of money RBS would forego in case the P30 million came from its funds or
was borrowed from banks.

RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of the film "Maging
Sino Ka Man" because the print advertisements were put out to announce the showing on a particular day and hour
on Channel 7, i.e., in its entirety at one time, not a series to be shown on a periodic basis. Hence, the print
advertisement were good and relevant for the particular date showing, and since the film could not be shown on that
particular date and hour because of the injunction, the expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured injunctions purely
for the purpose of harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN
must be held liable for such damages. Citing Tolentino,34 damages may be awarded in cases of abuse of rights even
if the act done is not illicit and there is abuse of rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages, private respondents RBS cited
People v. Manero,35 where it was stated that such entity may recover moral and exemplary damages if it has a good
reputation that is debased resulting in social humiliation. it then ratiocinates; thus:
 There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in this case. When
RBS was not able to fulfill its commitment to the viewing public to show the film "Maging Sino Ka Man"
on the scheduled dates and times (and on two occasions that RBS advertised), it suffered serious
embarrassment and social humiliation. When the showing was canceled, late viewers called up RBS'
offices and subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman
ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something RBS brought
upon itself. it was exactly what ABS-CBN had planned to happen.

The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify
the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS operations as a broadcasting
company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those who own and watch
television. It is not an exaggeration to state, and it is a matter of judicial notice that almost every other
person in the country watches television. The humiliation suffered by RBS is multiplied by the number
of televiewers who had anticipated the showing of the film "Maging Sino Ka Man" on May 28 and
November 3, 1992 but did not see it owing to the cancellation. Added to this are the advertisers who
had placed commercial spots for the telecast and to whom RBS had a commitment in consideration
of the placement to show the film in the dates and times specified.

The second is that it is a competitor that caused RBS to suffer the humiliation. The humiliation and
injury are far greater in degree when caused by an entity whose ultimate business objective is to lure
customers (viewers in this case) away from the competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the Court of Appeals
do not support ABS-CBN's claim that there was a perfected contract. Such factual findings can no longer be disturbed
in this petition for review under Rule 45, as only questions of law can be raised, not questions of fact. On the issue of
damages and attorneys fees, they adopted the arguments of RBS.

The key issues for our consideration are (1) whether there was a perfected contract between VIVA and ABS-CBN,
and (2) whether RBS is entitled to damages and attorney's fees. It may be noted that the award of attorney's fees of
P212,000 in favor of VIVA is not assigned as another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two persons whereby
one binds himself to give something or to render some service to another 37 for a consideration. there is no contract
unless the following requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject of
the contract; and (3) cause of the obligation, which is established.38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation and bargaining, ending
at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties come to agree on the
terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the
contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there is concurrence
between the offer and the acceptance upon the subject matter, consideration, and terms of payment a contract is
produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must
not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection
of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such
acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer
annuls the offer.40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992 to discuss the
package of films, said package of 104 VIVA films was VIVA's offer to ABS-CBN to enter into a new Film Exhibition
Agreement. But ABS-CBN, sent, through Ms. Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counter-proposal could be nothing less than the counter-
offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no
acceptance of VIVA's offer, for it was met by a counter-offer which substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of Appeals 41 and Villonco Realty Company
v. Bormaheco, Inc., 42 is misplaced. In these cases, it was held that an acceptance may contain a request for certain
changes in the terms of the offer and yet be a binding acceptance as long as "it is clear that the meaning of the
acceptance is positively and unequivocally to accept the offer, whether such request is granted or not." This ruling
was, however, reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of all offer must be
unqualified and absolute, i.e., it "must be identical in all respects with that of the offer so as to produce consent or
meeting of the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer were not material
but merely clarificatory of what had previously been agreed upon. It cited the statement in Stuart v. Franklin Life
Insurance Co.44 that "a vendor's change in a phrase of the offer to purchase, which change does not essentially
change the terms of the offer, does not amount to a rejection of the offer and the tender of a counter-offer." 45However,
when any of the elements of the contract is modified upon acceptance, such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they underwent a period of
bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft contract, VIVA through its Board
of Directors, rejected such counter-offer, Even if it be conceded arguendo that Del Rosario had accepted the counter-
offer, the acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific authority
to do so.

Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such as the power; to enter
into contracts; are exercised by the Board of Directors. However, the Board may delegate such powers to either an
executive committee or officials or contracted managers. The delegation, except for the executive committee, must
be for specific purposes, 47 Delegation to officers makes the latter agents of the corporation; accordingly, the general
rules of agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter
must specially authorize them to do so. That Del Rosario did not have the authority to accept ABS-CBN's counter-
offer was best evidenced by his submission of the draft contract to VIVA's Board of Directors for the latter's approval.
In any event, there was between Del Rosario and Lopez III no meeting of minds. The following findings of the trial
court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract was perfected at that
lunch meeting on April 02, 1992 at the Tamarind Grill.

FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the price and
the number of films, which he wrote on a napkin. However, Exhibit "C" contains numerous provisions
which, were not discussed at the Tamarind Grill, if Lopez testimony was to be believed nor could they
have been physically written on a napkin. There was even doubt as to whether it was a paper napkin
or a cloth napkin. In short what were written in Exhibit "C'' were not discussed, and therefore could not
have been agreed upon, by the parties. How then could this court compel the parties to sign Exhibit
"C" when the provisions thereof were not previously agreed upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was 14
films. The complaint in fact prays for delivery of 14 films. But Exhibit "C" mentions 53 films as its subject
matter. Which is which If Exhibits "C" reflected the true intent of the parties, then ABS-CBN's claim for
14 films in its complaint is false or if what it alleged in the complaint is true, then Exhibit "C" did not
reflect what was agreed upon by the parties. This underscores the fact that there was no meeting of
the minds as to the subject matter of the contracts, so as to preclude perfection thereof. For settled is
the rule that there can be no contract where there is no object which is its subject matter (Art. 1318,
NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states:

We were able to reach an agreement. VIVA gave us the exclusive license to show
these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00
as well as grant Viva commercial slots worth P19,950,000.00. We had already
earmarked this P16, 050,000.00.

which gives a total consideration of P36 million (P19,950,000.00 plus P16,050,000.00. equals
P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?

A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies
and the other 7 Viva movies because the price was broken down accordingly. The
none [sic] Viva and the seven other Viva movies and the sharing between the cash
portion and the concerned spot portion in the total amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.

FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C" to Mr. Del
Rosario with a handwritten note, describing said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-
24 June 08, 1992). The said draft has a well defined meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing prepared for
discussion, the terms and conditions thereof could not have been previously agreed upon by ABS-
CBN and Viva Exhibit "C'' could not therefore legally bind Viva, not having agreed thereto. In fact, Ms.
Concio admitted that the terms and conditions embodied in Exhibit "C" were prepared by ABS-CBN's
lawyers and there was no discussion on said terms and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in Exhibit "C," and there was
no evidence whatsoever that Viva agreed to the terms and conditions thereof, said document cannot
be a binding contract. The fact that Viva refused to sign Exhibit "C" reveals only two [sic] well that it
did not agree on its terms and conditions, and this court has no authority to compel Viva to agree
thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the Tamarind
Grill was only provisional, in the sense that it was subject to approval by the Board of Directors of Viva.
He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting wherein
you claimed that you have the meeting of the minds between you and Mr. Vic del
Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell us specifically the result of the
discussion with the Board of Directors.
Q. And you are referring to the so-called agreement which you wrote in [sic] a piece of
paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no authority
to bind Viva to a contract with ABS-CBN until and unless its Board of Directors approved it. The
complaint, in fact, alleges that Mr. Del Rosario "is the Executive Producer of defendant Viva" which "is
 a corporation." (par. 2, complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless
what he did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold
vs. Willetsand Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario
could not be held liable jointly and severally with Viva and his inclusion as party defendant has no
legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that what was
supposed to have been agreed upon at the Tamarind Grill between Mr. Lopez and Del Rosario was
not a binding agreement. It is as it should be because corporate power to enter into a contract is lodged
in the Board of Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva board,
whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid contract binding
upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced shows
that the Board of Directors of Viva rejected Exhibit "C" and insisted that the film package for 140 films
be maintained (Exh. "7-1" - Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films under the 1990
Film Exhibition Agreement and that the meeting between Lopez and Del Rosario was a continuation of said previous
contract is untenable. As observed by the trial court, ABS-CBN right of first refusal had already been exercised when
Ms. Concio wrote to VIVA ticking off ten films, Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself admitted on cross-examination to having used or
exercised the right of first refusal. She stated that the list was not acceptable and was indeed not
accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the right
of the first refusal may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992,
pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its rights of the first
refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50

II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages. Chapter 2, Title XVIII,
Book IV of the Civil Code is the specific law on actual or compensatory damages. Except as provided by law or by
stipulation, one is entitled to compensation for actual damages only for such pecuniary loss suffered by him as he has
duly proved. 51 The indemnification shall comprehend not only the value of the loss suffered, but also that of the profits
that the obligee failed to obtain. 52 In contracts and quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or otherwise, It case of good faith, the damages recoverable
are those which are the natural and probable consequences of the breach of the obligation and which the parties have
foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If the obligor acted with
fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages which may be reasonably attributed
to the non-performance of the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages
which are the natural and probable consequences of the act or omission complained of, whether or not such damages
has been foreseen or could have reasonably been foreseen by the defendant.54

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of temporary or
permanent personal injury, or for injury to the plaintiff's business standing or commercial credit.55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-delict. It arose from
the fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack of cause of action. Thus paragraph 12
of RBS's Answer with Counterclaim and Cross-claim under the heading COUNTERCLAIM specifically alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action RBS. As a result
thereof, RBS suffered actual damages in the amount of P6,621,195.32. 56

Needless to state the award of actual damages cannot be comprehended under the above law on actual damages.
RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code, which read as follows:

Art. 19. 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.
 Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for tile same.

Art. 21. 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.

It may further be observed that in cases where a writ of preliminary injunction is issued, the damages which the
defendant may suffer by reason of the writ are recoverable from the injunctive bond. 57 In this case, ABS-CBN had
not yet filed the required bond; as a matter of fact, it asked for reduction of the bond and even went to the Court of
Appeals to challenge the order on the matter, Clearly then, it was not necessary for RBS to file a counterbond. Hence,
ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of sufficient legal
basis. The RTC issued a temporary restraining order and later, a writ of preliminary injunction on the basis of its
determination that there existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve the
injunction on the ground of lack of legal and factual basis, but because of the plea of RBS that it be allowed to put up
a counterbond.

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be recovered as
actual or compensatory damages under any of the circumstances provided for in Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages because of the policy that no premium
should be placed on the right to litigate.59 They are not to be awarded every time a party wins a suit. The power of the
court to award attorney's fees under Article 2208 demands factual, legal, and equitable justification.60Even when
claimant is compelled to litigate with third persons or to incur expenses to protect his rights, still attorney's fees may
not be awarded where no sufficient showing of bad faith could be reflected in a party's persistence in a case other
than erroneous conviction of the righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217 thereof defines
what are included in moral damages, while Article 2219 enumerates the cases where they may be recovered, Article
2220 provides that moral damages may be recovered in breaches of contract where the defendant acted fraudulently
or in bad faith. RBS's claim for moral damages could possibly fall only under item (10) of Article 2219, thereof which
reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered. and
not to impose a penalty on the wrongdoer.62 The award is not meant to enrich the complainant at the expense of the
defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate then
moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status
quo ante, and should be proportionate to the suffering inflicted.63 Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it was
due to passion, prejudice, or corruption on the part of the trial court. 64

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and
having existence only in legal contemplation, it has no feelings, no emotions, no senses, It cannot, therefore,
experience physical suffering and mental anguish, which call be experienced only by one having a nervous
system. 65 The statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover
moral damages if it "has a good reputation that is debased, resulting in social humiliation" is an obiter dictum. On this
score alone the award for damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code. These are
imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated or
compensatory damages. 68 They are recoverable in criminal cases as part of the civil liability when the crime was
committed with one or more aggravating circumstances; 69 in quasi-contracts, if the defendant acted with gross
negligence; 70 and in contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.71
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract, delict, or quasi-
delict, Hence, the claims for moral and exemplary damages can only be based on Articles 19, 20, and 21 of the Civil
Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or duty, (2) which
is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another. Article 20 speaks of the general
sanction for all other provisions of law which do not especially provide for their own sanction; while Article 21 deals
with acts contra bonus mores, and has the following elements; (1) there is an act which is legal, (2) but which is
contrary to morals, good custom, public order, or public policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a conscious and
intentional design to do a wrongful act for a dishonest purpose or moral obliquity. 73 Such must be substantiated by
evidence. 74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly convinced of the merits
of its cause after it had undergone serious negotiations culminating in its formal submission of a draft contract. Settled
is the rule that the adverse result of an action does not per se make the action wrongful and subject the actor to
damages, for the law could not have meant to impose a penalty on the right to litigate. If damages result from a
person's exercise of a right, it is damnum absque injuria.75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in CA-G.R. CV No,
44125 is hereby REVERSED except as to unappealed award of attorney's fees in favor of VIVA Productions,
Inc.1âwphi1.nêt

No pronouncement as to costs. SO ORDERED.

2. Filipinas Broadcasting Networks Inc. vs. Ago Medical and Educational Center

G.R. No. 141994 January 17, 2005

FILIPINAS BROADCASTING NETWORK, INC., petitioner,

vs. AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM)
and ANGELITA F. AGO, respondents.

CARPIO, J.:

The Case

This petition for review1 assails the 4 January 1999 Decision2 and 26 January 2000 Resolution of the Court of Appeals
in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14 December 1992 Decision 3 of the
Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas
Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and ordered
them to solidarily pay Ago Medical and Educational Center-Bicol Christian College of Medicine moral damages,
attorney’s fees and costs of suit.

The Antecedents

"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’ Rima ("Rima") and Hermogenes ‘Jun’ Alegre
("Alegre").5 Exposé is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting Network, Inc.
("FBNI"). "Exposé" is heard over Legazpi City, the Albay municipalities and other Bicol areas.6

In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints from students,
teachers and parents against Ago Medical and Educational Center-Bicol Christian College of Medicine ("AMEC") and
its administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita Ago ("Ago"), as Dean of
AMEC’s College of Medicine, filed a complaint for damages7 against FBNI, Rima and Alegre on 27 February 1990.
Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM, advise them to
pass all subjects because if they fail in any subject they will repeat their year level, taking up all subjects including
those they have passed already. Several students had approached me stating that they had consulted with the DECS
which told them that there is no such regulation. If [there] is no such regulation why is AMEC doing the same?

xxx

Second: Earlier AMEC students in Physical Therapy had complained that the course is not recognized by DECS. xxx

Third: Students are required to take and pay for the subject even if the subject does not have an instructor - such
greed for money on the part of AMEC’s administration. Take the subject Anatomy: students would pay for the subject
upon enrolment because it is offered by the school. However there would be no instructor for such subject. Students
would be informed that course would be moved to a later date because the school is still searching for the appropriate
instructor.

xxx

It is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving for the
past few years since its inception because of funds support from foreign foundations. If you will take a look at the
AMEC premises you’ll find out that the names of the buildings there are foreign soundings. There is a McDonald Hall.
Why not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the support of foreign
foundations for AMEC is substantial, isn’t it? With the report which is the basis of the expose in DZRC today, it would
be very easy for detractors and enemies of the Ago family to stop the flow of support of foreign foundations who assist
the medical school on the basis of the latter’s purpose. But if the purpose of the institution (AMEC) is to deceive
students at cross purpose with its reason for being it is possible for these foreign foundations to lift or suspend their
donations temporarily.8

xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the AMEC-Institute of Mass
Communication in their effort to minimize expenses in terms of salary are absorbing or continues to accept
"rejects". For example how many teachers in AMEC are former teachers of Aquinas University but were removed
because of immorality? Does it mean that the present administration of AMEC have the total definite moral foundation
from catholic administrator of Aquinas University. I will prove to you my friends, that AMEC is a dumping ground,
garbage, not merely of moral and physical misfits. Probably they only qualify in terms of intellect. The Dean of Student
Affairs of AMEC is Justita Lola, as the family name implies. She is too old to work, being an old woman. Is the AMEC
administration exploiting the very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is
just patiently making use of Dean Justita Lola were if she is very old. As in atmospheric situation – zero visibility – the
plane cannot land, meaning she is very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the
committee on scholarship in AMEC. She had retired from Bicol University a long time ago but AMEC has patiently
made use of her.

xxx

MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people. What does
this mean? Immoral and physically misfits as teachers.

May I say I’m sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to teach. You
are too old. As an aviation, your case is zero visibility. Don’t insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at that. The
reason is practical cost saving in salaries, because an old person is not fastidious, so long as she has money to buy
the ingredient of beetle juice. The elderly can get by – that’s why she (Lola) was taken in as Dean.
xxx

xxx On our end our task is to attend to the interests of students. It is likely that the students would be influenced by
evil. When they become members of society outside of campus will be liabilities rather than assets. What do
you expect from a doctor who while studying at AMEC is so much burdened with unreasonable imposition? What do
you expect from a student who aside from peculiar problems – because not all students are rich – in their struggle to
improve their social status are even more burdened with false regulations. xxx9 (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposés, FBNI, Rima
and Alegre "transmitted malicious imputations, and as such, destroyed plaintiffs’ (AMEC and Ago) reputation." AMEC
and Ago included FBNI as defendant for allegedly failing to exercise due diligence in the selection and supervision of
its employees, particularly Rima and Alegre.

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer10 alleging that the broadcasts
against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly impelled by a sense of public
duty to report the "goings-on in AMEC, [which is] an institution imbued with public interest."

Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea, collaborating
counsel of Atty. Lozares, filed a Motion to Dismiss11 on FBNI’s behalf. The trial court denied the motion to dismiss.
Consequently, FBNI filed a separate Answer claiming that it exercised due diligence in the selection and supervision
of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster should (1) file an application; (2)
be interviewed; and (3) undergo an apprenticeship and training program after passing the interview. FBNI likewise
claimed that it always reminds its broadcasters to "observe truth, fairness and objectivity in their broadcasts and to
refrain from using libelous and indecent language." Moreover, FBNI requires all broadcasters to pass the Kapisanan
ng mga Brodkaster sa Pilipinas ("KBP") accreditation test and to secure a KBP permit.

On 14 December 1992, the trial court rendered a Decision12 finding FBNI and Alegre liable for libel except Rima. The
trial court held that the broadcasts are libelous per se. The trial court rejected the broadcasters’ claim that their
utterances were the result of straight reporting because it had no factual basis. The broadcasters did not even verify
their reports before airing them to show good faith. In holding FBNI liable for libel, the trial court found that FBNI failed
to exercise diligence in the selection and supervision of its employees.

In absolving Rima from the charge, the trial court ruled that Rima’s only participation was when he agreed with Alegre’s
exposé. The trial court found Rima’s statement within the "bounds of freedom of speech, expression, and of the press."
The dispositive portion of the decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages caused by
the controversial utterances, which are not found by this court to be really very serious and damaging, and there being
no showing that indeed the enrollment of plaintiff school dropped, defendants Hermogenes "Jun" Alegre, Jr. and
Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby jointly and severally ordered to pay
plaintiff Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of
₱300,000.00 moral damages, plus ₱30,000.00 reimbursement of attorney’s fees, and to pay the costs of suit.

SO ORDERED. 13 (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed the decision
to the Court of Appeals. The Court of Appeals affirmed the trial court’s judgment with modification. The appellate court
made Rima solidarily liable with FBNI and Alegre. The appellate court denied Ago’s claim for damages and attorney’s
fees because the broadcasts were directed against AMEC, and not against her. The dispositive portion of the Court
of Appeals’ decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that broadcaster Mel
Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26 January 2000
Resolution.

Hence, FBNI filed this petition.15

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial court’s ruling that the questioned broadcasts are libelous per se and that FBNI,
Rima and Alegre failed to overcome the legal presumption of malice. The Court of Appeals found Rima and Alegre’s
claim that they were actuated by their moral and social duty to inform the public of the students’ gripes as insufficient
to justify the utterance of the defamatory remarks.

Finding no factual basis for the imputations against AMEC’s administrators, the Court of Appeals ruled that the
broadcasts were made "with reckless disregard as to whether they were true or false." The appellate court pointed
out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly complained against AMEC.
Rima and Alegre merely gave a single name when asked to identify the students. According to the Court of Appeals,
these circumstances cast doubt on the veracity of the broadcasters’ claim that they were "impelled by their moral and
social duty to inform the public about the students’ gripes."

The Court of Appeals found Rima also liable for libel since he remarked that "(1) AMEC-BCCM is a dumping ground
for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to minimize expenses
on its employees’ salaries; and (3) AMEC burdened the students with unreasonable imposition and false
regulations."16

The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of its employees
for allowing Rima and Alegre to make the radio broadcasts without the proper KBP accreditation. The Court of Appeals
denied Ago’s claim for damages and attorney’s fees because the libelous remarks were directed against AMEC, and
not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral damages,
attorney’s fees and costs of suit.1awphi1.nét

Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEY’S FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF MORAL
DAMAGES, ATTORNEY’S FEES AND COSTS OF SUIT.

The Court’s Ruling

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre against
AMEC.17 While AMEC did not point out clearly the legal basis for its complaint, a reading of the complaint reveals that
AMEC’s cause of action is based on Articles 30 and 33 of the Civil Code. Article 3018 authorizes a separate civil action
to recover civil liability arising from a criminal offense. On the other hand, Article 33 19 particularly provides that the
injured party may bring a separate civil action for damages in cases of defamation, fraud, and physical injuries. AMEC
also invokes Article 1920 of the Civil Code to justify its claim for damages. AMEC cites Articles 217621 and 218022 of
the Civil Code to hold FBNI solidarily liable with Rima and Alegre.

I.

Whether the broadcasts are libelous

A libel23 is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any act or omission,
condition, status, or circumstance tending to cause the dishonor, discredit, or contempt of a natural or juridical person,
or to blacken the memory of one who is dead.24

There is no question that the broadcasts were made public and imputed to AMEC defects or circumstances tending
to cause it dishonor, discredit and contempt. Rima and Alegre’s remarks such as "greed for money on the part of
AMEC’s administrators"; "AMEC is a dumping ground, garbage of xxx moral and physical misfits"; and AMEC students
who graduate "will be liabilities rather than assets" of the society are libelous per se. Taken as a whole, the broadcasts
suggest that AMEC is a money-making institution where physically and morally unfit teachers abound.

However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were plainly
impelled by their civic duty to air the students’ gripes. FBNI alleges that there is no evidence that ill will or spite
motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to
obtain AMEC’s side and gave Ago the opportunity to defend AMEC and its administrators. FBNI concludes that since
there is no malice, there is no libel.

FBNI’s contentions are untenable.

Every defamatory imputation is presumed malicious.25 Rima and Alegre failed to show adequately their good intention
and justifiable motive in airing the supposed gripes of the students. As hosts of a documentary or public affairs
program, Rima and Alegre should have presented the public issues "free from inaccurate and misleading
information."26 Hearing the students’ alleged complaints a month before the exposé,27 they had sufficient time to verify
their sources and information. However, Rima and Alegre hardly made a thorough investigation of the students’
alleged gripes. Neither did they inquire about nor confirm the purported irregularities in AMEC from the Department
of Education, Culture and Sports. Alegre testified that he merely went to AMEC to verify his report from an alleged
AMEC official who refused to disclose any information. Alegre simply relied on the words of the students "because
they were many and not because there is proof that what they are saying is true."28 This plainly shows Rima and
Alegre’s reckless disregard of whether their report was true or not.

Contrary to FBNI’s claim, the broadcasts were not "the result of straight reporting." Significantly, some courts in the
United States apply the privilege of "neutral reportage" in libel cases involving matters of public interest or public
figures. Under this privilege, a republisher who accurately and disinterestedly reports certain defamatory statements
made against public figures is shielded from liability, regardless of the republisher’s subjective awareness of the truth
or falsity of the accusation.29 Rima and Alegre cannot invoke the privilege of neutral reportage because unfounded
comments abound in the broadcasts. Moreover, there is no existing controversy involving AMEC when the broadcasts
were made. The privilege of neutral reportage applies where the defamed person is a public figure who is involved in
an existing controversy, and a party to that controversy makes the defamatory statement.30

However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court of
Appeals,31 FBNI contends that the broadcasts "fall within the coverage of qualifiedly privileged communications" for
being commentaries on matters of public interest. Such being the case, AMEC should prove malice in fact or actual
malice. Since AMEC allegedly failed to prove actual malice, there is no libel.

FBNI’s reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of fair comment," thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action for libel or
slander. The doctrine of fair comment means that while in general every discreditable imputation publicly made is
deemed false, because every man is presumed innocent until his guilt is judicially proved, and every false imputation
is deemed malicious, nevertheless, when the discreditable imputation is directed against a public person in his public
capacity, it is not necessarily actionable. In order that such discreditable imputation to a public official may be
actionable, it must either be a false allegation of fact or a comment based on a false supposition. If the comment is
an expression of opinion, based on established facts, then it is immaterial that the opinion happens to be mistaken,
as long as it might reasonably be inferred from the facts.32 (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is "genuinely imbued with public
interest." The welfare of the youth in general and AMEC’s students in particular is a matter which the public has the
right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with matters of public
interest. However, unlike in Borjal, the questioned broadcasts are not based on established facts. The record supports
the following findings of the trial court:

xxx Although defendants claim that they were motivated by consistent reports of students and parents against plaintiff,
yet, defendants have not presented in court, nor even gave name of a single student who made the complaint to them,
much less present written complaint or petition to that effect. To accept this defense of defendants is too dangerous
because it could easily give license to the media to malign people and establishments based on flimsy excuses that
there were reports to them although they could not satisfactorily establish it. Such laxity would encourage careless
and irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their duties, did
not verify and analyze the truth of the reports before they aired it, in order to prove that they are in good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy courses. Yet,
plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2 years before the
controversial broadcast, accreditation to offer Physical Therapy course had already been given the plaintiff, which
certificate is signed by no less than the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-
rebuttal). Defendants could have easily known this were they careful enough to verify. And yet, defendants were very
categorical and sounded too positive when they made the erroneous report that plaintiff had no permit to offer Physical
Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald Foundation prove not
to be true also. The truth is there is no Mcdonald Foundation existing. Although a big building of plaintiff school was
given the name Mcdonald building, that was only in order to honor the first missionary in Bicol of plaintiffs’ religion, as
explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a single centavo appears to be received
by plaintiff school from the aforementioned McDonald Foundation which does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical students fail
in one subject, they are made to repeat all the other subject[s], even those they have already passed, nor their claim
that the school charges laboratory fees even if there are no laboratories in the school. No evidence was presented to
prove the bases for these claims, at least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s] singled out
Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in court last Jan. 21, 1991,
and was found to be 75 years old. xxx Even older people prove to be effective teachers like Supreme Court Justices
who are still very much in demand as law professors in their late years. Counsel for defendants is past 75 but is found
by this court to be still very sharp and effective.l^vvphi1.net So is plaintiffs’ counsel.

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert and docile.

The contention that plaintiffs’ graduates become liabilities rather than assets of our society is a mere conclusion. Being
from the place himself, this court is aware that majority of the medical graduates of plaintiffs pass the board
examination easily and become prosperous and responsible professionals.33

Had the comments been an expression of opinion based on established facts, it is immaterial that the opinion happens
to be mistaken, as long as it might reasonably be inferred from the facts.34 However, the comments of Rima and
Alegre were not backed up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.

The broadcasts also violate the Radio Code35 of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. ("Radio Code").
Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x
 4. Public affairs program shall present public issues free from personal bias, prejudice and inaccurate
and misleading information. x x x Furthermore, the station shall strive to present balanced discussion of
issues. x x x.

xxx

7. The station shall be responsible at all times in the supervision of public affairs, public issues and
commentary programs so that they conform to the provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public interest,
general welfare and good order in the presentation of public affairs and public issues.36 (Emphasis supplied)

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of ethical conduct
governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code of conduct imposed by
the radio broadcast industry on its own members. The Radio Code is a public warranty by the radio broadcast industry
that radio broadcast practitioners are subject to a code by which their conduct are measured for lapses, liability and
sanctions.

The public has a right to expect and demand that radio broadcast practitioners live up to the code of conduct of their
profession, just like other professionals. A professional code of conduct provides the standards for determining
whether a person has acted justly, honestly and with good faith in the exercise of his rights and performance of his
duties as required by Article 1937 of the Civil Code. A professional code of conduct also provides the standards for
determining whether a person who willfully causes loss or injury to another has acted in a manner contrary to morals
or good customs under Article 2138 of the Civil Code.

II.

Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a corporation.39

A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.40 The
Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.41 to justify the award of moral damages. However, the
Court’s statement in Mambulao that "a corporation may have a good reputation which, if besmirched, may also be a
ground for the award of moral damages" is an obiter dictum.42

Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article 2219 43 of the Civil Code. This provision
expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for moral damages.44

Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a case, evidence of an honest
mistake or the want of character or reputation of the party libeled goes only in mitigation of damages.46 Neither in such
a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of
some damages.47 In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.

However, we find the award of ₱300,000 moral damages unreasonable. The record shows that even though the
broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to its reputation.
Therefore, we reduce the award of moral damages from ₱300,000 to ₱150,000.

III.

Whether the award of attorney’s fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of attorney’s fees.
FBNI adds that the instant case does not fall under the enumeration in Article 220848 of the Civil Code.
The award of attorney’s fees is not proper because AMEC failed to justify satisfactorily its claim for attorney’s fees.
AMEC did not adduce evidence to warrant the award of attorney’s fees. Moreover, both the trial and appellate courts
failed to explicitly state in their respective decisions the rationale for the award of attorney’s fees. 49 In Inter-Asia
Investment Industries, Inc. v. Court of Appeals ,50 we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and
counsel’s fees are not to be awarded every time a party wins a suit. The power of the court to award attorney’s
fees under Article 2208 of the Civil Code demands factual, legal and equitable justification, without which the
award is a conclusion without a premise, its basis being improperly left to speculation and conjecture. In all
events, the court must explicitly state in the text of the decision, and not only in the decretal portion thereof, the legal
reason for the award of attorney’s fees.51 (Emphasis supplied)

While it mentioned about the award of attorney’s fees by stating that it "lies within the discretion of the court and
depends upon the circumstances of each case," the Court of Appeals failed to point out any circumstance to justify
the award.

IV.

Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorney’s fees and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorney’s fees
because it exercised due diligence in the selection and supervision of its employees, particularly Rima and Alegre.
FBNI maintains that its broadcasters, including Rima and Alegre, undergo a "very regimented process" before they
are allowed to go on air. "Those who apply for broadcaster are subjected to interviews, examinations and an
apprenticeship program."

FBNI further argues that Alegre’s age and lack of training are irrelevant to his competence as a broadcaster. FBNI
points out that the "minor deficiencies in the KBP accreditation of Rima and Alegre do not in any way prove that FBNI
did not exercise the diligence of a good father of a family in selecting and supervising them." Rima’s accreditation
lapsed due to his non-payment of the KBP annual fees while Alegre’s accreditation card was delayed allegedly for
reasons attributable to the KBP Manila Office. FBNI claims that membership in the KBP is merely voluntary and not
required by any law or government regulation.

FBNI’s arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort which they
commit.52 Joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance,
cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their benefit.53Thus,
AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of the Civil Code.1a\^/phi1.net

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages arising from
the libelous broadcasts. As stated by the Court of Appeals, "recovery for defamatory statements published by radio
or television may be had from the owner of the station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory statements."54 An employer and employee are solidarily
liable for a defamatory statement by the employee within the course and scope of his or her employment, at least
when the employer authorizes or ratifies the defamation.55 In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNI’s radio program Exposé when they aired the broadcasts. FBNI neither alleged nor
proved that Rima and Alegre went beyond the scope of their work at that time. There was likewise no showing that
FBNI did not authorize and ratify the defamatory broadcasts.

Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection andsupervision of its employees, particularly Rima and Alegre. FBNI merely showed that it exercised
diligence in the selection of its broadcasters without introducing any evidence to prove that it observed the same
diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in supervising its
broadcasters. FBNI’s alleged constant reminder to its broadcasters to "observe truth, fairness and objectivity and to
refrain from using libelous and indecent language" is not enough to prove due diligence in the supervision of its
broadcasters. Adequate training of the broadcasters on the industry’s code of conduct, sufficient information on libel
laws, and continuous evaluation of the broadcasters’ performance are but a few of the many ways of showing diligence
in the supervision of broadcasters.

FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as broadcasters, bearing in mind
their qualifications." However, no clear and convincing evidence shows that Rima and Alegre underwent FBNI’s
"regimented process" of application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP
accreditation,56 which is one of FBNI’s requirements before it hires a broadcaster. Significantly, membership in the
KBP, while voluntary, indicates the broadcaster’s strong commitment to observe the broadcast industry’s rules and
regulations. Clearly, these circumstances show FBNI’s lack of diligence in selecting andsupervising Rima and Alegre.
Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.

WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution of 26
January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the award of moral
damages is reduced from ₱300,000 to ₱150,000 and the award of attorney’s fees is deleted. Costs against petitioner.

SO ORDERED.

3. Crystal vs. BPI

G.R. No. 172428 November 28, 2008

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE, and DORIS C. MAGLASANG,
as Heirs of Deceased SPOUSES RAYMUNDO I. CRYSTAL and DESAMPARADOS C. CRYSTAL, petitioners,
vs. BANK OF THE PHILIPPINE ISLANDS, respondent.

TINGA, J.:

Before us is a Petition for Review1 of the Decision2 and Resolution3 of the Court of Appeals dated 24 October 2005
and 31 March 2006, respectively, in CA G.R. CV No. 72886, which affirmed the 8 June 2001 decision of the Regional
Trial Court, Branch 5, of Cebu City.4

The facts, as culled from the records, follow.

On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained a P300,000.00 loan in behalf of the
Cebu Contractors Consortium Co. (CCCC) from the Bank of the Philippine Islands-Butuan branch (BPI-Butuan). The
loan was secured by a chattel mortgage on heavy equipment and machinery of CCCC. On the same date, the spouses
executed in favor of BPI-Butuan a Continuing Suretyship5 where they bound themselves as surety of CCCC in the
aggregate principal sum of not exceeding P300,000.00. Thereafter, or on 29 March 1979, Raymundo Crystal executed
a promissory note6 for the amount of P300,000.00, also in favor of BPI-Butuan.

Sometime in August 1979, CCCC renewed a previous loan, this time from BPI, Cebu City branch (BPI-Cebu City).
The renewal was evidenced by a promissory note7 dated 13 August 1979, signed by the spouses in their personal
capacities and as managing partners of CCCC. The promissory note states that the spouses are jointly and severally
liable with CCCC. It appears that before the original loan could be granted, BPI-Cebu City required CCCC to put up a
security.

However, CCCC had no real property to offer as security for the loan; hence, the spouses executed a real estate
mortgage8over their own real property on 22 September 1977.9 On 3 October 1977, they executed another real estate
mortgage over the same lot in favor of BPI-Cebu City, to secure an additional loan of P20,000.00 of CCCC.10

CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they became due. CCCC, as well as the
spouses, failed to pay their obligations despite demands. Thus, BPI resorted to the foreclosure of the chattel mortgage
and the real estate mortgage. The foreclosure sale on the chattel mortgage was initially stalled with the issuance of a
restraining order against BPI.11 However, following BPI’s compliance with the necessary requisites of extrajudicial
foreclosure, the foreclosure sale on the chattel mortgage was consummated on 28 February 1988, with the proceeds
amounting to P240,000.00 applied to the loan from BPI-Butuan which had then reached P707,393.90.12 Meanwhile,
on 7 July 1981, Insular Bank of Asia and America (IBAA), through its Vice-President for Legal and Corporate Affairs,
offered to buy the lot subject of the two (2) real

estate mortgages and to pay directly the spouses’ indebtedness in exchange for the release of the mortgages. BPI
rejected IBAA’s offer to pay.13

BPI filed a complaint for sum of money against CCCC and the spouses before the Regional Trial Court of Butuan City
(RTC Butuan), seeking to recover the deficiency of the loan of CCCC and the spouses with BPI-Butuan. The trial court
ruled in favor of BPI. Pursuant to the decision, BPI instituted extrajudicial foreclosure of the spouses’ mortgaged
property.14

On 10 April 1985, the spouses filed an action for Injunction With Damages, With A Prayer For A Restraining Order
and/ or Writ of Preliminary Injunction.15 The spouses claimed that the foreclosure of the real estate mortgages is illegal
because BPI should have exhausted CCCC’s properties first, stressing that they are mere guarantors of the renewed
loans. They also prayed that they be awarded moral and exemplary damages, attorney’s fees, litigation expenses and
cost of suit. Subsequently, the spouses filed an amended complaint,16 additionally alleging that CCCC had opened
and maintained a foreign currency savings account (FCSA-197) with bpi, Makati branch (BPI-Makati), and that said
FCSA was used as security for a P450,000.00 loan also extended by BPI-Makati. The P450,000.00 loan was allegedly
paid, and thereafter the spouses demanded the return of the FCSA passbook. BPI rejected the demand; thus, the
spouses were unable to withdraw from the said account to pay for their other obligations to BPI.

The trial court dismissed the spouses’ complaint and ordered them to pay moral and exemplary damages and
attorney’s fees to BPI.17 It ruled that since the spouses agreed to bind themselves jointly and severally, they are
solidarily liable for the loans; hence, BPI can validly foreclose the two real estate mortgages. Moreover, being
guarantors-mortgagors, the spouses are not entitled to the benefit of exhaustion. Anent the FCSA, the trial court found
that CCCC originally had FCDU SA No. 197 with BPI, Dewey Boulevard branch, which was transferred to BPI-Makati
as FCDU SA 76/0035, at the request of Desamparados Crystal. FCDU SA 76/0035 was thus closed, but
Desamparados Crystal failed to surrender the passbook because it was lost. The transferred FCSA in BPI-Makati was
the one used as security for CCCC’s P450,000.00 loan from BPI-Makati. CCCC was no longer allowed to withdraw
from FCDU SA No. 197 because it was already closed.

The spouses appealed the decision of the trial court to the Court of Appeals, but their appeal was dismissed.18 The
spouses moved for the reconsideration of the decision, but the Court of Appeals also denied their motion for
reconsideration.19Hence, the present petition.

Before the Court, petitioners who are the heirs of the spouses argue that the failure of the spouses to pay the BPI-
Cebu City loan of P120,000.00 was due to BPI’s illegal refusal to accept payment for the loan unless the P300,000.00
loan from BPI-Butuan would also be paid. Consequently, in view of BPI’s unjust refusal to accept payment of the BPI-
Cebu City loan, the loan obligation of the spouses was extinguished, petitioners contend.

The contention has no merit. Petitioners rely on IBAA’s offer to purchase the mortgaged lot from them and to directly
pay BPI out of the proceeds thereof to settle the loan.20 BPI’s refusal to agree to such payment scheme cannot
extinguish the spouses’ loan obligation. In the first place, IBAA is not privy to the loan agreement or the promissory
note between the spouses and BPI. Contracts, after all, take effect only between the parties, their successors in
interest, heirs

and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not bound to accept payment or performance
by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
We see no stipulation in the promissory note which states that a third person may fulfill the spouses’ obligation. Thus,
it is clear that the spouses alone bear responsibility for the same.

In any event, the promissory note is the controlling repository of the obligation of the spouses. Under the promissory
note, the spouses defined the parameters of their obligation as follows:

On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and severally, to the
BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu Philippines, the sum of ONE HUNDRED
TWENTY THOUSAND PESOS (P120,0000.00), Philippine Currency, subject to periodic installments on the
principal as follows: P30,000.00 quarterly amortization starting September 28, 1979. x x x 22
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the creditors is
entitled to demand the satisfaction of the whole obligation from any or all of the debtors. 23 A liability is solidary "only
when the obligation expressly so states, when the law so provides or when the nature of the

obligation so requires."24 Thus, when the obligor undertakes to be "jointly and severally" liable, it means that the
obligation is solidary,25 such as in this case. By stating "I/we promise to pay, jointly and severally, to the BANK OF
THE PHILIPPINE ISLANDS," the spouses agreed to be sought out and be demanded payment from, by BPI. BPI did
demand payment from them, but they failed to comply with their obligation, prompting BPI’s valid resort to the
foreclosure of the chattel mortgage and the real estate mortgages.

More importantly, the promissory note, wherein the spouses undertook to be solidarily liable for the principal loan,
partakes the nature of a suretyship and therefore is an additional security for the loan. Thus we held in one case that
if solidary liability was instituted to "guarantee" a principal obligation, the law deems the contract to be one of
suretyship.26 And while a contract of a surety is in essence secondary only to a valid principal obligation, the surety’s
liability to the creditor or promisee of the principal is said to be direct, primary, and absolute; in other words, the surety
is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of another
even if he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.27

Petitioners contend that the Court of Appeals erred in not granting their counterclaims, considering that they suffered
moral damages in view of the unjust refusal of BPI to accept the payment scheme proposed by IBAA and the allegedly
unjust and illegal foreclosure of the real estate mortgages on their property.28 Conversely, they argue that the Court
of Appeals erred in awarding moral damages to BPI, which is a corporation, as well as exemplary damages, attorney’s
fees and expenses of litigation.29

We do not agree. Moral damages are meant to compensate the claimant for any physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injuries
unjustly caused.30 Such damages, to be recoverable, must be the proximate result of a wrongful act or omission the
factual basis for which is satisfactorily established by the aggrieved party.31 There being no wrongful or unjust act on
the part of BPI in demanding payment from them and in seeking the foreclosure of the chattel and real estate
mortgages, there is no lawful basis for award of damages in favor of the spouses.

Neither is BPI entitled to moral damages. A juridical person is generally not entitled to moral damages because, unlike
a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock.32 The Court of Appeals found BPI as "being famous and having gained its familiarity
and respect not only in the Philippines but also in the whole world because of its good will and good reputation must
protect and defend the same against any unwarranted suit such as the case at bench."33 In holding that BPI is entitled
to moral damages, the Court of Appeals relied on the case of People v. Manero,34 wherein the Court ruled that "[i]t is
only when a juridical person has a good reputation that is debased, resulting in social humiliation, that moral damages
may be awarded."35

We do not agree with the Court of Appeals. A statement similar to that made by the Court in Manero can be found in
the case of Mambulao Lumber Co. v. PNB, et al.,36 thus:

x x x Obviously, an artificial person like herein appellant corporation cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis
of moral damages. A corporation may have good reputation which, if besmirched may also be a ground
for the award of moral damages. x x x (Emphasis supplied)

Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et al.,37 and Filipinas Broadcasting
Network, Inc. v. Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM),38 the Court
held that the statements in Manero and Mambulao were mere obiter dicta, implying that the award of moral damages
to corporations is not a hard and fast rule. Indeed, while the Court may allow the grant of moral damages to
corporations, it is not automatically granted; there must still be proof of the existence of the factual basis of the damage
and its causal relation to the defendant’s acts. This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate the claimant for actual injury suffered and not
to impose a penalty on the wrongdoer.39
The spouses’ complaint against BPI proved to be unfounded, but it does not automatically entitle BPI to moral
damages. Although the institution of a clearly unfounded civil suit can at times be a legal

justification for an award of attorney's fees, such filing, however, has almost invariably been held not to be a ground
for an award of moral damages. The rationale for the rule is that the law could not have meant to impose a penalty on
the right to litigate. Otherwise, moral damages must every time be awarded in favor of the prevailing defendant against
an unsuccessful plaintiff.40 BPI may have been inconvenienced by the suit, but we do not see how it could have
possibly suffered besmirched reputation on account of the single suit alone. Hence, the award of moral damages
should be deleted.

The awards of exemplary damages and attorney’s fees, however, are proper. Exemplary damages, on the other hand,
are imposed by way of example or correction for the public good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner, while attorney’s fees are allowed when exemplary damages are
awarded and when the party to a suit is compelled to incur expenses to protect his interest.41 The spouses instituted
their complaint against BPI notwithstanding the fact that they were the ones who failed to pay their obligations.
Consequently, BPI was forced to litigate and defend its interest. For these reasons, BPI is entitled to the awards of
exemplary damages and attorney’s fees.

WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals dated 24 October 2005
and 31 March 2006, respectively, are hereby AFFIRMED, with the MODIFICATION that the award of moral damages
to Bank of the Philippine Islands is DELETED.

Costs against the petitioners. SO ORDERED.

Practice of Profession
1. Ulep vs. The Legal Clinic

Bar Matter No. 553 June 17, 1993

MAURICIO C. ULEP, petitioner, vs. THE LEGAL CLINIC, INC., respondent.

REGALADO, J.:

Petitioner prays this Court "to order the respondent to cease and desist from issuing advertisements similar to or of
the same tenor as that of annexes "A" and "B" (of said petition) and to perpetually prohibit persons or entities from
making advertisements pertaining to the exercise of the law profession other than those allowed by law."

The advertisements complained of by herein petitioner are as follows:

Annex A

SECRET MARRIAGE?
P560.00 for a valid marriage.
Info on DIVORCE. ABSENCE.
ANNULMENT. VISA.

THE Please call: 521-0767 LEGAL 5217232, 5222041 CLINIC, INC. 8:30 am— 6:00 pm 7-Flr.
Victoria Bldg., UN Ave., Mla.

Annex B

GUAM DIVORCE.

DON PARKINSON
 an Attorney in Guam, is giving FREE BOOKS on Guam Divorce through The Legal Clinic beginning
Monday to Friday during office hours.

Guam divorce. Annulment of Marriage. Immigration Problems, Visa Ext. Quota/Non-quota Res. &
Special Retiree's Visa. Declaration of Absence. Remarriage to Filipina Fiancees. Adoption. Investment
in the Phil. US/Foreign Visa for Filipina Spouse/Children. Call Marivic.

THE 7F Victoria Bldg. 429 UN Ave., LEGAL Ermita, Manila nr. US Embassy CLINIC, INC. 1 Tel. 521-
7232; 521-7251; 522-2041; 521-0767

It is the submission of petitioner that the advertisements above reproduced are champterous, unethical, demeaning
of the law profession, and destructive of the confidence of the community in the integrity of the members of the bar
and that, as a member of the legal profession, he is ashamed and offended by the said advertisements, hence the
reliefs sought in his petition as hereinbefore quoted.

In its answer to the petition, respondent admits the fact of publication of said advertisement at its instance, but claims
that it is not engaged in the practice of law but in the rendering of "legal support services" through paralegals with the
use of modern computers and electronic machines. Respondent further argues that assuming that the services
advertised are legal services, the act of advertising these services should be allowed supposedly
in the light of the case of John R. Bates and Van O'Steen vs. State Bar of Arizona,2 reportedly decided by the United
States Supreme Court on June 7, 1977.

Considering the critical implications on the legal profession of the issues raised herein, we required the (1) Integrated
Bar of the Philippines (IBP), (2) Philippine Bar Association (PBA), (3) Philippine Lawyers' Association (PLA), (4) U.P.
Womens Lawyers' Circle (WILOCI), (5) Women Lawyers Association of the Philippines (WLAP), and (6) Federacion
International de Abogadas (FIDA) to submit their respective position papers on the controversy and, thereafter, their
memoranda. 3 The said bar associations readily responded and extended their valuable services and cooperation of
which this Court takes note with appreciation and gratitude.

The main issues posed for resolution before the Court are whether or not the services offered by respondent, The
Legal Clinic, Inc., as advertised by it constitutes practice of law and, in either case, whether the same can properly be
the subject of the advertisements herein complained of.

Before proceeding with an in-depth analysis of the merits of this case, we deem it proper and enlightening to present
hereunder excerpts from the respective position papers adopted by the aforementioned bar associations and the
memoranda submitted by them on the issues involved in this bar matter.

1. Integrated Bar of the Philippines:

xxx xxx xxx

Notwithstanding the subtle manner by which respondent endeavored to distinguish the two terms, i.e.,
"legal support services" vis-a-vis "legal services", common sense would readily dictate that the same
are essentially without substantial distinction. For who could deny that document search, evidence
gathering, assistance to layman in need of basic institutional services from government or non-
government agencies like birth, marriage, property, or business registration, obtaining documents like
clearance, passports, local or foreign visas, constitutes practice of law?

xxx xxx xxx

The Integrated Bar of the Philippines (IBP) does not wish to make issue with respondent's foreign
citations. Suffice it to state that the IBP has made its position manifest, to wit, that it strongly opposes
the view espoused by respondent (to the effect that today it is alright to advertise one's legal services).

The IBP accordingly declares in no uncertain terms its opposition to respondent's act of establishing
a "legal clinic" and of concomitantly advertising the same through newspaper publications.
The IBP would therefore invoke the administrative supervision of this Honorable Court to perpetually
restrain respondent from undertaking highly unethical activities in the field of law practice as
aforedescribed.4

xxx xxx xxx

A. The use of the name "The Legal Clinic, Inc." gives the impression that respondent corporation is
being operated by lawyers and that it renders legal services.

While the respondent repeatedly denies that it offers legal services to the public, the advertisements
in question give the impression that respondent is offering legal services. The Petition in fact simply
assumes this to be so, as earlier mentioned, apparently because this (is) the effect that the
advertisements have on the reading public.

The impression created by the advertisements in question can be traced, first of all, to the very name
being used by respondent — "The Legal Clinic, Inc." Such a name, it is respectfully submitted connotes
the rendering of legal services for legal problems, just like a medical clinic connotes medical services
for medical problems. More importantly, the term "Legal Clinic" connotes lawyers, as the term medical
clinic connotes doctors.

Furthermore, the respondent's name, as published in the advertisements subject of the present case,
appears with (the) scale(s) of justice, which all the more reinforces the impression that it is being
operated by members of the bar and that it offers legal services. In addition, the advertisements in
question appear with a picture and name of a person being represented as a lawyer from Guam, and
this practically removes whatever doubt may still remain as to the nature of the service or services
being offered.

It thus becomes irrelevant whether respondent is merely offering "legal support services" as claimed
by it, or whether it offers legal services as any lawyer actively engaged in law practice does. And it
becomes unnecessary to make a distinction between "legal services" and "legal support services," as
the respondent would have it. The advertisements in question leave no room for doubt in the minds of
the reading public that legal services are being offered by lawyers, whether true or not.

B. The advertisements in question are meant to induce the performance of acts contrary to law, morals,
public order and public policy.

It may be conceded that, as the respondent claims, the advertisements in question are only meant to
inform the general public of the services being offered by it. Said advertisements, however, emphasize
to Guam divorce, and any law student ought to know that under the Family Code, there is only one
instance when a foreign divorce is recognized, and that is:

Article 26. . . .

Where a marriage between a Filipino citizen and a foreigner is validly celebrated and a
divorce is thereafter validly obtained abroad by the alien spouse capacitating him or
her to remarry, the Filipino spouse shall have capacity to remarry under Philippine
Law.

It must not be forgotten, too, that the Family Code (defines) a marriage as follows:

Article 1. Marriage is special contract of permanent union between a man and woman
entered into accordance with law for the establishment of conjugal and family life. It is
the foundation of the family and an inviolable social institution whose nature,
consequences, and incidents are governed by law and not subject to stipulation,
except that marriage settlements may fix the property relation during the marriage
within the limits provided by this Code.
By simply reading the questioned advertisements, it is obvious that the message being conveyed is
that Filipinos can avoid the legal consequences of a marriage celebrated in accordance with our law,
by simply going to Guam for a divorce. This is not only misleading, but encourages, or serves to
induce, violation of Philippine law. At the very least, this can be considered "the dark side" of legal
practice, where certain defects in Philippine laws are exploited for the sake of profit. At worst, this is
outright malpractice.

Rule 1.02. — A lawyer shall not counsel or abet activities aimed at defiance of the law
or at lessening confidence in the legal system.

In addition, it may also be relevant to point out that advertisements such as that shown in Annex "A"
of the Petition, which contains a cartoon of a motor vehicle with the words "Just Married" on its bumper
and seems to address those planning a "secret marriage," if not suggesting a "secret marriage," makes
light of the "special contract of permanent union," the inviolable social institution," which is how the
Family Code describes marriage, obviously to emphasize its sanctity and inviolability. Worse, this
particular advertisement appears to encourage marriages celebrated in secrecy, which is suggestive
of immoral publication of applications for a marriage license.

If the article "Rx for Legal Problems" is to be reviewed, it can readily be concluded that the above
impressions one may gather from the advertisements in question are accurate. The Sharon Cuneta-
Gabby Concepcion example alone confirms what the advertisements suggest. Here it can be seen
that criminal acts are being encouraged or committed
(a bigamous marriage in Hong Kong or Las Vegas) with impunity simply because the jurisdiction of
Philippine courts does not extend to the place where the crime is committed.

Even if it be assumed, arguendo, (that) the "legal support services" respondent offers do not constitute
legal services as commonly understood, the advertisements in question give the impression that
respondent corporation is being operated by lawyers and that it offers legal services, as earlier
discussed. Thus, the only logical consequence is that, in the eyes of an ordinary newspaper reader,
members of the bar themselves are encouraging or inducing the performance of acts which are
contrary to law, morals, good customs and the public good, thereby destroying and demeaning the
integrity of the Bar.

xxx xxx xxx

It is respectfully submitted that respondent should be enjoined from causing the publication of the
advertisements in question, or any other advertisements similar thereto. It is also submitted that
respondent should be prohibited from further performing or offering some of the services it presently
offers, or, at the very least, from offering such services to the public in general.

The IBP is aware of the fact that providing computerized legal research, electronic data gathering,
storage and retrieval, standardized legal forms, investigators for gathering of evidence, and like
services will greatly benefit the legal profession and should not be stifled but instead encouraged.
However, when the conduct of such business by non-members of the Bar encroaches upon the
practice of law, there can be no choice but to prohibit such business.

Admittedly, many of the services involved in the case at bar can be better performed by specialists in
other fields, such as computer experts, who by reason of their having devoted time and effort
exclusively to such field cannot fulfill the exacting requirements for admission to the Bar. To prohibit
them from "encroaching" upon the legal profession will deny the profession of the great benefits and
advantages of modern technology. Indeed, a lawyer using a computer will be doing better than a
lawyer using a typewriter, even if both are (equal) in skill.

Both the Bench and the Bar, however, should be careful not to allow or tolerate the illegal practice of
law in any form, not only for the protection of members of the Bar but also, and more importantly, for
the protection of the public. Technological development in the profession may be encouraged without
tolerating, but instead ensuring prevention of illegal practice.
There might be nothing objectionable if respondent is allowed to perform all of its services, but only if
such services are made available exclusively to members of the Bench and Bar. Respondent would
then be offering technical assistance, not legal services. Alternatively, the more difficult task of
carefully distinguishing between which service may be offered to the public in general and which
should be made available exclusively to members of the Bar may be undertaken. This, however, may
require further proceedings because of the factual considerations involved.

It must be emphasized, however, that some of respondent's services ought to be prohibited outright,
such as acts which tend to suggest or induce celebration abroad of marriages which are bigamous or
otherwise illegal and void under Philippine law. While respondent may not be prohibited from simply
disseminating information regarding such matters, it must be required to include, in the information
given, a disclaimer that it is not authorized to practice law, that certain course of action may be illegal
under Philippine law, that it is not authorized or capable of rendering a legal opinion, that a lawyer
should be consulted before deciding on which course of action to take, and that it cannot recommend
any particular lawyer without subjecting itself to possible sanctions for illegal practice of law.

If respondent is allowed to advertise, advertising should be directed exclusively at members of the

Bar, with a clear and unmistakable disclaimer that it is not authorized to practice law or perform legal
services.

The benefits of being assisted by paralegals cannot be ignored. But nobody should be allowed to
represent himself as a "paralegal" for profit, without such term being clearly defined by rule or
regulation, and without any adequate and effective means of regulating his activities. Also, law practice
in a corporate form may prove to be advantageous to the legal profession, but before allowance of
such practice may be considered, the corporation's Article of Incorporation and By-laws must conform
to each and every provision of the Code of Professional Responsibility and the Rules of Court.5

2. Philippine Bar Association:

xxx xxx xxx.

Respondent asserts that it "is not engaged in the practice of law but engaged in giving legal support
services to lawyers and laymen, through experienced paralegals, with the use of modern computers
and electronic machines" (pars. 2 and 3, Comment). This is absurd. Unquestionably, respondent's
acts of holding out itself to the public under the trade name "The Legal Clinic, Inc.," and soliciting
employment for its enumerated services fall within the realm of a practice which thus yields itself to
the regulatory powers of the Supreme Court. For respondent to say that it is merely engaged in
paralegal work is to stretch credulity. Respondent's own commercial advertisement which announces
a certain Atty. Don Parkinson to be handling the fields of law belies its pretense. From all indications,
respondent "The Legal Clinic, Inc." is offering and rendering legal services through its reserve of
lawyers. It has been held that the practice of law is not limited to the conduct of cases in court, but
includes drawing of deeds, incorporation, rendering opinions, and advising clients as to their legal right
and then take them to an attorney and ask the latter to look after their case in court See Martin, Legal
and Judicial Ethics, 1984 ed., p. 39).

It is apt to recall that only natural persons can engage in the practice of law, and such limitation cannot
be evaded by a corporation employing competent lawyers to practice for it. Obviously, this is the
scheme or device by which respondent "The Legal Clinic, Inc." holds out itself to the public and solicits
employment of its legal services. It is an odious vehicle for deception, especially so when the public
cannot ventilate any grievance for malpractice against the business conduit. Precisely, the limitation
of practice of law to persons who have been duly admitted as members of the Bar (Sec. 1, Rule 138,
Revised Rules of Court) is to subject the members to the discipline of the Supreme Court. Although
respondent uses its business name, the persons and the lawyers who act for it are subject to court
discipline. The practice of law is not a profession open to all who wish to engage in it nor can it be
assigned to another (See 5 Am. Jur. 270). It is a personal right limited to persons who have qualified
themselves under the law. It follows that not only respondent but also all the persons who are acting
for respondent are the persons engaged in unethical law practice.6
3. Philippine Lawyers' Association:

The Philippine Lawyers' Association's position, in answer to the issues stated herein, are wit:

1. The Legal Clinic is engaged in the practice of law;

2. Such practice is unauthorized;

3. The advertisements complained of are not only unethical, but also misleading and patently immoral;
and

4. The Honorable Supreme Court has the power to supress and punish the Legal Clinic and its
corporate officers for its unauthorized practice of law and for its unethical, misleading and immoral
advertising.

xxx xxx xxx

Respondent posits that is it not engaged in the practice of law. It claims that it merely renders "legal
support services" to answers, litigants and the general public as enunciated in the Primary Purpose
Clause of its Article(s) of Incorporation. (See pages 2 to 5 of Respondent's Comment). But its
advertised services, as enumerated above, clearly and convincingly show that it is indeed engaged in
law practice, albeit outside of court.

As advertised, it offers the general public its advisory services on Persons and Family Relations Law,
particularly regarding foreign divorces, annulment of marriages, secret marriages, absence and
adoption; Immigration Laws, particularly on visa related problems, immigration problems; the
Investments Law of the Philippines and such other related laws.

Its advertised services unmistakably require the application of the aforesaid law, the legal principles
and procedures related thereto, the legal advices based thereon and which activities call for legal
training, knowledge and experience.

Applying the test laid down by the Court in the aforecited Agrava Case, the activities of respondent fall
squarely and are embraced in what lawyers and laymen equally term as "the practice of law."7

4. U.P. Women Lawyers' Circle:

In resolving, the issues before this Honorable Court, paramount consideration should be given to the
protection of the general public from the danger of being exploited by unqualified persons or entities
who may be engaged in the practice of law.

At present, becoming a lawyer requires one to take a rigorous four-year course of study on top of a
four-year bachelor of arts or sciences course and then to take and pass the bar examinations. Only
then, is a lawyer qualified to practice law.

While the use of a paralegal is sanctioned in many jurisdiction as an aid to the administration of justice,
there are in those jurisdictions, courses of study and/or standards which would qualify these paralegals
to deal with the general public as such. While it may now be the opportune time to establish these
courses of study and/or standards, the fact remains that at present, these do not exist in the
Philippines. In the meantime, this Honorable Court may decide to make measures to protect the
general public from being exploited by those who may be dealing with the general public in the guise
of being "paralegals" without being qualified to do so.

In the same manner, the general public should also be protected from the dangers which may be
brought about by advertising of legal services. While it appears that lawyers are prohibited under the
present Code of Professional Responsibility from advertising, it appears in the instant case that legal
services are being advertised not by lawyers but by an entity staffed by "paralegals." Clearly, measures
should be taken to protect the general public from falling prey to those who advertise legal services
without being qualified to offer such services. 8

A perusal of the questioned advertisements of Respondent, however, seems to give the impression
that information regarding validity of marriages, divorce, annulment of marriage, immigration, visa
extensions, declaration of absence, adoption and foreign investment, which are in essence, legal
matters , will be given to them if they avail of its services. The Respondent's name — The Legal Clinic,
Inc. — does not help matters. It gives the impression again that Respondent will or can cure the legal
problems brought to them. Assuming that Respondent is, as claimed, staffed purely by paralegals, it
also gives the misleading impression that there are lawyers involved in The Legal Clinic, Inc., as there
are doctors in any medical clinic, when only "paralegals" are involved in The Legal Clinic, Inc.

Respondent's allegations are further belied by the very admissions of its President and majority
stockholder, Atty. Nogales, who gave an insight on the structure and main purpose of Respondent
corporation in the aforementioned "Starweek" article."9

5. Women Lawyer's Association of the Philippines:

Annexes "A" and "B" of the petition are clearly advertisements to solicit cases for the purpose of gain
which, as provided for under the above cited law, (are) illegal and against the Code of Professional
Responsibility of lawyers in this country.

Annex "A" of the petition is not only illegal in that it is an advertisement to solicit cases, but it is illegal
in that in bold letters it announces that the Legal Clinic, Inc., could work out/cause the celebration of
a secret marriage which is not only illegal but immoral in this country. While it is advertised that one
has to go to said agency and pay P560 for a valid marriage it is certainly fooling the public for valid
marriages in the Philippines are solemnized only by officers authorized to do so under the law. And to
employ an agency for said purpose of contracting marriage is not necessary.

No amount of reasoning that in the USA, Canada and other countries the trend is towards allowing
lawyers to advertise their special skills to enable people to obtain from qualified practitioners legal
services for their particular needs can justify the use of advertisements such as are the subject matter
of the petition, for one (cannot) justify an illegal act even by whatever merit the illegal act may serve.
The law has yet to be amended so that such act could become justifiable.

We submit further that these advertisements that seem to project that secret marriages and divorce
are possible in this country for a fee, when in fact it is not so, are highly reprehensible.

It would encourage people to consult this clinic about how they could go about having a secret
marriage here, when it cannot nor should ever be attempted, and seek advice on divorce, where in
this country there is none, except under the Code of Muslim Personal Laws in the Philippines. It is also
against good morals and is deceitful because it falsely represents to the public to be able to do that
which by our laws cannot be done (and) by our Code of Morals should not be done.

In the case (of) In re Taguda, 53 Phil. 37, the Supreme Court held that solicitation for clients by an
attorney by circulars of advertisements, is unprofessional, and offenses of this character justify
permanent elimination from the Bar. 10

6. Federacion Internacional de Abogados:

xxx xxx xxx

1.7 That entities admittedly not engaged in the practice of law, such as management consultancy firms
or travel agencies, whether run by lawyers or not, perform the services rendered by Respondent does
not necessarily lead to the conclusion that Respondent is not unlawfully practicing law. In the same
vein, however, the fact that the business of respondent (assuming it can be engaged in independently
of the practice of law) involves knowledge of the law does not necessarily make respondent guilty of
unlawful practice of law.

. . . . Of necessity, no one . . . . acting as a consultant can render effective service

unless he is familiar with such statutes and regulations. He must be careful not to
suggest a course of conduct which the law forbids. It seems . . . .clear that (the
consultant's) knowledge of the law, and his use of that knowledge as a factor in
determining what measures he shall recommend, do not constitute the practice of law
. . . . It is not only presumed that all men know the law, but it is a fact that most men
have considerable acquaintance with broad features of the law . . . . Our knowledge of
the law — accurate or inaccurate — moulds our conduct not only when we are acting
for ourselves, but when we are serving others. Bankers, liquor dealers and laymen
generally possess rather precise knowledge of the laws touching their particular
business or profession. A good example is the architect, who must be familiar with
zoning, building and fire prevention codes, factory and tenement house statutes, and
who draws plans and specification in harmony with the law. This is not practicing law.

But suppose the architect, asked by his client to omit a fire tower, replies that it is
required by the statute. Or the industrial relations expert cites, in support of some
measure that he recommends, a decision of the National Labor Relations Board. Are
they practicing law? In my opinion, they are not, provided no separate fee is charged
for the legal advice or information, and the legal question is subordinate and incidental
to a major non-legal problem.

It is largely a matter of degree and of custom.

If it were usual for one intending to erect a building on his land to engage a lawyer to
advise him and the architect in respect to the building code and the like, then an
architect who performed this function would probably be considered to be trespassing
on territory reserved for licensed attorneys. Likewise, if the industrial relations field had
been pre-empted by lawyers, or custom placed a lawyer always at the elbow of the lay
personnel man. But this is not the case. The most important body of the industrial
relations experts are the officers and business agents of the labor unions and few of
them are lawyers. Among the larger corporate employers, it has been the practice for
some years to delegate special responsibility in employee matters to a management
group chosen for their practical knowledge and skill in such matter, and without regard
to legal thinking or lack of it. More recently, consultants like the defendants have the
same service that the larger employers get from their own specialized staff.

The handling of industrial relations is growing into a recognized profession for which
appropriate courses are offered by our leading universities. The court should be very
cautious about declaring [that] a widespread, well-established method of conducting
business is unlawful, or that the considerable class of men who customarily perform a
certain function have no right to do so, or that the technical education given by our
schools cannot be used by the graduates in their business.

In determining whether a man is practicing law, we should consider his work for any
particular client or customer, as a whole. I can imagine defendant being engaged
primarily to advise as to the law defining his client's obligations to his employees, to
guide his client's obligations to his employees, to guide his client along the path charted
by law. This, of course, would be the practice of the law. But such is not the fact in the
case before me. Defendant's primarily efforts are along economic and psychological
lines. The law only provides the frame within which he must work, just as the zoning
code limits the kind of building the limits the kind of building the architect may plan. The
incidental legal advice or information defendant may give, does not transform his
activities into the practice of law. Let me add that if, even as a minor feature of his
work, he performed services which are customarily reserved to members of the bar,
 he would be practicing law. For instance, if as part of a welfare program, he drew
employees' wills.

Another branch of defendant's work is the representations of the employer in the

adjustment of grievances and in collective bargaining, with or without a mediator. This
is not per se the practice of law. Anyone may use an agent for negotiations and may
select an agent particularly skilled in the subject under discussion, and the person
appointed is free to accept the employment whether or not he is a member of the bar.
Here, however, there may be an exception where the business turns on a question of
law. Most real estate sales are negotiated by brokers who are not lawyers. But if the
value of the land depends on a disputed right-of-way and the principal role of the
negotiator is to assess the probable outcome of the dispute and persuade the opposite
party to the same opinion, then it may be that only a lawyer can accept the assignment.
Or if a controversy between an employer and his men grows from differing
interpretations of a contract, or of a statute, it is quite likely that defendant should not
handle it. But I need not reach a definite conclusion here, since the situation is not
presented by the proofs.

Defendant also appears to represent the employer before administrative agencies of

the federal government, especially before trial examiners of the National Labor
Relations Board. An agency of the federal government, acting by virtue of an authority
granted by the Congress, may regulate the representation of parties before such
agency. The State of New Jersey is without power to interfere with such determination
or to forbid representation before the agency by one whom the agency admits. The
rules of the National Labor Relations Board give to a party the right to appear in person,
or by counsel, or by other representative. Rules and Regulations, September 11th,
1946, S. 203.31. 'Counsel' here means a licensed attorney, and ther representative'
one not a lawyer. In this phase of his work, defendant may lawfully do whatever the
Labor Board allows, even arguing questions purely legal. (Auerbacher v. Wood, 53 A.
2d 800, cited in Statsky, Introduction to Paralegalism [1974], at pp. 154-156.).

1.8 From the foregoing, it can be said that a person engaged in a lawful calling (which may involve
knowledge of the law) is not engaged in the practice of law provided that:

(a) The legal question is subordinate and incidental to a major non-legal problem;.

(b) The services performed are not customarily reserved to members of the bar; .

(c) No separate fee is charged for the legal advice or information.

All these must be considered in relation to the work for any particular client as a whole.

1.9. If the person involved is both lawyer and non-lawyer, the Code of Professional Responsibility
succintly states the rule of conduct:

Rule 15.08 — A lawyer who is engaged in another profession or occupation concurrently with the
practice of law shall make clear to his client whether he is acting as a lawyer or in another capacity.

1.10. In the present case. the Legal Clinic appears to render wedding services (See Annex "A"
Petition). Services on routine, straightforward marriages, like securing a marriage license, and making
arrangements with a priest or a judge, may not constitute practice of law. However, if the problem is
as complicated as that described in "Rx for Legal Problems" on the Sharon Cuneta-Gabby
Concepcion-Richard Gomez case, then what may be involved is actually the practice of law. If a non-
lawyer, such as the Legal Clinic, renders such services then it is engaged in the unauthorized practice
of law.
1.11. The Legal Clinic also appears to give information on divorce, absence, annulment of marriage
and visas (See Annexes "A" and "B" Petition). Purely giving informational materials may not constitute
of law. The business is similar to that of a bookstore where the customer buys materials on the subject
and determines on the subject and determines by himself what courses of action to take.

It is not entirely improbable, however, that aside from purely giving information, the Legal Clinic's
paralegals may apply the law to the particular problem of the client, and give legal advice. Such would
constitute unauthorized practice of law.

It cannot be claimed that the publication of a legal text which publication of a legal text
which purports to say what the law is amount to legal practice. And the mere fact that
the principles or rules stated in the text may be accepted by a particular reader as a
solution to his problem does not affect this. . . . . Apparently it is urged that the
conjoining of these two, that is, the text and the forms, with advice as to how the forms
should be filled out, constitutes the unlawful practice of law. But that is the situation
with many approved and accepted texts. Dacey's book is sold to the public at
large. There is no personal contact or relationship with a particular individual. Nor does
there exist that relation of confidence and trust so necessary to the status of attorney
and client. THIS IS THE ESSENTIAL OF LEGAL PRACTICE — THE
REPRESENTATION AND ADVISING OF A PARTICULAR PERSON IN A
PARTICULAR SITUATION. At most the book assumes to offer general advice on
common problems, and does not purport to give personal advice on a specific problem
peculiar to a designated or readily identified person. Similarly the defendant's
publication does not purport to give personal advice on a specific problem peculiar to
a designated or readily identified person in a particular situation — in their publication
and sale of the kits, such publication and sale did not constitutes the unlawful practice
of law . . . . There being no legal impediment under the statute to the sale of the kit,
there was no proper basis for the injunction against defendant maintaining an office
for the purpose of selling to persons seeking a divorce, separation, annulment or
separation agreement any printed material or writings relating to matrimonial law or
the prohibition in the memorandum of modification of the judgment against defendant
having an interest in any publishing house publishing his manuscript on divorce and
against his having any personal contact with any prospective purchaser. The record
does fully support, however, the finding that for the change of $75 or $100 for the kit,
the defendant gave legal advice in the course of personal contacts concerning
particular problems which might arise in the preparation and presentation of the
purchaser's asserted matrimonial cause of action or pursuit of other legal remedies
and assistance in the preparation of necessary documents (The injunction therefore
sought to) enjoin conduct constituting the practice of law, particularly with reference to
the giving of advice and counsel by the defendant relating to specific problems of
particular individuals in connection with a divorce, separation, annulment of separation
agreement sought and should be affirmed. (State v. Winder, 348, NYS 2D 270 [1973],
cited in Statsky, supra at p. 101.).

1.12. Respondent, of course, states that its services are "strictly non-diagnostic, non-advisory. "It is
not controverted, however, that if the services "involve giving legal advice or counselling," such would
constitute practice of law (Comment, par. 6.2). It is in this light that FIDA submits that a factual inquiry
may be necessary for the judicious disposition of this case.

xxx xxx xxx

2.10. Annex "A" may be ethically objectionable in that it can give the impression (or perpetuate the
wrong notion) that there is a secret marriage. With all the solemnities, formalities and other requisites
of marriages (See Articles 2, et seq., Family Code), no Philippine marriage can be secret.

2.11. Annex "B" may likewise be ethically objectionable. The second paragraph thereof (which is not
necessarily related to the first paragraph) fails to state the limitation that only "paralegal services?" or
"legal support services", and not legal services, are available." 11
A prefatory discussion on the meaning of the phrase "practice of law" becomes exigent for the proper determination
of the issues raised by the petition at bar. On this score, we note that the clause "practice of law" has long been the
subject of judicial construction and interpretation. The courts have laid down general principles and doctrines
explaining the meaning and scope of the term, some of which we now take into account.

Practice of law means any activity, in or out of court, which requires the application of law, legal procedures,
knowledge, training and experience. To engage in the practice of law is to perform those acts which are characteristic
of the profession. Generally, to practice law is to give advice or render any kind of service that involves legal knowledge
or skill. 12

The practice of law is not limited to the conduct of cases in court. It includes legal advice and counsel, and the
preparation of legal instruments and contract by which legal rights are secured, although such matter may or may not
be pending in a court. 13

In the practice of his profession, a licensed attorney at law generally engages in three principal types of professional
activity: legal advice and instructions to clients to inform them of their rights and obligations, preparation for clients of
documents requiring knowledge of legal principles not possessed by ordinary layman, and appearance for clients
before public tribunals which possess power and authority to determine rights of life, liberty, and property according
to law, in order to assist in proper interpretation and enforcement of law. 14

When a person participates in the a trial and advertises himself as a lawyer, he is in the practice of law. 15 One who
confers with clients, advises them as to their legal rights and then takes the business to an attorney and asks the latter
to look after the case in court, is also practicing law. 16 Giving advice for compensation regarding the legal status and
rights of another and the conduct with respect thereto constitutes a practice of law. 17 One who renders an opinion as
to the proper interpretation of a statute, and receives pay for it, is, to that extent, practicing law. 18

In the recent case of Cayetano vs. Monsod, 19 after citing the doctrines in several cases, we laid down the test to
determine whether certain acts constitute "practice of law," thus:

Black defines "practice of law" as:

The rendition of services requiring the knowledge and the application of legal principles and technique
to serve the interest of another with his consent. It is not limited to appearing in court, or advising and
assisting in the conduct of litigation, but embraces the preparation of pleadings, and other papers
incident to actions and special proceedings, conveyancing, the preparation of legal instruments of all
kinds, and the giving of all legal advice to clients. It embraces all advice to clients and all actions taken
for them in matters connected with the law.

The practice of law is not limited to the conduct of cases on court.(Land Title Abstract and Trust Co. v. Dworken , 129
Ohio St. 23, 193N. E. 650). A person is also considered to be in the practice of law when he:

. . . . for valuable consideration engages in the business of advising person, firms, associations or
corporations as to their right under the law, or appears in a representative capacity as an advocate in
proceedings, pending or prospective, before any court, commissioner, referee, board, body,
committee, or commission constituted by law or authorized to settle controversies and there, in such
representative capacity, performs any act or acts for the purpose of obtaining or defending the rights
of their clients under the law. Otherwise stated, one who, in a representative capacity, engages in the
business of advising clients as to their rights under the law, or while so engaged performs any act or
acts either in court or outside of court for that purpose, is engaged in the practice of law. (State ex. rel.
Mckittrick v. C.S. Dudley and Co., 102 S. W. 2d 895, 340 Mo. 852).

This Court, in the case of Philippines Lawyers Association v. Agrava (105 Phil. 173, 176-177),stated:

The practice of law is not limited to the conduct of cases or litigation in court; it embraces the
preparation of pleadings and other papers incident to actions and special proceedings, the
management of such actions and proceedings on behalf of clients before judges and courts, and in
addition, conveying. In general, all advice to clients, and all action taken for them in matters connected
 with the law incorporation services, assessment and condemnation services contemplating an
appearance before a judicial body, the foreclosure of a mortgage, enforcement of a creditor's claim in
bankruptcy and insolvency proceedings, and conducting proceedings in attachment, and in matters or
estate and guardianship have been held to constitute law practice, as do the preparation and drafting
of legal instruments, where the work done involves the determination by the trained legal mind of the
legal effect of facts and conditions. (5 Am. Jr. p. 262, 263).

Practice of law under modern conditions consists in no small part of work performed outside of any
court and having no immediate relation to proceedings in court. It embraces conveyancing, the giving
of legal advice on a large variety of subjects and the preparation and execution of legal instruments
covering an extensive field of business and trust relations and other affairs. Although these
transactions may have no direct connection with court proceedings, they are always subject to become
involved in litigation. They require in many aspects a high degree of legal skill, a wide experience with
men and affairs, and great capacity for adaptation to difficult and complex situations. These customary
functions of an attorney or counselor at law bear an intimate relation to the administration of justice by
the courts. No valid distinction, so far as concerns the question set forth in the order, can be drawn
between that part of the work of the lawyer which involves appearance in court and that part which
involves advice and drafting of instruments in his office. It is of importance to the welfare of the public
that these manifold customary functions be performed by persons possessed of adequate learning
and skill, of sound moral character, and acting at all times under the heavy trust obligations to clients
which rests upon all attorneys. (Moran, Comments on the Rules o Court, Vol. 3 [1973 ed.], pp. 665-
666, citing In Re Opinion of the Justices [Mass], 194 N. E. 313, quoted in Rhode Is. Bar Assoc. v.
Automobile Service Assoc. [R.I.] 197 A. 139, 144).

The practice of law, therefore, covers a wide range of activities in and out of court. Applying the aforementioned criteria
to the case at bar, we agree with the perceptive findings and observations of the aforestated bar associations that the
activities of respondent, as advertised, constitute "practice of law."

The contention of respondent that it merely offers legal support services can neither be seriously considered nor
sustained. Said proposition is belied by respondent's own description of the services it has been offering, to wit:

Legal support services basically consists of giving ready information by trained paralegals to laymen
and lawyers, which are strictly non-diagnostic, non-advisory, through the extensive use of computers
and modern information technology in the gathering, processing, storage, transmission and
reproduction of information and communication, such as computerized legal research; encoding and
reproduction of documents and pleadings prepared by laymen or lawyers; document search; evidence
gathering; locating parties or witnesses to a case; fact finding investigations; and assistance to laymen
in need of basic institutional services from government or non-government agencies, like birth,
marriage, property, or business registrations; educational or employment records or certifications,
obtaining documentation like clearances, passports, local or foreign visas; giving information about
laws of other countries that they may find useful, like foreign divorce, marriage or adoption laws that
they can avail of preparatory to emigration to the foreign country, and other matters that do not involve
representation of clients in court; designing and installing computer systems, programs, or software
for the efficient management of law offices, corporate legal departments, courts and other entities
engaged in dispensing or administering legal services. 20

While some of the services being offered by respondent corporation merely involve mechanical and technical
knowhow, such as the installation of computer systems and programs for the efficient management of law offices, or
the computerization of research aids and materials, these will not suffice to justify an exception to the general rule.

What is palpably clear is that respondent corporation gives out legal information to laymen and lawyers. Its contention
that such function is non-advisory and non-diagnostic is more apparent than real. In providing information, for example,
about foreign laws on marriage, divorce and adoption, it strains the credulity of this Court that all the respondent
corporation will simply do is look for the law, furnish a copy thereof to the client, and stop there as if it were merely a
bookstore. With its attorneys and so called paralegals, it will necessarily have to explain to the client the intricacies of
the law and advise him or her on the proper course of action to be taken as may be provided for by said law. That is
what its advertisements represent and for the which services it will consequently charge and be paid. That activity
falls squarely within the jurisprudential definition of "practice of law." Such a conclusion will not be altered by the fact
that respondent corporation does not represent clients in court since law practice, as the weight of authority holds, is
not limited merely giving legal advice, contract drafting and so forth.

The aforesaid conclusion is further strengthened by an article published in the January 13, 1991 issue of the
Starweek/The Sunday Magazine of the Philippines Star, entitled "Rx for Legal Problems," where an insight into the
structure, main purpose and operations of respondent corporation was given by its own "proprietor," Atty. Rogelio P.
Nogales:

This is the kind of business that is transacted everyday at The Legal Clinic, with offices on the seventh
floor of the Victoria Building along U. N. Avenue in Manila. No matter what the client's problem, and
even if it is as complicated as the Cuneta-Concepcion domestic situation, Atty. Nogales and his staff
of lawyers, who, like doctors are "specialists" in various fields can take care of it. The Legal Clinic, Inc.
has specialists in taxation and criminal law, medico-legal problems, labor, litigation, and family law.
These specialist are backed up by a battery of paralegals, counsellors and attorneys.

Atty. Nogales set up The Legal Clinic in 1984. Inspired by the trend in the medical field toward
specialization, it caters to clients who cannot afford the services of the big law firms.

The Legal Clinic has regular and walk-in clients. "when they come, we start by analyzing the problem.
That's what doctors do also. They ask you how you contracted what's bothering you, they take your
temperature, they observe you for the symptoms and so on. That's how we operate, too. And once
the problem has been categorized, then it's referred to one of our specialists.

There are cases which do not, in medical terms, require surgery or follow-up treatment. These The
Legal Clinic disposes of in a matter of minutes. "Things like preparing a simple deed of sale or an
affidavit of loss can be taken care of by our staff or, if this were a hospital the residents or the interns.
We can take care of these matters on a while you wait basis. Again, kung baga sa hospital, out-patient,
hindi kailangang ma-confine. It's just like a common cold or diarrhea," explains Atty. Nogales.

Those cases which requires more extensive "treatment" are dealt with accordingly. "If you had a rich
relative who died and named you her sole heir, and you stand to inherit millions of pesos of property,
we would refer you to a specialist in taxation. There would be real estate taxes and arrears which
would need to be put in order, and your relative is even taxed by the state for the right to transfer her
property, and only a specialist in taxation would be properly trained to deal with the problem. Now, if
there were other heirs contesting your rich relatives will, then you would need a litigator, who knows
how to arrange the problem for presentation in court, and gather evidence to support the case. 21

That fact that the corporation employs paralegals to carry out its services is not controlling. What is important is that
it is engaged in the practice of law by virtue of the nature of the services it renders which thereby brings it within the
ambit of the statutory prohibitions against the advertisements which it has caused to be published and are now
assailed in this proceeding.

Further, as correctly and appropriately pointed out by the U.P. WILOCI, said reported facts sufficiently establish that
the main purpose of respondent is to serve as a one-stop-shop of sorts for various legal problems wherein a client
may avail of legal services from simple documentation to complex litigation and corporate undertakings. Most of these
services are undoubtedly beyond the domain of paralegals, but rather, are exclusive functions of lawyers engaged in
the practice of law. 22

It should be noted that in our jurisdiction the services being offered by private respondent which constitute practice of
law cannot be performed by paralegals. Only a person duly admitted as a member of the bar, or hereafter admitted
as such in accordance with the provisions of the Rules of Court, and who is in good and regular standing, is entitled
to practice law. 23

Public policy requires that the practice of law be limited to those individuals found duly qualified in education and
character. The permissive right conferred on the lawyers is an individual and limited privilege subject to withdrawal if
he fails to maintain proper standards of moral and professional conduct. The purpose is to protect the public, the court,
the client and the bar from the incompetence or dishonesty of those unlicensed to practice law and not subject to the
disciplinary control of the court. 24
The same rule is observed in the american jurisdiction wherefrom respondent would wish to draw support for his
thesis. The doctrines there also stress that the practice of law is limited to those who meet the requirements for, and
have been admitted to, the bar, and various statutes or rules specifically so provide. 25 The practice of law is not a
lawful business except for members of the bar who have complied with all the conditions required by statute and the
rules of court. Only those persons are allowed to practice law who, by reason of attainments previously acquired
through education and study, have been recognized by the courts as possessing profound knowledge of legal science
entitling them to advise, counsel with, protect, or defend the rights claims, or liabilities of their clients, with respect to
the construction, interpretation, operation and effect of law. 26 The justification for excluding from the practice of law
those not admitted to the bar is found, not in the protection of the bar from competition, but in the protection of the
public from being advised and represented in legal matters by incompetent and unreliable persons over whom the
judicial department can exercise little control.27

We have to necessarily and definitely reject respondent's position that the concept in the United States of paralegals
as an occupation separate from the law profession be adopted in this jurisdiction. Whatever may be its merits,
respondent cannot but be aware that this should first be a matter for judicial rules or legislative action, and not of
unilateral adoption as it has done.

Paralegals in the United States are trained professionals. As admitted by respondent, there are schools and
universities there which offer studies and degrees in paralegal education, while there are none in the Philippines. 28As
the concept of the "paralegals" or "legal assistant" evolved in the United States, standards and guidelines also evolved
to protect the general public. One of the major standards or guidelines was developed by the American Bar Association
which set up Guidelines for the Approval of Legal Assistant Education Programs (1973). Legislation has even been
proposed to certify legal assistants. There are also associations of paralegals in the United States with their own code
of professional ethics, such as the National Association of Legal Assistants, Inc. and the American Paralegal
Association. 29

In the Philippines, we still have a restricted concept and limited acceptance of what may be considered as paralegal
service. As pointed out by FIDA, some persons not duly licensed to practice law are or have been allowed limited
representation in behalf of another or to render legal services, but such allowable services are limited in scope and
extent by the law, rules or regulations granting permission therefor. 30

Accordingly, we have adopted the American judicial policy that, in the absence of constitutional or statutory authority,
a person who has not been admitted as an attorney cannot practice law for the proper administration of justice cannot
be hindered by the unwarranted intrusion of an unauthorized and unskilled person into the practice of law. 31 That
policy should continue to be one of encouraging persons who are unsure of their legal rights and remedies to seek
legal assistance only from persons licensed to practice law in the state. 32

Anent the issue on the validity of the questioned advertisements, the Code of Professional Responsibility provides
that a lawyer in making known his legal services shall use only true, honest, fair, dignified and objective information
or statement of facts. 33 He is not supposed to use or permit the use of any false, fraudulent, misleading, deceptive,
undignified, self-laudatory or unfair statement or claim regarding his qualifications or legal services. 34 Nor shall he
pay or give something of value to representatives of the mass media in anticipation of, or in return for, publicity to
attract legal business. 35 Prior to the adoption of the code of Professional Responsibility, the Canons of Professional
Ethics had also warned that lawyers should not resort to indirect advertisements for professional employment, such
as furnishing or inspiring newspaper comments, or procuring his photograph to be published in connection with causes
in which the lawyer has been or is engaged or concerning the manner of their conduct, the magnitude of the interest
involved, the importance of the lawyer's position, and all other like self-laudation. 36

The standards of the legal profession condemn the lawyer's advertisement of his talents. A lawyer cannot, without
violating the ethics of his profession. advertise his talents or skill as in a manner similar to a merchant advertising his
goods. 37 The prescription against advertising of legal services or solicitation of legal business rests on the
fundamental postulate that the that the practice of law is a profession. Thus, in the case of The Director of Religious
Affairs. vs. Estanislao R. Bayot 38 an advertisement, similar to those of respondent which are involved in the present
proceeding, 39 was held to constitute improper advertising or solicitation.

The pertinent part of the decision therein reads:

 It is undeniable that the advertisement in question was a flagrant violation by the respondent of the
ethics of his profession, it being a brazen solicitation of business from the public. Section 25 of Rule
127 expressly provides among other things that "the practice of soliciting cases at law for the purpose
of gain, either personally or thru paid agents or brokers, constitutes malpractice." It is highly unethical
for an attorney to advertise his talents or skill as a merchant advertises his wares. Law is a profession
and not a trade. The lawyer degrades himself and his profession who stoops to and adopts the
practices of mercantilism by advertising his services or offering them to the public. As a member of
the bar, he defiles the temple of justice with mercenary activities as the money-changers of old defiled
the temple of Jehovah. "The most worthy and effective advertisement possible, even for a young
lawyer, . . . . is the establishment of a well-merited reputation for professional capacity and fidelity to
trust. This cannot be forced but must be the outcome of character and conduct." (Canon 27, Code of
Ethics.).

We repeat, the canon of the profession tell us that the best advertising possible for a lawyer is a well-merited reputation
for professional capacity and fidelity to trust, which must be earned as the outcome of character and conduct. Good
and efficient service to a client as well as to the community has a way of publicizing itself and catching public attention.
That publicity is a normal by-product of effective service which is right and proper. A good and reputable lawyer needs
no artificial stimulus to generate it and to magnify his success. He easily sees the difference between a normal by-
product of able service and the unwholesome result of propaganda. 40

Of course, not all types of advertising or solicitation are prohibited. The canons of the profession enumerate exceptions
to the rule against advertising or solicitation and define the extent to which they may be undertaken. The exceptions
are of two broad categories, namely, those which are expressly allowed and those which are necessarily implied from
the restrictions. 41

The first of such exceptions is the publication in reputable law lists, in a manner consistent with the standards of
conduct imposed by the canons, of brief biographical and informative data. "Such data must not be misleading and
may include only a statement of the lawyer's name and the names of his professional associates; addresses,
telephone numbers, cable addresses; branches of law practiced; date and place of birth and admission to the bar;
schools attended with dates of graduation, degrees and other educational distinction; public or quasi-public offices;
posts of honor; legal authorships; legal teaching positions; membership and offices in bar associations and
committees thereof, in legal and scientific societies and legal fraternities; the fact of listings in other reputable law lists;
the names and addresses of references; and, with their written consent, the names of clients regularly represented." 42

The law list must be a reputable law list published primarily for that purpose; it cannot be a mere supplemental feature
of a paper, magazine, trade journal or periodical which is published principally for other purposes. For that reason, a
lawyer may not properly publish his brief biographical and informative data in a daily paper, magazine, trade journal
or society program. Nor may a lawyer permit his name to be published in a law list the conduct, management or
contents of which are calculated or likely to deceive or injure the public or the bar, or to lower the dignity or standing
of the profession. 43

The use of an ordinary simple professional card is also permitted. The card may contain only a statement of his name,
the name of the law firm which he is connected with, address, telephone number and special branch of law practiced.
The publication of a simple announcement of the opening of a law firm or of changes in the partnership, associates,
firm name or office address, being for the convenience of the profession, is not objectionable. He may likewise have
his name listed in a telephone directory but not under a designation of special branch of law. 44

Verily, taking into consideration the nature and contents of the advertisements for which respondent is being taken to
task, which even includes a quotation of the fees charged by said respondent corporation for services rendered, we
find and so hold that the same definitely do not and conclusively cannot fall under any of the above-mentioned
exceptions.

The ruling in the case of Bates, et al. vs. State Bar of Arizona, 45 which is repeatedly invoked and constitutes the
justification relied upon by respondent, is obviously not applicable to the case at bar. Foremost is the fact that the
disciplinary rule involved in said case explicitly allows a lawyer, as an exception to the prohibition against
advertisements by lawyers, to publish a statement of legal fees for an initial consultation or the availability upon request
of a written schedule of fees or an estimate of the fee to be charged for the specific services. No such exception is
provided for, expressly or impliedly, whether in our former Canons of Professional Ethics or the present Code of
Professional Responsibility. Besides, even the disciplinary rule in the Bates case contains a proviso that the
exceptions stated therein are "not applicable in any state unless and until it is implemented by such authority in that
state." 46 This goes to show that an exception to the general rule, such as that being invoked by herein respondent,
can be made only if and when the canons expressly provide for such an exception. Otherwise, the prohibition stands,
as in the case at bar.

It bears mention that in a survey conducted by the American Bar Association after the decision in Bates, on the attitude
of the public about lawyers after viewing television commercials, it was found that public opinion dropped
significantly 47 with respect to these characteristics of lawyers:

Trustworthy from 71% to 14%

Professional from 71% to 14%
Honest from 65% to 14%
Dignified from 45% to 14%

Secondly, it is our firm belief that with the present situation of our legal and judicial systems, to allow the publication
of advertisements of the kind used by respondent would only serve to aggravate what is already a deteriorating public
opinion of the legal profession whose integrity has consistently been under attack lately by media and the community
in general. At this point in time, it is of utmost importance in the face of such negative, even if unfair, criticisms at
times, to adopt and maintain that level of professional conduct which is beyond reproach, and to exert all efforts to
regain the high esteem formerly accorded to the legal profession.

In sum, it is undoubtedly a misbehavior on the part of the lawyer, subject to disciplinary action, to advertise his services
except in allowable instances 48 or to aid a layman in the unauthorized practice of law. 49 Considering that Atty. Rogelio
P. Nogales, who is the prime incorporator, major stockholder and proprietor of The Legal Clinic, Inc. is a member of
the Philippine Bar, he is hereby reprimanded, with a warning that a repetition of the same or similar acts which are
involved in this proceeding will be dealt with more severely.

While we deem it necessary that the question as to the legality or illegality of the purpose/s for which the Legal Clinic,
Inc. was created should be passed upon and determined, we are constrained to refrain from lapsing into an obiter on
that aspect since it is clearly not within the adjudicative parameters of the present proceeding which is merely
administrative in nature. It is, of course, imperative that this matter be promptly determined, albeit in a different
proceeding and forum, since, under the present state of our law and jurisprudence, a corporation cannot be organized
for or engage in the practice of law in this country. This interdiction, just like the rule against unethical advertising,
cannot be subverted by employing some so-called paralegals supposedly rendering the alleged support services.

The remedy for the apparent breach of this prohibition by respondent is the concern and province of the Solicitor
General who can institute the corresponding quo warranto action, 50 after due ascertainment of the factual background
and basis for the grant of respondent's corporate charter, in light of the putative misuse thereof. That spin-off from the
instant bar matter is referred to the Solicitor General for such action as may be necessary under the circumstances.

ACCORDINGLY, the Court Resolved to RESTRAIN and ENJOIN herein respondent, The Legal Clinic, Inc., from
issuing or causing the publication or dissemination of any advertisement in any form which is of the same or similar
tenor and purpose as Annexes "A" and "B" of this petition, and from conducting, directly or indirectly, any activity,
operation or transaction proscribed by law or the Code of Professional Ethics as indicated herein. Let copies of this
resolution be furnished the Integrated Bar of the Philippines, the Office of the Bar Confidant and the Office of the
Solicitor General for appropriate action in accordance herewith.

2. Samahan ng Optometrists vs. Acebedo In’l Corp

G.R. No. 117097 March 21, 1997

SAMAHAN NG OPTOMETRISTS SA PILIPINAS, ILOCOS SUR-ABRA CHAPTER, EDUARDO MA. GUIRNALDA,

DANTE G. PACQUING and OCTAVIO A. DE PERALTA, petitioners,
vs. ACEBEDO INTERNATIONAL CORPORATION and the HON. COURT OF APPEALS, respondents.

HERMOSISIMA, JR., J.:

Before us is a petition seeking the review and ultimately the reversal of the decision 1 of the Court of Appeals2 which
rejected what petitioners vehemently claim to be a prohibition, under Republic Act (R.A.) No. 1998, popularly known
as the old Optometry Law, against the employment by corporations, usually optical shops and eyeware stores, of
optometrists, such practice, according to petitioners, being an indirect violation of the rule against corporations
exercising professions reserved only to natural persons. Petitioners understandably did not welcome the herein
assailed decision because they have, earlier, obtained a decision3 favorable to them from the Regional Trial Court of
Candon, Ilocos Sur, Branch 23, presided over by Judge Gabino Balbin, Jr. The said judge had, in the main, ruled that
the operations of private respondent Acebedo International Corporation involves the practice of optometry which is
precluded by R.A. No. 1998.

The undisputed facts of the case, as found by the respondent Court of Appeals and quoted by petitioners, are as
follows:

On February 22, 1991, . . . [private respondent] filed an application with the Office of the Mayor of
Candon, Ilocos Sur, for the issuance of a permit for the opening and operation of a branch of the
Acebedo Optical in that municipality.

The application was opposed by the . . . [petitioner] Samahan ng Optometrists sa Pilipinas (SOP)
which contended that . . . [private respondent] is a juridical entity not qualified to practice optometry.

On March 6, 1991, . . . [private respondent] filed its answer, arguing it is not the corporation, but the
optometrists employed by it, who would be practicing optometry.

On April 17, 1991, the Mayor of Candon created a committee, composed of public respondents
Eduardo Ma. Guirnalda, Dante G. Pacquing and Octavio de Peralta, to pass on [private respondent's]
application.

On September 26, 1991 the committee rendered a decision denying [private respondent's] application
for a mayor's permit to operate a branch in Candon and ordering . . . [private respondent] to close its
establishment within fifteen (15) days from receipt of the decision. Acebedo moved for a
reconsideration but its motion was denied on November 14, 1991. . . . [Private respondent] was
ordered to close its establishment within ten (10) days from receipt of the order.

On December 9, 1991, . . . [private respondent] filed with the Court of Appeals a petition
for certiorari(CA G.R SP No. 26782), questioning the decision of respondent committee. Its petition,
however, was referred to the court a quo, which on December 16, 1992, dismissed Acebedo's petition.
Hence, . . . [the] appeal [to the respondent Court of Appeals].4

The singular issue, admittedly extensively debated and intensely contested not only by the members of the optometry
profession and the players in the business of selling optical ware, supplies, substances and instruments but also by
the members of the Senate during the deliberations respecting R. A. 8050, otherwise known as Revised New
Optometry Law, is this: May corporations, engaged in the business of selling optical wares, supplies, substances and
instruments which, as an incident to and in the ordinary course of the business hire optometrists, be said to be
practicing the profession of optometry which, by legal mandate, may only be engaged in by natural persons possessed
of specific legal qualifications?

The trial court resolved this issue in the affirmative. In so finding, it explained, thus:

The denial of the application of Acebedo rested on the grounds that it is operating an optical shop and
it is practicing optometry where its charter does not grant to it authority to practice the former. Acebedo
submits that the findings of the Commission have no basis both in law and in fact. It argues that the
hiring of optometrists by the petitioner is merely incidental to its main business which is the sale of
optical products. Acebedo contends further that its employees have a personality separate and distinct
from that of Acebedo which is a juridical entity, and it cannot therefore be considered as engaged in
optometry.

The Court disagrees.

 Quoted for the enlightenment of both parties is a portion of the contested Decision, to wit:

The visit revealed the following:

1. The establishment was manned by three personnel: Dr. Salvador Pagarigan, optometrist; Miss
Lilibeth Begonia, receptionist; and a Laboratory technician, who refused to give his name;

2. There were several shelves containing eyeglasses;

3. There were benches where, according to Miss Begonia, would-be clients can sit while waiting for
their turn to be examined;

4. An examination room complete with an optical chair and optical charts; and,

5. An optical laboratory.

The Court is very much aware of the existence of several shops owned by Acebedo. They are
operating up to the present. But the Court has to rely in this case on the findings of the Commission
created by the Mayor of Candon in the absence of proof that the same was arrived at hastily and
without regard for the rights of the parties. In fact, the contested Decision was issued only after an
ocular inspection was conducted and the parties have submitted their respective memorandum.

The findings of the Commission reveal that the operation of Acebedo's local shop involves the practice
of optometry. If indeed Acebedo is engaged in the sale of optical products, the absence of sales clerks
more than demonstrate its real business. In the contested Decision, the floor plan of the shop was
even commented on as that of an optical shop. As noted by the members of the Commission, there
was also a banner in front of the shop prominently display advertising free consultations (libreng
consulta sa mata). These facts, taken together, denote that Acebedo was operating in Candon an
optical shop contrary to law.

While it is also true that a corporation has a personality separate and distinct from that of its personnel,
the veil of corporate fiction cannot be used for the purpose of some illegal activity. The veil of corporate
fiction can be pierced, as in this case, and the acts of the personnel of the corporation will be
considered as those of the corporation. Acebedo then is engaged in the practice of optometry.5

Disagreeing with the foregoing decision of the trial court, private respondent appealed therefrom and asked the
respondent Court of Appeals to reverse the same on the ground that the court a quo erred in concluding that private
respondent was engaged in the practice of optometry by operating an optical shop.

Respondent appellate court found that private respondent's contentions merited the reversal of the court a
quo'sdecision. The respondent court, speaking through Court of Appeals Presiding Justice, now Supreme Court
Associate Justice Vicente V. Mendoza, ratiocinated in this wise:

First. . . . [Private respondent] maintains that it is not practicing optometry nor is it operating an optical
clinic. The contention has merit. The amended Articles of Incorporation of . . . [private respondent] in
part states:

PRIMARY PURPOSES

1. To own, maintain, conduct, operate and carry on the business of dispensing

opticians and optical establishments, and in the course of the business, to buy, sell,
ship, store and otherwise use, deal in, acquire and dispose of every kind of optical,
ophthalmic and scientific instrument, glass, lens, optical solutions or equipment
necessary or convenient to the operation and conduct of the general business of
dispensing opticians.

SECONDARY PURPOSES
 xxx xxx xxx

3. To do all and everything necessary, suitable or proper for the accomplishment of

any of the purposes, the attainment of any of the objects, or in the exercise of any of
the powers herein set forth, either alone or in conjunction with other corporations, firms
or individuals and either as principal or agents and to do every other act or acts, thing
or things, incidental or appurtenant to or growing out of or connected with the
abovementioned objects, purposes or powers.

Clearly, the corporation is not an optical clinic. Nor is it — but rather the optometrists employed by it
who are — engaged in the practice of optometry. Petitioner-appellant simply dispenses optical and
ophthalmic instruments and supplies.

Indeed, the Optometry Law (Rep. Act No. 1998), which . . . [petitioners] cite, does not prohibit
corporations, like . . . [private respondent] from employing licensed optometrists.

What it prohibits is the practice of the profession without license by those engaged in it. This is clear
from sec. 2 of the law which provides:

No person shall practice or attempt to practice optometry as defined in this Act, without
holding a valid certificate of registration as optometrist issued to him by the Board of
Examiners in Optometry herein created and in accordance with the provisions hereof:
Provided, that valid certificates of registration as optometrists shall be issued to
optometrists of good moral character now registered in accordance with the provisions
of chapter thirty-three of the Revised Administrative Code, who shall, by application
within a period of one year from the effectivity of this Act, be exempt from the provisions
of sections eleven, twelve and twenty-three of this Act. . . .

The prohibition is thus addressed to natural persons who are required to have "a valid certificate of
registration as optometrist" and who must be of "good moral character". The prohibition can have no
application to . . . [private respondent] which is not itself engaged in the practice of optometry. As the
Professional Regulation Commission said, "Acebedo Optical, Acebedo Optical Clinic, Acebedo Optical
Co., Inc. and Acebedo International, Inc. are not natural persons who can take the Optometrist
licensure examinations. They are not, and cannot be registered as Optometrist under RA 1998 [The
Optometry Law].6

Petitioners filed a Motion for Reconsideration of the aforegoing decision. It was, however, denied by respondent
appellate court. Hence, this petition anchored on the following sole ground:

ISSUE

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN

DECLARING THAT PRIVATE RESPONDENT ACEBEDO INTERNATIONAL
CORPORATION DOES NOT VIOLATE THE OPTOMETRY LAW (RA NO. 1998)
WHEN IT EMPLOYS OPTOMETRISTS TO ENGAGE IN THE PRACTICE OF
OPTOMETRY UNDER ITS NAME AND FOR ITS BEHALF

The herein petitioner most respectfully submits that the private respondent Acebedo International
Corporation flagrantly violates R.A. No. 1998 and the Corporation Code of the Philippines when it
employs optometrists to engage in the practice of optometry under its name and for its behalf.7

We hold that the petition lacks merit.

Private respondent does not deny that it employs optometrists whose role in the operations of its optical shops is to
administer the proper eye examination in order to determine the correct type and grade of lenses to prescribe to
persons purchasing the same from private respondent's optical shops. Petitioners vehemently insist that in so
employing said optometrists, private respondent is in effect itself practicing optometry. Such practice, petitioners
conclude, is in violation of RA. No. 1998, which, it must be noted at this juncture, has been repealed and superseded
by R.A. 8050.

Petitioners' contentions are, however, untenable. The fact that private respondent hires optometrists who practice
their profession in the course of their employment in private respondent's optical shops, does not translate into a
practice of optometry by private respondent itself. Private respondent is a corporation created and organized for the
purpose of conducting the business of selling optical lenses or eyeglasses, among others. The clientele of private
respondent understably, would largely be composed of persons with defective vision and thus need the proper lenses
to correct the same and enable them to gain normal vision. The determination of the proper lenses to sell to private
respondent's clientele entails the employment of optometrists who have been precisely trained for that purpose.
Private respondent's business is not the determination itself of the proper lenses needed by persons with defective
vision. Private respondent's business, rather, is the buying and importing of eyeglasses and lenses and other similar
or allied instruments from suppliers thereof and selling the same to consumers.

For petitioners' argument to hold water, there need be clear showing that R.A. No. 1998 prohibits a corporation from
hiring optometrists, for only then would it be undeniably evident that the intention of the legislature is to preclude the
formation of the so-called optometry corporations because such is tantamount to the practice of the profession of
optometry which is legally exercisable only by natural persons and professional partnerships. We have carefully
reviewed R.A. No. 1998 however, and we find nothing therein that supports petitioner's insistent claims.8

It is significant to note that even under R.A. No. 8050, known as the Revised Optometry Law,9 we find no prohibition
against the hiring by corporations of optometrists. The pertinent provisions of R.A. No. 8050 regarding the practice of
optometry, are reproduced below for ready reference:

THE PRACTICE OF OPTOMETRY

Sec. 4. Acts Constituting the practice of Optometry. Any of the following acts constitute
the practice of optometry:

a) The examination of the human eye through the employment of subjective and
objective procedures, including the use of specific topical diagnostic pharmaceutical
agents or drugs and instruments, tools, equipment, implements, visual aids,
apparatuses, machines, ocular exercises and related devices, for the purpose of
determining the condition and acuity of human vision to correct and improve the same
in accordance with subsections (b), (c) and (d) hereof; vision to correct and improve
the same in accordance with subsections (b), (c) and (d) hereof;

b) The prescription and dispensing of ophthalmic lenses, prisms, contact lenses and
their accessories and solutions, frames and their accessories, and supplies for the
purpose of correcting and treating defects, deficiencies and abnormalities of vision.

c) The conduct of ocular exercises and vision training, the provision of orthoptics and
other devices and procedures to aid and correct abnormalities of human vision, and
the installation of prosthetic devices;

d) The counseling of patients with regard to vision and eye care and hygiene;

e) The establishment of offices, clinics, and similar places where optometric services
are offered; and

f) The collection of professional fees for the performance of any of the acts mentioned
in paragraphs (a), (b), (c) and (d) of this section.

Sec. 5. Prohibition Against the Unauthorized Practice of Optometry. — No person shall

practice optometry as defined in Section 3 of this Act nor perform any of the acts,
constituting the practice of optometry as setforth in Section 4 hereof, without having
been first admitted to the practice of this profession under the provisions of this Act
 and its implementing rules and regulations: Provided, That this prohibition shall not
apply to regularly licensed and duly registered physicians who have received post-
graduate training in the diagnosis and treatment of eye diseases: Provided, however,
That the examination of the human eye by duly registered physicians in connection
with the physical examination of patients shall not be considered as practice of
optometry: Provided, further, That public health workers trained and involved in the
government's blindness prevention program may conduct only visual acuity test and
visual screening.

Sec. 6. Disclosure of Authority to Practice. — An optometrist shall be required to

indicate his professional license number and the date of its expiration in the documents
he issues or signs in connection with the practice of his profession. He shall also
display his certificate of registration in a conspicuous area of his clinic or office.

All told, there is no law that prohibits the hiring by corporations of optometrists or considers the hiring by corporations
of optometrists as a practice by the corporation itself of the profession of optometry.

WHEREFORE, the instant petition is hereby DISMISSED. Costs against the petitioners. SO ORDERED.

3. Acebedo Optical Company vs. CA

G.R. No. 100152 March 31, 2000

ACEBEDO OPTICAL COMPANY, INC., petitioner,

vs. THE HONORABLE COURT OF APPEALS, Hon. MAMINDIARA MANGOTARA, in his capacity as Presiding
Judge of the RTC, 12th Judicial Region, Br. 1, Iligan City; SAMAHANG OPTOMETRIST Sa PILIPINAS — Iligan City
Chapter, LEO T. CAHANAP, City Legal Officer, and Hon. CAMILO P. CABILI, City Mayor of Iligan,respondents.

PURISIMA, J.:

At bar is a petition for review under Rule 45 of the Rules of Court seeking to nullify the dismissal by the Court of
Appeals of the original petition for certiorari, prohibition and mandamus filed by the herein petitioner against the City
Mayor and City Legal Officer of Iligan and the Samahang Optometrist sa Pilipinas — Iligan Chapter (SOPI, for brevity).

The antecedent facts leading to the filing of the instant petition are as follows:

Petitioner applied with the Office of the City Mayor of Iligan for a business permit. After consideration of petitioner's
application and the opposition interposed thereto by local optometrists, respondent City Mayor issued Business Permit
No. 5342 subject to the following conditions:

1. Since it is a corporation, Acebedo cannot put up an optical clinic but only a commercial store;

2. Acebedo cannot examine and/or prescribe reading and similar optical glasses for patients, because these
are functions of optical clinics;

3. Acebedo cannot sell reading and similar eyeglasses without a prescription having first been made by an
independent optometrist (not its employee) or independent optical clinic. Acebedo can only sell directly to the
public, without need of a prescription, Ray-Ban and similar eyeglasses;

4. Acebedo cannot advertise optical lenses and eyeglasses, but can advertise Ray-Ban and similar glasses
and frames;

5. Acebedo is allowed to grind lenses but only upon the prescription of an independent optometrist. 1
On December 5, 1988, private respondent Samahan ng Optometrist Sa Pilipinas (SOPI), Iligan Chapter, through its
Acting President, Dr. Frances B. Apostol, lodged a complaint against the petitioner before the Office of the City Mayor,
alleging that Acebedo had violated the conditions set forth in its business permit and requesting the cancellation and/or
revocation of such permit.

Acting on such complaint, then City Mayor Camilo P. Cabili designated City Legal Officer Leo T. Cahanap to conduct
an investigation on the matter. On July 12, 1989, respondent City Legal Officer submitted a report to the City Mayor
finding the herein petitioner guilty of violating all the conditions of its business permit and recommending the
disqualification of petitioner from operating its business in Iligan City. The report further advised that no new permit
shall be granted to petitioner for the year 1989 and should only be given time to wind up its affairs.

On July 19, 1989, the City Mayor sent petitioner a Notice of Resolution and Cancellation of Business Permit effective
as of said date and giving petitioner three (3) months to wind up its affairs.

On October 17, 1989, petitioner brought a petition for certiorari, prohibition and mandamus with prayer for restraining
order/preliminary injunction against the respondents, City Mayor, City Legal Officer and Samahan ng Optometrists sa
Pilipinas-Iligan City Chapter (SOPI), docketed as Civil Case No. 1497 before the Regional Trial Court of Iligan City,
Branch I. Petitioner alleged that (1) it was denied due process because it was not given an opportunity to present its
evidence during the investigation conducted by the City Legal Officer; (2) it was denied equal protection of the laws
as the limitations imposed on its business permit were not imposed on similar businesses in Iligan City; (3) the City
Mayor had no authority to impose the special conditions on its business permit; and (4) the City Legal Officer had no
authority to conduct the investigation as the matter falls within the exclusive jurisdiction of the Professional Regulation
Commission and the Board of Optometry.

Respondent SOPI interposed a Motion to Dismiss the Petition on the ground of non-exhaustion of administrative
remedies but on November 24, 1989, Presiding Judge Mamindiara P. Mangotara deferred resolution of such Motion
to Dismiss until after trial of the case on the merits. However, the prayer for a writ of preliminary injunction was granted.
Thereafter, respondent SOPI filed its answer.1âwphi1.nêt

On May 30, 1990, the trial court dismissed the petition for failure to exhaust administrative remedies, and dissolved
the writ of preliminary injunction it earlier issued. Petitioner's motion for reconsideration met the same fate. It was
denied by an Order dated June 28, 1990.

On October 3, 1990, instead of taking an appeal, petitioner filed a petition for certiorari, prohibition and mandamus
with the Court of Appeals seeking to set aside the questioned Order of Dismissal, branding the same as tainted with
grave abuse of discretion on the part of the trial court.

On January 24, 1991, the Ninth Division 2 of the Court of Appeals dismissed the petition for lack of merit. Petitioner's
motion reconsideration was also denied in the Resolution dated May 15, 1991.

Undaunted, petitioner has come before this court via the present petition, theorizing that:

A.

THE RESPONDENT COURT, WHILE CORRECTLY HOLDING THAT THE RESPONDENT CITY MAYOR
ACTED BEYOND HIS AUTHORITY IN IMPOSING THE SPECIAL CONDITIONS IN THE PERMIT AS THEY
HAD NO BASIS IN ANY LAW OR ORDINANCE, ERRED IN HOLDING THAT THE SAID SPECIAL
CONDITIONS NEVERTHELESS BECAME BINDING ON PETITIONER UPON ITS ACCEPTANCE
THEREOF AS A PRIVATE AGREEMENT OR CONTRACT.

B.

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT BETWEEN
PETITIONER AND THE CITY OF ILIGAN WAS ENTERED INTO BY THE LATTER IN THE PERFORMANCE
OF ITS PROPRIETARY FUNCTIONS.

The petition is impressed with merit.

Although petitioner agrees with the finding of the Court of Appeals that respondent City Mayor acted beyond the scope
of his authority in imposing the assailed conditions in subject business permit, it has excepted to the ruling of the Court
of Appeals that the said conditions nonetheless became binding on petitioner, once accepted, as a private agreement
or contract. Petitioner maintains that the said special conditions are null and void for being ultra vires and cannot be
given effect; and therefore, the principle of estoppel cannot apply against it.

On the other hand, the public respondents, City Mayor and City Legal Officer, private respondent SOPI and the Office
of the Solicitor General contend that as a valid exercise of police power, respondent City Mayor has the authority to
impose, as he did, special conditions in the grant of business permits.

Police power as an inherent attribute of sovereignty is the power to prescribe regulations to promote the health, morals,
peace, education, good order or safety and general welfare of the people. 9 The State, through the legislature, has
delegated the exercise of police power to local government units, as agencies of the State, in order to effectively
accomplish and carry out the declared objects of their creation. 4 This delegation of police power is embodied in the
general welfare clause of the Local Government Code which provides:

Sec. 6. General Welfare. — Every local government unit shall exercise the powers expressly granted, those
necessarily implied therefrom, as well as powers necessary, appropriate, or incidental for its efficient and
effective governance, and those which are essential to the promotion of the general welfare. Within their
respective territorial jurisdictions, local government units shall ensure and support, among other things, the
preservation and enrichment of culture, promote health and safety, enhance the right of the people to a
balanced ecology, encourage and support the development of appropriate and self-reliant scientific and
technological capabilities, improve public morals, enhance economic prosperity and social justice, promote
full employment among their residents, maintain peace and order, and preserve the comfort and convenience
of their inhabitants.

The scope of police power has been held to be so comprehensive as to encompass almost all matters affecting the
health, safety, peace, order, morals, comfort and convenience of the community. Police power is essentially regulatory
in nature and the power to issue licenses or grant business permits, if exercised for a regulatory and not revenue-
raising purpose, is within the ambit of this power. 5

The authority of city mayors to issue or grant licenses and business permits is beyond cavil. It is provided for by law.
Section 171, paragraph 2 (n) of Batas Pambansa Bilang 337 otherwise known as the Local Government Code of
1983, reads:

Sec. 171. The City Mayor shall:

xxx xxx xxx

n) Grant or refuse to grant, pursuant to law, city licenses or permits, and revoke the same for violation of law
or ordinance or the conditions upon which they are granted.

However, the power to grant or issue licenses or business permits must always be exercised in accordance with law,
with utmost observance of the rights of all concerned to due process and equal protection of the law.

Succinct and in point is the ruling of this Court, that:

. . . While a business may be regulated, such regulation must, however, be within the bounds of reason, i.e.,
the regulatory ordinance must be reasonable, and its provision cannot be oppressive amounting to an arbitrary
interference with the business or calling subject of regulation. A lawful business or calling may not, under the
guise of regulation, be unreasonably interfered with even by the exercise of police power. . . .

xxx xxx xxx

. . . The exercise of police power by the local government is valid unless it contravenes the fundamental law
of the land or an act of the legislature, or unless it is against public policy or is unreasonable, oppressive,
partial, discriminating or in derogation of a common right. 6
In the case under consideration, the business permit granted by respondent City Mayor to petitioner was burdened
with several conditions. Petitioner agrees with the holding by the Court of Appeals that respondent City Mayor acted
beyond his authority in imposing such special conditions in its permit as the same have no basis in the law or
ordinance. Public respondents and private respondent SOPI, on the other hand, are one in saying that the imposition
of said special conditions on petitioner's business permit is well within the authority of the City Mayor as a valid
exercise of police power.

As aptly discussed by the Solicitor General in his Comment, the power to issue licenses and permits necessarily
includes the corollary power to revoke, withdraw or cancel the same. And the power to revoke or cancel, likewise
includes the power to restrict through the imposition of certain conditions. In the case of Austin-
Hardware, Inc. vs. Court of Appeals, 7 it was held that the power to license carries with it the authority to provide
reasonable terms and conditions under which the licensed business shall be conducted. As the Solicitor General puts
it:

If the City Mayor is empowered to grant or refuse to grant a license, which is a broader power, it stands to
reason that he can also exercise a lesser power that is reasonably incidental to his express power, i.e. to
restrict a license through the imposition of certain conditions, especially so that there is no positive prohibition
to the exercise of such prerogative by the City Mayor, nor is there any particular official or body vested with
such authority. 8

However, the present inquiry does not stop there, as the Solicitor General believes. The power or authority of the City
Mayor to impose conditions or restrictions in the business permit is indisputable. What petitioner assails are the
conditions imposed in its particular case which, it complains, amount to a confiscation of the business in which
petitioner is engaged.

Distinction must be made between the grant of a license or permit to do business and the issuance of a license to
engage in the practice of a particular profession. The first is usually granted by the local authorities and the second is
issued by the Board or Commission tasked to regulate the particular profession. A business permit authorizes the
person, natural or otherwise, to engage in business or some form of commercial activity. A professional license, on
the other hand, is the grant of authority to a natural person to engage in the practice or exercise of his or her profession.

In the case at bar, what is sought by petitioner from respondent City Mayor is a permit to engage in the business of
running an optical shop. It does not purport to seek a license to engage in the practice of optometry as a corporate
body or entity, although it does have in its employ, persons who are duly licensed to practice optometry by the Board
of Examiners in Optometry.

The case of Samahan ng Optometrists sa Pilipinas vs. Acebedo International Corporation, G.R. No.
117097, 9promulgated by this Court on March 21, 1997, is in point. The factual antecedents of that case are similar to
those of the case under consideration and the issue ultimately resolved therein is exactly the same issue posed for
resolution by this Court en banc.

In the said case, the Acebedo International Corporation filed with the Office of the Municipal Mayor an application for
a business permit for the operation of a branch of Acebedo Optical in Candon, Ilocos Sur. The application was
opposed by the Samahan ng Optometrists sa Pilipinas-Ilocos Sur Chapter, theorizing that Acebedo is a juridical entity
not qualified to practice optometry. A committee was created by the Office of the Mayor to study private respondent's
application. Upon recommendation of the said committee, Acebedo's application for a business permit was denied.
Acebedo filed a petition with the Regional Trial Court but the same was dismissed. On appeal, however, the Court of
Appeals reversed the trial court's disposition, prompting the Samahan ng Optometrists to elevate the matter to this
Court.

The First Division of this Court, then composed of Honorable Justice Teodoro Padilla, Josue Bellosillo, Jose Vitug and
Santiago Kapunan, with Honorable Justice Regino Hermosisima, Jr. as ponente, denied the petition and ruled in favor
of respondent Acebedo International Corporation, holding that "the fact that private respondent hires optometrists who
practice their profession in the course of their employment in private respondent's optical shops, does not translate
into a practice of optometry by private respondent itself," 10 The Court further elucidated that in both the old and new
Optometry Law, R.A. No. 1998, superseded by R.A. No. 8050, it is significant to note that there is no prohibition
against the hiring by corporations of optometrists. The Court concluded thus:
 All told, there is no law that prohibits the hiring by corporations of optometrists or considers the hiring by
corporations of optometrists as a practice by the corporation itself of the profession of optometry.

In the present case, the objective of the imposition of subject conditions on petitioner's business permit could be
attained by requiring the optometrists in petitioner's employ to produce a valid certificate of registration as optometrist,
from the Board of Examiners in Optometry. A business permit is issued primarily to regulate the conduct of business
and the City Mayor cannot, through the issuance of such permit, regulate the practice of a profession, like that of
optometry. Such a function is within the exclusive domain of the administrative agency specifically empowered by law
to supervise the profession, in this case the Professional Regulations Commission and the Board of Examiners in
Optometry.

It is significant to note that during the deliberations of the bicameral conference committee of the Senate and the
House of Representatives on R.A. 8050 (Senate Bill No. 1998 and House Bill No. 14100), the committee failed to
reach a consensus as to the prohibition on indirect practice of optometry by corporations. The proponent of the bill,
former Senator Freddie Webb, admitted thus:

Senator Webb: xxx xxx xxx

The focus of contention remains to be the proposal of prohibiting the indirect practice of optometry by
corporations.1âwphi1 We took a second look and even a third look at the issue in the bicameral conference,
but a compromise remained elusive. 11

Former Senator Leticia Ramos-Shahani likewise voted her reservation in casting her vote:

Senator Shahani: Mr. President.

The optometry bills have evoked controversial views from the members of the panel. While we realize the
need to uplift the standards of optometry as a profession, the consesnsus of both Houses was to avoid
touching sensitive issues which properly belong to judicial determination. Thus, the bicameral conference
committee decided to leave the issue of indirect practice of optometry and the use of trade names open to the
wisdom of the Courts which are vested with the prerogative of interpreting the laws. 12

From the foregoing, it is thus evident that Congress has not adopted a unanimous position on the matter of prohibition
of indirect practice of optometry by corporations, specifically on the hiring and employment of licensed optometrists
by optical corporations. It is clear that Congress left the resolution of such issue for judicial determination, and it is
therefore proper for this Court to resolve the issue.

Even in the United States, jurisprudence varies and there is a conflict of opinions among the federal courts as to the
right of a corporation or individual not himself licensed, to hire and employ licensed optometrists. 13

Courts have distinguished between optometry as a learned profession in the category of law and medicine, and
optometry as a mechanical art. And, insofar as the courts regard optometry as merely a mechanical art, they have
tended to find nothing objectionable in the making and selling of eyeglasses, spectacles and lenses by corporations
so long as the patient is actually examined and prescribed for by a qualified practitioner. 14

The primary purpose of the statute regulating the practice of optometry is to insure that optometrical services are to
be rendered by competent and licensed persons in order to protect the health and physical welfare of the people from
the dangers engendered by unlicensed practice. Such purpose may be fully accomplished although the person
rendering the service is employed by a corporation. 15

Furthermore, it was ruled that the employment of a qualified optometrist by a corporation is not against public
policy. 16 Unless prohibited by statutes, a corporation has all the contractual rights that an individual has 17 and it does
not become the practice of medicine or optometry because of the presence of a physician or optometrist. 18 The
manufacturing, selling, trading and bartering of eyeglasses and spectacles as articles of merchandise do not constitute
the practice of optometry. 19
In the case of Dvorine vs. Castelberg Jewelry Corporation, 20 defendant corporation conducted as part of its business,
a department for the sale of eyeglasses and the furnishing of optometrical services to its clients. It employed a
registered optometrist who was compensated at a regular salary and commission and who was furnished instruments
and appliances needed for the work, as well as an office. In holding that corporation was not engaged in the practice
of optometry, the court ruled that there is no public policy forbidding the commercialization of optometry, as in law and
medicine, and recognized the general practice of making it a commercial business by advertising and selling
eyeglasses.

To accomplish the objective of the regulation, a state may provide by statute that corporations cannot sell eyeglasses,
spectacles, and lenses unless a duly licensed physician or a duly qualified optometrist is in charge of, and in personal
attendance at the place where such articles are sold. 21 In such a case, the patient's primary and essential safeguard
lies in the optometrist's control of the "treatment" by means of prescription and preliminary and final examination. 22

In analogy, it is noteworthy that private hospitals are maintained by corporations incorporated for the purpose of
furnishing medical and surgical treatment. In the course of providing such treatments, these corporations employ
physicians, surgeons and medical practitioners, in the same way that in the course of manufacturing and selling
eyeglasses, eye frames and optical lenses, optical shops hire licensed optometrists to examine, prescribe and
dispense ophthalmic lenses. No one has ever charged that these corporations are engaged in the practice of medicine.
There is indeed no valid basis for treating corporations engaged in the business of running optical shops differently.

It also bears stressing, as petitioner has pointed out, that the public and private respondents did not appeal from the
ruling of the Court of Appeals. Consequently, the holding by the Court of Appeals that the act of respondent City Mayor
in imposing the questioned special conditions on petitioner's business permit is ultra vires cannot be put into issue
here by the respondents. It is well-settled that:

A party who has not appealed from the decision may not obtain any affirmative relief from the appellate court
other than what he had obtain from the lower court, if any, whose decision is brought up on appeal. 23

. . . an appellee who is not an appellant may assign errors in his brief where his purpose is to maintain the
judgment on other grounds, but he cannot seek modification or reversal of the judgment or affirmative relief
unless he has also appealed. 24

Thus, respondents' submission that the imposition of subject special conditions on petitioner's business permit is
not ultra vires cannot prevail over the finding and ruling by the Court of Appeals from which they (respondents) did
not appeal.

Anent the second assigned error, petitioner maintains that its business permit issued by the City Mayor is not a
contract entered into by Iligan City in the exercise of its proprietary functions, such that although petitioner agreed to
such conditions, it cannot be held in estoppel since ultra vires acts cannot be given effect.

Respondents, on the other hand, agree with the ruling of the Court of Appeals that the business permit in question is
in the nature of a contract between Iligan City and the herein petitioner, the terms and conditions of which are binding
upon agreement, and that petitioner is estopped from questioning the same. Moreover, in the Resolution denying
petitioner's motion for reconsideration, the Court of Appeals held that the contract between the petitioner and the City
of Iligan was entered into by the latter in the performance of its proprietary functions.

This Court holds otherwise. It had occasion to rule that a license or permit is not in the nature of a contract but a
special privilege.

. . . a license or a permit is not a contract between the sovereignty and the licensee or permitee, and is not a
property in the constitutional sense, as to which the constitutional proscription against impairment of the
obligation of contracts may extend. A license is rather in the nature of a special privilege, of a permission or
authority to do what is within its terms. It is not in any way vested, permanent or absolute. 25

It is therefore decisively clear that estoppel cannot apply in this case. The fact that petitioner acquiesced in the special
conditions imposed by the City Mayor in subject business permit does not preclude it from challenging the said
imposition, which is ultra vires or beyond the ambit of authority of respondent City Mayor. Ultra vires acts or acts which
are clearly beyond the scope of one's authority are null and void and cannot be given any effect. The doctrine of
estoppel cannot operate to give effect to an act which is otherwise null and void or ultra vires.

The Court of Appeals erred in adjudging subject business permit as having been issued by responded City Mayor in
the performance of proprietary functions of Iligan City. As hereinabove elaborated upon, the issuance of business
licenses and permits by a municipality or city is essentially regulatory in nature. The authority, which devolved upon
local government units to issue or grant such licenses or permits, is essentially in the exercise of the police power of
the State within the contemplation of the general welfare clause of the Local Government Code.

WHEREFORE, the petition is GRANTED; the Decision of the Court of Appeals in CA-GR SP No. 22995 REVERSED:
and the respondent City Mayor is hereby ordered to reissue petitioner's business permit in accordance with law and
with this disposition. No pronouncement as to costs. SO ORDERED.

Classifications of Corporations
1. Aguirre vs FQB+7

G.R. No. 170770 January 9, 2013

VITALIANO N. AGUIRRES II and FIDEL N. AGUIRRE, Petitioners,

vs. FQB+7, INC., NATHANIEL D. BOCOBO, PRISCILA BOCOBO and ANTONIO DE VILLA, Respondents.

DECISION

DEL CASTILLO, J.:

Pursuant to Section 145 of the Corporation Code, an existing intra-corporate dispute, which does not constitute a
continuation of corporate business, is not affected by the subsequent dissolution of the corporation.

Before the Court is a Petition for Review on Certiorari of the June 29, 2005 Decision1 of the Court of Appeals (CA) in
CA-G.R. SP No. 87293, which nullified the trial court’s writ of preliminary injunction and dismissed petitioner Vitaliano
N. Aguirre’s (Vitaliano) Complaint before the Regional Trial Court (RTC) for lack of jurisdiction. The dispositive portion
of the assailed Decision reads:

WHEREFORE, the assailed October 15, 2004 Order, as well as the October 27, 2004 Writ of Preliminary Injunction,
are SET ASIDE. With FQB+7, Inc.’s dissolution on September 29, 2003 and Case No. 04111077’s ceasing to become
an intra-corporate dispute said case is hereby ordered DISMISSED for want of jurisdiction.

SO ORDERED.2

Likewise assailed in this Petition is the appellate court’s December 16, 2005 Resolution, 3 which denied a
reconsideration of the assailed Decision.

Factual Antecedents

On October 5, 2004, Vitaliano filed, in his individual capacity and on behalf of FQB+7, Inc. (FQB+7), a Complaint 4for
intra-corporate dispute, injunction, inspection of corporate books and records, and damages, against respondents
Nathaniel D. Bocobo (Nathaniel), Priscila D. Bocobo (Priscila), and Antonio De Villa (Antonio). The Complaint alleged
that FQB+7 was established in 1985 with the following directors and subscribers, as reflected in its Articles of
Incorporation:

Directors Subscribers

1. Francisco Q. Bocobo 1. Francisco Q. Bocobo

2. Fidel N. Aguirre 2. Fidel N. Aguirre
 3. Alfredo Torres 3. Alfredo Torres
4. Victoriano Santos 4. Victoriano Santos

5. Victorino Santos5 5. Victorino Santos

6. Vitaliano N. Aguirre II

7. Alberto Galang

8. Rolando B. Bechayda6

To Vitaliano’s knowledge, except for the death of Francisco Q. Bocobo and Alfredo Torres, there has been no other
change in the above listings.

The Complaint further alleged that, sometime in April 2004, Vitaliano discovered a General Information Sheet (GIS)
of FQB+7, dated September 6, 2002, in the Securities and Exchange Commission (SEC) records. This GIS was filed
by Francisco Q. Bocobo’s heirs, Nathaniel and Priscila, as FQB+7’s president and secretary/treasurer, respectively.
It also stated FQB+7’s directors and subscribers, as follows:

Directors Subscribers

1. Nathaniel D. Bocobo 1. Nathaniel D. Bocobo

2. Priscila D. Bocobo 2. Priscila D. Bocobo

3. Fidel N. Aguirre 3. Fidel N. Aguirre
4. Victoriano Santos 4. Victorino7 Santos
5. Victorino Santos 5. Victorino Santos

6. Consolacion Santos8 6. Consolacion Santos9

Further, the GIS reported that FQB+7’s stockholders held their annual meeting on September 3, 2002.10

The substantive changes found in the GIS, respecting the composition of directors and subscribers of FQB+7,
prompted Vitaliano to write to the "real" Board of Directors (the directors reflected in the Articles of Incorporation),
represented by Fidel N. Aguirre (Fidel). In this letter11 dated April 29, 2004, Vitaliano questioned the validity and
truthfulness of the alleged stockholders meeting held on September 3, 2002. He asked the "real" Board to rectify what
he perceived as erroneous entries in the GIS, and to allow him to inspect the corporate books and records. The "real"
Board allegedly ignored Vitaliano’s request.

On September 27, 2004, Nathaniel, in the exercise of his power as FQB+7’s president, appointed Antonio as the
corporation’s attorney-in-fact, with power of administration over the corporation’s farm in Quezon Province.12Pursuant
thereto, Antonio attempted to take over the farm, but was allegedly prevented by Fidel and his men.13

Characterizing Nathaniel’s, Priscila’s, and Antonio’s continuous representation of the corporation as a usurpation of
the management powers and prerogatives of the "real" Board of Directors, the Complaint asked for an injunction
against them and for the nullification of all their previous actions as purported directors, including the GIS they had
filed with the SEC. The Complaint also sought damages for the plaintiffs and a declaration of Vitaliano’s right to inspect
the corporate records.

The case, docketed as SEC Case No. 04-111077, was assigned to Branch 24 of the RTC of Manila (Manila RTC),
which was a designated special commercial court, pursuant to A.M. No. 03-03-03-SC.14

The respondents failed, despite notice, to attend the hearing on Vitaliano’s application for preliminary
injunction.15Thus, in an Order16 dated October 15, 2004, the trial court granted the application based only on
Vitaliano’s testimonial and documentary evidence, consisting of the corporation’s articles of incorporation, by-laws,
the GIS, demand letter on the "real" Board of Directors, and police blotter of the incident between Fidel’s and Antonio’s
groups. On October 27, 2004, the trial court issued the writ of preliminary injunction17 after Vitaliano filed an injunction
bond.

The respondents filed a motion for an extension of 10 days to file the "pleadings warranted in response to the
complaint," which they received on October 6, 2004.18 The trial court denied this motion for being a prohibited pleading
under Section 8, Rule 1 of the Interim Rules of Procedure Governing Intra-corporate Controversies under Republic
Act (R.A.) No. 8799.19

The respondents filed a Petition for Certiorari and Prohibition,20 docketed as CA-G.R. SP No. 87293, before the CA.
They later amended their Petition by impleading Fidel, who allegedly shares Vitaliano’s interest in keeping them out
of the corporation, as a private respondent therein.21

The respondents sought, in their certiorari petition, the annulment of all the proceedings and issuances in SEC Case
No. 04-11107722 on the ground that Branch 24 of the Manila RTC has no jurisdiction over the subject matter, which
they defined as being an agrarian dispute.23 They theorized that Vitaliano’s real goal in filing the Complaint was to
maintain custody of the corporate farm in Quezon Province. Since this land is agricultural in nature, they claimed that
jurisdiction belongs to the Department of Agrarian Reform (DAR), not to the Manila RTC. 24 They also raised the
grounds of improper venue (alleging that the real corporate address is different from that stated in the Articles of
Incorporation)25 and forum-shopping26 (there being a pending case between the parties before the DAR regarding the
inclusion of the corporate property in the agrarian reform program).27 Respondents also raised their defenses to
Vitaliano’s suit, particularly the alleged disloyalty and fraud committed by the "real" Board of Directors,28 and
respondents’ "preferential right to possess the corporate property" as the heirs of the majority stockholder Francisco
Q. Bocobo.29

The respondents further informed the CA that the SEC had already revoked FQB+7’s Certificate of Registration on
September 29, 2003 for its failure to comply with the SEC reportorial requirements.30 The CA determined that the
corporation’s dissolution was a conclusive fact after petitioners Vitaliano and Fidel failed to dispute this factual
assertion.31

Ruling of the Court of Appeals

The CA determined that the issues of the case are the following: (1) whether the trial court’s issuance of the writ of
preliminary injunction, in its October 15, 2004 Order, was attended by grave abuse of discretion amounting to lack of
jurisdiction; and (2) whether the corporation’s dissolution affected the trial court’s jurisdiction to hear the intra corporate
dispute in SEC Case No. 04-111077.32

On the first issue, the CA determined that the trial court committed a grave abuse of discretion when it issued the writ
of preliminary injunction to remove the respondents from their positions in the Board of Directors based only on
Vitaliano’s self-serving and empty assertions. Such assertions cannot outweigh the entries in the GIS, which are
documented facts on record, which state that respondents are stockholders and were duly elected corporate directors
and officers of FQB+7, Inc. The CA held that Vitaliano only proved a future right in case he wins the suit. Since an
injunction is not a remedy to protect future, contingent or abstract rights, then Vitaliano is not entitled to a writ.33

Further, the CA disapproved the discrepancy between the trial court’s October 15, 2004 Order, which granted the
application for preliminary injunction, and its writ dated October 27, 2004. The Order enjoined all the respondents
"from entering, occupying, or taking over possession of the farm owned by Atty. Vitaliano Aguirre II," while the writ
states that the subject farm is "owned by plaintiff corporation located in Mulanay, Quezon Province." The CA held that
this discrepancy imbued the October 15, 2004 Order with jurisdictional infirmity.34

On the second issue, the CA postulated that Section 122 of the Corporation Code allows a dissolved corporation to
continue as a body corporate for the limited purpose of liquidating the corporate assets and distributing them to its
creditors, stockholders, and others in interest. It does not allow the dissolved corporation to continue its business.
That being the state of the law, the CA determined that Vitaliano’s Complaint, being geared towards the continuation
of FQB+7, Inc.’s business, should be dismissed because the corporation has lost its juridical personality.35Moreover,
the CA held that the trial court does not have jurisdiction to entertain an intra-corporate dispute when the corporation
is already dissolved.36
After dismissing the Complaint, the CA reminded the parties that they should proceed with the liquidation of the
dissolved corporation based on the existing GIS, thus:

With SEC’s revocation of its certificate of registration on September 29, 2004 [sic], FQB+7, Inc. will be obligated to
wind up its affairs. The Corporation will have to be liquidated within the 3-year period mandated by Sec. 122 of the
Corporation Code.

Regardless of the method it will opt to liquidate itself, the Corporation will have to reckon with the members of the
board as duly listed in the General Information Sheet last filed with SEC. Necessarily, and as admitted in the complaint
below, the following as listed in the Corporation’s General Information Sheet dated September 6, 2002, will have to
continue acting as Members of the Board of FQB+7, Inc. viz:

x x x x37

Herein petitioners filed a Motion for Reconsideration.38 They argued that the CA erred in ruling that the October 15,
2004 Order was inconsistent with the writ. They explained that pages 2 and 3 of the said Order were interchanged in
the CA’s records, which then misled the CA to its erroneous conclusion. They also posited that the original sentence
in the correct Order reads: "All defendants are further enjoined from entering, occupying or taking over possession of
the farm owned by plaintiff corporation located in Mulanay, Quezon." This sentence is in accord with what is ordered
in the writ, hence the CA erred in nullifying the Order.

On the second issue, herein petitioners maintained that the CA erred in characterizing the reliefs they sought as a
continuance of the dissolved corporation’s business, which is prohibited under Section 122 of the Corporation Code.
Instead, they argued, the relief they seek is only to determine the real Board of Directors that can represent the
dissolved corporation.

The CA denied the Motion for Reconsideration in its December 16, 2005 Resolution.39 It determined that the crucial
issue is the trial court’s jurisdiction over an intra-corporate dispute involving a dissolved corporation.40 Based on the
prayers in the Complaint, petitioners seek a determination of the real Board that can take over the management of
the corporation’s farm, not to sit as a liquidation Board. Thus, contrary to petitioners’ claims, their Complaint is not
geared towards liquidation but a continuance of the corporation’s business.

Issues

1. Whether the CA erred in annulling the October 15, 2004 Order based on interchanged pages.

2. Whether the Complaint seeks to continue the dissolved corporation’s business.

3. Whether the RTC has jurisdiction over an intra-corporate dispute involving a dissolved corporation.

Our Ruling

The Petition is partly meritorious.

On the nullification of the Order of preliminary injunction.

Petitioners reiterate their argument that the CA was misled by the interchanged pages in the October 15, 2004 Order.
They posit that had the CA read the Order in its correct sequence, it would not have nullified the Order on the ground
that it was issued with grave abuse of discretion amounting to lack of jurisdiction.41

Petitioners’ argument fails to impress. The CA did not nullify the October 15, 2004 Order merely because of the
interchanged pages. Instead, the CA determined that the applicant, Vitaliano, was not able to show that he had an
actual and existing right that had to be protected by a preliminary injunction. The most that Vitaliano was able to prove
was a future right based on his victory in the suit. Contrasting this future right of Vitaliano with respondents’ existing
right under the GIS, the CA determined that the trial court should not have disturbed the status quo. The CA’s
discussion regarding the interchanged pages was made only in addition to its above ratiocination. Thus, whether the
pages were interchanged or not will not affect the CA’s main finding that the trial court issued the Order despite the
absence of a clear and existing right in favor of the applicant, which is tantamount to grave abuse of discretion. We
cannot disturb the CA’s finding on this score without any showing by petitioners of strong basis to warrant the reversal.

Is the Complaint a continuation of

business?

Section 122 of the Corporation Code prohibits a dissolved corporation from continuing its business, but allows it to
continue with a limited personality in order to settle and close its affairs, including its complete liquidation, thus:

Sec. 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for
which it was established.

xxxx

Upon learning of the corporation’s dissolution by revocation of its corporate franchise, the CA held that the intra-
corporate Complaint, which aims to continue the corporation’s business, must now be dismissed under Section 122.

Petitioners concede that a dissolved corporation can no longer continue its business. They argue, however, that
Section 122 allows a dissolved corporation to wind up its affairs within 3 years from its dissolution. Petitioners then
maintain that the Complaint, which seeks only a declaration that respondents are strangers to the corporation and
have no right to sit in the board or act as officers thereof, and a return of Vitaliano’s stockholdings, intends only to
resolve remaining corporate issues. The resolution of these issues is allegedly part of corporate winding up.

Does the Complaint seek a continuation of business or is it a settlement of corporate affairs? The answer lies in the
prayers of the Complaint, which state:

PRAYER

WHEREFORE, it is most respectfully prayed of this Honorable Court that judgment be rendered in favor of the plaintiffs
and against the defendants, in the following wise:

I. ON THE PRAYER OF TRO/STATUS QUO ORDER AND WRIT OF PRELIMINARY INJUNCTION:

1. Forthwith and pending the resolution of plaintiffs’ prayer for issuance of writ of preliminary injunction,
in order to maintain the status quo, a status quo order or temporary restraining order (TRO) be issued
enjoining the defendants, their officers, employees, and agents from exercising the powers and
authority as members of the Board of Directors of plaintiff FQB as well as officers thereof and from
misrepresenting and conducting themselves as such, and enjoining defendant Antonio de Villa from
taking over the farm of the plaintiff FQB and from exercising any power and authority by reason of his
appointment emanating from his co-defendant Bocobos.

2. After due notice and hearing and during the pendency of this action, to issue writ of preliminary
injunction prohibiting the defendants from committing the acts complained of herein, more particularly
those enumerated in the immediately preceeding paragraph, and making the injunction permanent
after trial on the merits.

II. ON THE MERITS

After trial, judgment be rendered in favor of the plaintiffs and against the defendants, as follows:

1. Declaring defendant Bocobos as without any power and authority to represent or conduct
themselves as members of the Board of Directors of plaintiff FQB, or as officers thereof.
 2. Declaring that Vitaliano N. Aguirre II is a stockholder of plaintiff FQB owning fifty (50) shares of stock
thereof.

3. Allowing Vitaliano N. Aguirre II to inspect books and records of the company.

4. Annulling the GIS, Annex "C" of the Complaint as fraudulent and illegally executed and filed.

5. Ordering the defendants to pay jointly and solidarily the sum of at least ₱200,000.00 as moral
damages; at least ₱100,000.00 as exemplary damages; and at least ₱100,000.00 as and for attorney’s
fees and other litigation expenses.

Plaintiffs further pray for costs and such other relief just and equitable under the premises.42

The Court fails to find in the prayers above any intention to continue the corporate business of FQB+7. The Complaint
does not seek to enter into contracts, issue new stocks, acquire properties, execute business transactions, etc. Its
aim is not to continue the corporate business, but to determine and vindicate an alleged stockholder’s right to the
return of his stockholdings and to participate in the election of directors, and a corporation’s right to remove usurpers
and strangers from its affairs. The Court fails to see how the resolution of these issues can be said to continue the
business of FQB+7.

Neither are these issues mooted by the dissolution of the corporation. A corporation’s board of directors is not
rendered functus officio by its dissolution. Since Section 122 allows a corporation to continue its existence for a limited
purpose, necessarily there must be a board that will continue acting for and on behalf of the dissolved corporation for
that purpose. In fact, Section 122 authorizes the dissolved corporation’s board of directors to conduct its liquidation
within three years from its dissolution. Jurisprudence has even recognized the board’s authority to act as trustee for
persons in interest beyond the said three-year period.43 Thus, the determination of which group is the bona fide or
rightful board of the dissolved corporation will still provide practical relief to the parties involved.

The same is true with regard to Vitaliano’s shareholdings in the dissolved corporation. A party’s stockholdings in a
corporation, whether existing or dissolved, is a property right44 which he may vindicate against another party who has
deprived him thereof. The corporation’s dissolution does not extinguish such property right. Section 145 of the
Corporation Code ensures the protection of this right, thus:

Sec. 145. Amendment or repeal. – No right or remedy in favor of or against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof. (Emphases supplied.)

On the dismissal of the Complaint for lack of jurisdiction.

The CA held that the trial court does not have jurisdiction over an intra-corporate dispute involving a dissolved
corporation. It further held that due to the corporation’s dissolution, the qualifications of the respondents can no longer
be questioned and that the dissolved corporation must now commence liquidation proceedings with the respondents
as its directors and officers.

The CA’s ruling is founded on the assumptions that intra-corporate controversies continue only in existing
corporations; that when the corporation is dissolved, these controversies cease to be intra-corporate and need no
longer be resolved; and that the status quo in the corporation at the time of its dissolution must be maintained. The
Court finds no basis for the said assumptions.

Intra-corporate disputes remain even when the corporation is dissolved.

Jurisdiction over the subject matter is conferred by law. R.A. No. 879945 conferred jurisdiction over intra-corporate
controversies on courts of general jurisdiction or RTCs,46 to be designated by the Supreme Court. Thus, as long as
the nature of the controversy is intra-corporate, the designated RTCs have the authority to exercise jurisdiction over
such cases.
So what are intra-corporate controversies? R.A. No. 8799 refers to Section 5 of Presidential Decree (P.D.) No. 902-A
(or The SEC Reorganization Act) for a description of such controversies:

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or organizations registered with the Commission;

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members, or associates; between any or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees, officers or managers of such

corporations, partnerships or associations.

The Court reproduced the above jurisdiction in Rule 1 of the Interim Rules of Procedure Governing Intra-corporate
Controversies under R.A. No. 8799:

SECTION 1. (a) Cases Covered – These Rules shall govern the procedure to be observed in civil cases involving the
following:

(1) Devices or schemes employed by, or any act of, the board of directors, business associates,
officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest
of the public and/or of the stockholders, partners, or members of any corporation, partnership, or
association;
(2) Controversies arising out of intra-corporate, partnership, or association relations, between and
among stockholders, members, or associates; and between, any or all of them and the corporation,
partnership, or association of which they are stockholders, members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers, or managers of
corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.

Meanwhile, jurisprudence has elaborated on the above definitions by providing tests in determining whether a
controversy is intra-corporate. Reyes v. Regional Trial Court of Makati, Br. 14247 contains a comprehensive discussion
of these two tests, thus:

A review of relevant jurisprudence shows a development in the Court's approach in classifying what constitutes an
intra-corporate controversy. Initially, the main consideration in determining whether a dispute constitutes an intra-
corporate controversy was limited to a consideration of the intra-corporate relationship existing between or among the
parties. The types of relationships embraced under Section 5(b) x x x were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and the State as far as its franchise, permit or license
to operate is concerned; and
d) among the stockholders, partners or associates themselves. xxx

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC now the
RTC, regardless of the subject matter of the dispute. This came to be known as the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc., the Court introduced the
nature of the controversy test. We declared in this case that it is not the mere existence of an intra-corporate
relationship that gives rise to an intra-corporate controversy; to rely on the relationship test alone will divest the regular
courts of their jurisdiction for the sole reason that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or minimizing the value of the nature of the
transactions which gives rise to the dispute.
Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate. The controversy must not only be rooted in the existence
of an intra-corporate relationship, but must as well pertain to the enforcement of the parties' correlative rights and
obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by considering not only
the status or relationship of the parties, but also the nature of the question under controversy. This two-tier test was
adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals:

'To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the branches
of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status
or relationship of the parties, and [b] the nature of the question that is the subject of their controversy.1âwphi1

The first element requires that the controversy must arise out of intra-corporate or partnership relations between any
or all of the parties and the corporation, partnership, or association of which they are stockholders, members or
associates, between any or all of them and the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership, or association and the State insofar
as it concerns the individual franchises. The second element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil
in character, necessarily, the case does not involve an intra-corporate controversy.' (Citations and some emphases
omitted; emphases supplied.)

Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of intra-corporate or partnership
relations, and (b) the nature of the question subject of the controversy must be such that it is intrinsically connected
with the regulation of the corporation or the enforcement of the parties’ rights and obligations under the Corporation
Code and the internal regulatory rules of the corporation. So long as these two criteria are satisfied, the dispute is
intra-corporate and the RTC, acting as a special commercial court, has jurisdiction over it.

Examining the case before us in relation to these two criteria, the Court finds and so holds that the case is essentially
an intra-corporate dispute. It obviously arose from the intra-corporate relations between the parties, and the questions
involved pertain to their rights and obligations under the Corporation Code and matters relating to the regulation of
the corporation. We further hold that the nature of the case as an intra-corporate dispute was not affected by the
subsequent dissolution of the corporation.

It bears reiterating that Section 145 of the Corporation Code protects, among others, the rights and remedies of
corporate actors against other corporate actors. The statutory provision assures an aggrieved party that the
corporation’s dissolution will not impair, much less remove, his/her rights or remedies against the corporation, its
stockholders, directors or officers. It also states that corporate dissolution will not extinguish any liability already
incurred by the corporation, its stockholders, directors, or officers. In short, Section 145 preserves a corporate actor’s
cause of action and remedy against another corporate actor. In so doing, Section 145 also preserves the nature of
the controversy between the parties as an intra-corporate dispute.

The dissolution of the corporation simply prohibits it from continuing its business. However, despite such dissolution,
the parties involved in the litigation are still corporate actors. The dissolution does not automatically convert the parties
into total strangers or change their intra-corporate relationships. Neither does it change or terminate existing causes
of action, which arose because of the corporate ties between the parties. Thus, a cause of action involving an intra-
corporate controversy remains and must be filed as an intra-corporate dispute despite the subsequent dissolution of
the corporation.

WHEREFORE, premises considered, the Petition for Review on Certiorari is PARTIALLY GRANTED. The assailed
June 29, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 87293, as well as its December 16, 2005
Resolution, are ANNULLED with respect to their dismissal of SEC Case No. 04-111077 on the ground of lack of
jurisdiction. The said case is ordered REINSTATED before Branch 24 of the Regional Trial Court of Manila. The rest
of the assailed issuances are AFFIRMED.

SO ORDERED.
 2. Yujuico vs. Quiambao

G.R. No. 168639 January 29, 2007

ALDERITO Z. YUJUICO, BONIFACIO C. SUMBILLA, and DOLNEY S. SUMBILLA, Petitioners,

vs.
CEZAR T. QUIAMBAO, JOSE M. MAGNO III, MA. CHRISTINA F. FERREROS, ANTHONY K. QUIAMBAO,
SIMPLICIO T. QUIAMBAO, JR., ERIC C. PILAPIL, ALBERT M. RASALAN, and REGIONAL TRIAL COURT,
BRANCH 48, URDANETA CITY, Respondents.

SANDOVAL-GUTIERREZ, J.:

Before us for resolution is the Petition for Review on Certiorari 1 challenging the Decision dated March 31, 2005
rendered by the Court of Appeals in CA-G.R. SP No. 87785, as well as its Resolution dated June 29, 2006.

The facts are:

Strategic Alliance Development Corporation (STRADEC) is a domestic corporation engaged in the business of
providing financial and investment advisory services and investing in projects through consortium or joint venture
information.2 From its inception, STRADEC’s principal place of business was located at the 24th Floor, One
Magnificent Mile-Citra Building, San Miguel Avenue, Ortigas Center, Pasig City. On July 27, 1998, the Securities and
Exchange Commission (SEC) approved the amendment of STRADEC’s Articles of Incorporation authorizing the
change of its principal office from Pasig City to Bayambang, Pangasinan.3

On March 1, 2004, STRADEC held its annual stockholders’ meeting in its Pasig City office as indicated in the notices
sent to the stockholders.4 At the said meeting, the following were elected members of the Board of Directors: Alderito
Z. Yujuico, Bonifacio C. Sumbilla, Dolney S. Sumbilla (petitioners herein), Cesar T. Quiambao, Jose M. Magno III and
Ma. Christina Ferreros (respondents herein). Petitioners Alderito Yujuico was elected Chairman and President, while
Bonifacio Sumbilla was elected Treasurer. All of them then discharged the duties of their office.

After five (5) months, or on August 16, 2004, respondents filed with the Regional Trial Court (RTC), San Carlos City,
Pangasinan a Complaint against STRADEC (represented by herein petitioners as members of its Board of Directors),
docketed as Civil Case No. SCC-2874 and raffled off to Branch 56. The complaint prays that: (1) the March 1, 2004
election be nullified on the ground of improper venue, pursuant to Section 51 of the Corporation Code; (2) all ensuing
transactions conducted by the elected directors be likewise nullified; and (3) a special stockholders’ meeting be held
anew.

Subsequently, respondents filed an Amended Complaint dated September 2, 2004 further praying for the issuance of
a temporary restraining order (TRO) and/or writ of preliminary injunction to enjoin petitioners from discharging their
functions as directors and officers of STRADEC. On September 22, 2004, they filed a Supplemental Complaint praying
that the court (1) direct Export Industry Bank, Cezar T. Quiambao and Bonifacio G. Sumbilla to surrender to them the
original and reconstituted Stock and Transfer Book and other corporate documents of STRADEC; and (2) nullify the
reconstituted Stock and Transfer Book and all transactions of the corporation. Both pleadings were admitted by the
trial court.

As the controversy involves an intra-corporate dispute, the trial court, on October 4, 2004, issued an Order transferring
Civil Case No. SCC-2874 to RTC, Branch 48, Urdaneta City, being a designated Special Commercial Court. 5 The
case was then re-docketed as Civil (SEC) Case No. U-14.

Since Branch 48 of RTC, Urdaneta City had no presiding judge then, Judge Meliton G. Emuslan acted as pairing
judge of that branch to take cognizance of the cases therein until the appointment and assumption to duty of a regular
judge.6

On November 2, 2004, petitioners filed their Answer with Counterclaim7 in Civil (SEC) Case No. U-14. They prayed
for the dismissal of the complaint on the following grounds, among others: (a) the complaint does not state a cause of
action; (b) the action is barred by prescription for it was filed beyond the 15-day prescriptive period provided by Section
2, Rule 6 of the Interim Rules and Procedure Governing Intra-Corporate Controversies under Republic Act (R.A.) No.
8799; (c) respondents’ prayer that a special stockholders’ meeting be held in Bayambang, Pangasinan "is premature
pending the establishment of a principal office of STRADEC in said municipality;" and (d) respondents waived their
right to object to the venue as they attended and participated in the said March 1, 2004 meeting and election without
any protest."8 Petitioners likewise opposed the application for a writ of preliminary injunction as respondents have no
right that was violated, hence, are not entitled to be protected by law. They further prayed for damages by way of
counterclaim.

Meanwhile, Judge Aurelio R. Ralar, Jr. was appointed presiding judge of RTC, Branch 48, Urdaneta City. Significantly,
on November 9, 2004, he took his oath of office before Associate Justice Diosdado M. Peralta of the Sandiganbayan,
and on November 12, 2004, he assumed his duties.9 Subsequently, or on November 25, 2004, pairing Judge Meliton
Emuslan still issued an Order10 granting respondents’ application for preliminary injunction ordering (1) the holding of
a special stockholders’ meeting of STRADEC on December 10, 2004 "in the principal office of the corporation in
Bayambang, Pangasinan;" and (2) the turn-over by petitioner Bonifacio Sumbilla to the court of the duplicate key of
the safety deposit box in Export Industry Bank, Shaw Boulevard, Pasig City where the original Stock and Transfer
Book of STRADEC was deposited. The pertinent portions of the Order read:

ORDER

This resolves the application of plaintiffs for the issuance of writ of preliminary prohibitory injunction.

During the hearing on the application for Temporary Restraining Order/Injunction on October 20, 2004, plaintiffs
presented as witnesses: Cezar T. Quiambao, Jose M. Magno III and Eric Gene Pilapil who testified in support of the
material averments of the plaintiffs in their Amended Complaint and Supplemental Complaint. Specifically, plaintiff
Quiambao testified, among other things, on the fact of the unlawful denial by defendant Yujuico of his request for the
holding of a special stockholders’ meeting, the location of the principal place of office of the corporation, the deposit
by him and defendant Sumbilla of the Stock and Transfer Book of the corporation in the Export Industry Bank in Pasig
City, the illegal and unjustified reconstitution of said stock and transfer book, and the damages which he and the
corporation sustained as a result of defendants’ unlawful acts including the unauthorized sale of corporate shares of
stock.

Plaintiff Magno III testified that he did not attend the Annual Stockholders’ meeting held last March 1, 2004 and that
he did not authorize anybody to appear for and in his behalf.

Lastly, witness Pilapil testified on the principal place of business of defendant corporation, the holding of the Annual
Stockholders’ Meeting in a place outside the principal place of business of the corporation, and the fact that two (2)
other stockholders, namely, Jose Magno III and Angel Umali were neither present nor represented in said meeting,
contrary to what was alleged in defendants’ Answer with Counterclaim (see par. 50, Answer with Counterclaim).

xxx

After a careful evaluation of the records and all the pleadings extant in this case as well as the testimonies of the
witnesses for the plaintiffs, this court is inclined to grant the plaintiffs’ application for the writs of preliminary prohibitory
injunction in order to restrain the defendants from acting as officers of the corporation and committing further acts
inimical to the corporation and to the rest of the stockholders thereof. It is also evident from the pleadings that
defendants would not yield to the demand of plaintiffs for the maintenance of the status quo until after the resolution
of the merits of the instant controversy.

xxx

The effect of the issuance of this Order would create a hiatus in the action of the board of directors of STRADEC,
pending the determination of the merits of the case and after trial on the merits.

It would thus be for the best interest of the corporation as well as its stockholders that an election be undertaken of
the members of the board and officers pursuant to STRADEC’S Articles of the corporation (sic) and the Corporation
Code of the Philippines, under the supervision of the court.

This is to avoid discontinuity of the operations of the corporation, which may result to its damage and prejudice.
WHEREFORE, premises considered, let the Writ of Preliminary Injunction issue, upon posting of the requisite bond
in the amount of Five Hundred Thousand Pesos (P500,000.00) to answer for whatever damages that the defendants
would suffer on account of the issuance of the injunction writ, restraining defendants from acting as officers of the
Corporation and committing further acts inimical to the corporation.

It is likewise ordered that a special stockholders’ meeting in the principal place of office of the corporation in
Bayambang, Pangasinan on December 10, 2004 be held. The Branch Clerk of this court shall attend the said meeting
to observe the proceedings and report his observations to this court. For this purpose, the defendant Bonifacio
Sumbilla is ordered to surrender to the court, not later than December 3, 2004, the duplicate key given to him by
Export Industry Bank, Shaw Blvd., Pasig City, of the safety deposit box where he and plaintiff Cezar T. Quiambao
deposited the Original Stock and Transfer Book of STRADEC which shall be the basis in the determination of the
corporate stockholding during the meeting scheduled on the above-mentioned date.

SO ORDERED.

In compliance with the above Order, the court sheriff (and respondent Cezar Quiambao, as claimed by petitioners)
caused the opening of the safety deposit box of STRADEC in the Export Industry Bank, Shaw Boulevard Branch,
Pasig City and took custody of its contents.

On December 10, 2004, petitioners, claiming that a motion for reconsideration is a prohibited pleading under Section
8(3), Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, filed
with the Court of Appeals a Petition for Certiorari with Prayer for the Issuance of a TRO and/or Preliminary
Injunction,11 assailing Judge Emuslan’s November 25, 2004 Order. The petition was docketed as CA-G.R. SP No.
87785. In the proceedings before the appellate court, petitioners raised the following issues:

A. Only the SEC, not the RTC, has jurisdiction to order the holding of a special stockholders’ meeting involving
an intra-corporate controversy;

B. Judge Meliton Emuslan had no authority to issue the assailed Order dated November 25, 2004 as Judge
Aurelio Ralar, Jr. was already the presiding judge of RTC, Branch 48, Urdaneta City;12 and

C. Assuming Judge Emuslan had authority to issue the assailed Order, he nonetheless acted with grave abuse
of discretion amounting to lack or excess of jurisdiction.

Meanwhile, on the same day (December 10), as directed in the November 25, 2004 Order of Judge Emuslan, a special
stockholders’ meeting of STRADEC was held in Bayambang, Pangasinan wherein a new set of directors were elected
for the term 2004-2005, namely: Cezar T. Quiambao, Anthony K. Quiambao, and Simplicio T. Quiambao, Jr.
Immediately thereafter, the new directors elected the following officers: Cezar T. Quiambao as Chairman and
President; Eric C. Pilapil as Corporate Secretary; Anthony K. Quiambao as Corporate Treasurer; and Albert M.
Rasalan as Assistant Corporate Secretary.

On March 31, 2005, the Court of Appeals rendered a Decision13 in CA-G.R. SP No. 87785, dismissing the Petition for
Certiorari. It upheld the jurisdiction of the RTC over the controversy and sustained the validity of Judge Emuslan’s
Order of November 25, 2004. Petitioners’ motion for reconsideration was denied in a Resolution dated June 29,
2005.14

Hence, the instant Petition for Review on Certiorari.

FIRST, petitioners contend that the Court of Appeals erred in ruling that the RTC has the power to call a special
stockholders’ meeting involving an intra-corporate controversy. They maintain that it is only the SEC that may do so
to be held under its supervision.

The respondents, in their comment, counter that the appellate court correctly ruled that the power to hear and decide
controversies involving intra-corporate disputes, as well as to act on matters incidental and necessary thereto, have
been transferred from the SEC to the RTCs designated as Special Commercial Courts. It would be the height of
absurdity, they argue, to require the filing of a separate case with the SEC for the sole purpose of asking the said
agency to order the holding of a special stockholders’ meeting where there is already a pending case involving the
same matter before the proper court.

We agree with respondents.

An intra-corporate controversy is one which "pertains to any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the corporation, partnership or association and the State in so
far as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association
and its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates
themselves."15 There is thus no dispute that respondents’ complaint in Civil (SEC) Case No. U-14 before the RTC,
Branch 48, Urdaneta City involves an intra-corporate controversy, the contending parties being stockholders and
officers of a corporation.

Originally, Section 5 of Presidential Decree (P.D.) No. 902-A bestowed the SEC original and exclusive jurisdiction
over cases involving the following:

(a) Devices or schemes employed by, or any act of, the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of associations registered with the Commission;

(b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members or associates; between any or all of them and the corporation, partnership or association and the
State insofar as it concerns their individual franchise or right as such entity;

(c) Controversies in the election or appointment of directors, trustees, officers or managers of such
corporations, partnership or associations;

(d) Petitioners of corporations, partnerships or associations to be declared in the state of suspension of

payment in cases where the corporation, partnership or association possesses sufficient property to cover all
its debts but foresees the impossibility of meeting them when they fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its liabilities but is under the management of a
rehabilitation receiver or management committee created pursuant to this Decree.16 (Underscoring supplied)

Upon the enactment of R.A. No. 8799, otherwise known as "The Securities Regulation Code" which took effect on
August 8, 2000,17 the jurisdiction of the SEC over intra-corporate controversies and other cases enumerated in Section
5 of P.D. No. 902-A has been transferred to the courts of general jurisdiction, or the appropriate RTC. Section 5.2 of
R.A. No. 8799 provides:

5.2. The Commission’s jurisdiction over all cases enumerated in Section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court, Provided, That the Supreme
Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction
over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed. (Underscoring supplied)

Pursuant to R.A. No. 8799, the Court issued a Resolution dated November 21, 2000 in A.M. No. 00-11-03-SC
designating certain branches of the RTC to try and decide cases enumerated in Section 5 of P.D. No. 902-A. Branch
48 of RTC, Urdaneta City, the court a quo, is among those designated as a Special Commercial Court. On March 13,
2001, the Court approved the Interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. No.
8799 which took effect on April 1, 2001.18 Sections 1 and 2, Rule 6 of the said Rules provide:

SEC. 1. Cases covered. – The provisions of this rule shall apply to election contests in stock and non-stock
corporations.

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any elective
office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the
qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer
directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles
of incorporation or by-laws so provide. (Underscoring supplied)

In Morato v. Court of Appeals,19 we held that pursuant to R.A. No. 8799 and the Interim Rules of Procedure Governing
Intra-Corporate Controversies, "among the powers and functions of the SEC which were transferred to the RTC
include the following: (a) jurisdiction and supervision over all corporations, partnerships or associations which are the
grantees of primary franchises and/or a license or permit issued by the Government; (b) the approval, rejection,
suspension, revocation or requirement for registration statements, and registration and licensing applications; (c) the
regulation, investigation, or supervision of the activities of persons to ensure compliance; (d) the supervision,
monitoring, suspension or take over the activities of exchanges, clearing agencies, and other SROs; (e) the imposition
of sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; (f) the issuance of
cease-and-desist orders to prevent fraud or injury to the investing public; (g) the compulsion of the officers of any
registered corporation or association to call meetings of stockholders or members thereof under its supervision; and
(h) the exercise of such other powers as may be provided by law as well as those which may be implied from, or which
are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the
objectives and purposes of these laws."

Clearly, the RTC has the power to hear and decide the intra-corporate controversy of the parties herein. Concomitant
to said power is the authority to issue orders necessary or incidental to the carrying out of the powers expressly
granted to it. Thus, the RTC may, in appropriate cases, order the holding of a special meeting of stockholders or
members of a corporation involving an intra-corporate dispute under its supervision.

SECOND, petitioners assert that Judge Emuslan did not have the authority to issue the assailed Order of November
25, 2004 upon the appointment and assumption on "November 2, 2004" (should be November 12) by Judge Aurelio
R. Ralar, Jr. as the regular presiding judge of RTC, Branch 48, Urdaneta City.

Significantly, respondents never refuted petitioners’ assertion. The Court of Appeals, for its part, dismissed petitioners’
allegation by merely ruling that "this is the first time they are raising this issue – which is much too late in the day. In
any event, one cannot question the authority of the court when it does not suit him and accepts such authority when
it favors him."20 The ruling suggests that petitioners are barred by laches and/or estoppel from raising that issue. The
appellate court likewise denied petitioners’ motion to set the case for oral arguments.

The Court of Appeals should have resolved the issue of whether Judge Emuslan had the authority to issue the assailed
Order, a jurisdictional question crucial to the resolution of the petition. It is elementary that a jurisdictional controversy
may be raised at any time.21

Indeed, as early as November 12, 2004, Judge Aurelio Ralar, Jr. assumed his duties as presiding judge of RTC,
Branch 48, Urdaneta City. Evidently, Judge Emuslan’s authority, as pairing judge of Branch 48, to act on Civil (SEC)
Case No. U-14 automatically ceased on that date. Therefore, he no longer had the authority to issue the Order of
November 25, 2004, or thirteen (13) days after Judge Ralar, Jr. had assumed office. This is clear from this Court’s
Circular No. 19-98 dated February 18, 1998 which mandates:

TO : ALL JUDGES OF THE REGIONAL TRIAL COURTS, METROPOLITAN TRIAL COURTS, MUNICIPAL TRIAL
COURTS IN CITIES, MUNICIPAL TRIAL COURTS, AND MUNICIPAL CIRCUIT TRIAL COURTS

SUBJECT : EXPANDED AUTHORITY OF PAIRING COURTS

In the interest of efficient administration of justice, the authority of the pairing judge under Circular No. 7 dated
September 23, 1974 (Pairing System for Multiple Sala Stations) to act on incidental or interlocutory matters and those
urgent matters requiring immediate action on cases pertaining to the paired court shall henceforth be expanded to
include all other matters. Thus, whenever a vacancy occurs by reason of resignation, dismissal, suspension,
retirement, death, or prolonged absence of the presiding judge in a multi-sala station, the judge of the paired court
shall take cognizance of all cases thereat as acting judge therein UNTIL the APPOINTMENT and ASSUMPTION TO
DUTY OF THE REGULAR JUDGE or the designation of an acting presiding judge or the return of the regular
incumbent judge, or until further orders from this Court.
For this purpose, the provisions of Circular No.7, dated September 23, 1974, inconsistent with this Circular are hereby
amended.

x x x. (Underscoring supplied)

Thus, although the RTC, Branch 48, Urdaneta City is clothed with power to take cognizance of Civil (SEC) Case No.
U-14, the exercise of such power is entirely a different matter. Verily, in Tolentino v. Leviste, 22 this Court, speaking
through Justice (now Chief Justice) Reynato S. Puno, held:

x x x. Jurisdiction is not the same as the exercise of jurisdiction. As distinguished from the exercise of jurisdiction,
jurisdiction is the authority to decide a cause, not the decision rendered therein. Where there is jurisdiction over the
person and the subject matter, the decision on all other questions arising in the case is but an exercise of the
jurisdiction. x x x. (Underscoring supplied)

There are instances where a judge may commit errors. He may issue an order without authority. And if clothed with
power, he may exercise it in excess of his authority or with grave abuse of discretion amounting to lack or excess of
jurisdiction. Any of these acts may be struck down as a nullity through a petition for certiorari,23 as what petitioners
did before the Court of Appeals. It bears stressing that any act or order rendered by a judge without authority, such
as the questioned November 25, 2004 Order, is no order at all. It is void. As such, it cannot be the source of any right
nor the creator of any obligation. All acts performed pursuant to it and all claims emanating from it have no legal force
and effect.24

THIRD, petitioners further contend that even if Judge Emuslan had the authority to issue the challenged Order, still
he issued it with grave abuse of discretion amounting to lack or excess of jurisdiction. They lament that the Order
effectively disposed of the merits of the main case [Civil (SEC) Case No. U-14].

Unfortunately, despite the significance of this issue, the Court of Appeals totally ignored it by failing to render a ruling
thereon. Respondents, for their part, merely aver that Judge Emuslan "only had the best interest of STRADEC in
mind" when he issued the questioned Order. 25

We find for petitioners.

The duty of the court taking cognizance of an application for a writ of preliminary injunction is to determine whether
the requisites necessary for the grant of such writ are present. The requisites for the issuance of a writ of preliminary
injunction are: (1) the applicant for such writ must show that he has a clear and unmistakable right that must be
protected; and (2) there exists an urgent and paramount necessity for the writ to prevent serious damage.26

In this case, Judge Emuslan’s November 25, 2004 Order, quoted earlier, is hazy and too unsubstantial to justify the
issuance of a writ of preliminary injunction. The Order does not contain specific findings of fact and conclusion of law
showing that the requirements for the grant of the injunctive writ are present. It merely mentions the names of
witnesses presented by respondents during the hearing on the application for the issuance of the writ, but there is no
specific and substantial narration of the witnesses’ testimonies to establish the existence of a clear and unmistakable
right on their part that must be protected, as well as the serious damage or irreparable loss that they would suffer if
the writ is not granted. It does not also disclose the specific evidence formally offered by the applicants. Obviously,
the basis of the judge’s conclusion is too uncertain. Thus, in issuing the questioned November 25, 2004 Order granting
a writ of preliminary injunction, he committed grave abuse of discretion. In Manila International Airport Authority v.
Court of Appeals,27 we held:

In the instant case, however, the trial court’s order of January 20, 1993 was, on its face, bereft of basis for the issuance
of a writ of preliminary injunction. There were no findings of fact or law in the assailed order indicating that any of the
elements essential for the grant of a preliminary injunction existed. The trial court alluded to hearings during which the
parties marked their respective exhibits and the trial court heard the oral arguments of opposing counsels. However,
it cannot be ascertained what evidence was formally offered and presented by the parties and given weight and
credence by the trial court. The basis for the trial court’s conclusion that K Services was entitled to a writ of preliminary
injunction is unclear.
In its order of August 5, 1993, the trial court stated that it issued the injunction to prevent irreparable loss that might
be caused to K Services. Once more, however, the trial court neglected to mention what right in esse of K Services,
if any, was in danger of being violated and required the protection of a preliminary injunction.

x x x.

x x x the possibility of irreparable damage without proof of actual existing right is not a ground for an injunction (Heirs
of Asuncion v. Gervacio, Jr., 304 SCRA 322 [1999]). Where the complainant’s right is doubtful or disputed, injunction
is not proper. Absent a clear legal right, the issuance of the injunctive relief constitutes grave abuse of discretion
(Id.).28

Furthermore, Judge Emuslan’s November 25, 2004 Order goes against the concept and objective of a writ of
preliminary injunction. A writ of preliminary injunction is a provisional remedy, an adjunct to a main suit. It is also a
preservative remedy, issued to preserve the status quo of the things subject of the action or the relations between the
parties during the pendency of the suit. In Selegna Management and Development Corporation v. United Coconut
Planters Bank,29 we held:

x x x. Injunction is not designed to protect contingent or future rights. It is not proper when the complainant’s right is
doubtful or disputed.

x x x, courts should avoid issuing this writ which in effect disposes of the main case without trial (F. Regalado,
Remedial Law Compendium, Vol. I, 639 (7th revised ed., 1999). x x x. (Underscoring supplied)

In the same case of Manila International Airport Authority v. Court of Appeals,30 we urged the courts to exercise
extreme caution in issuing the writ, thus:

x x x. We remind trial courts that while generally the grant of a writ of preliminary injunction rests on the sound
discretion of the court taking cognizance of the case, extreme caution must be observed in the exercise of such
discretion. The discretion of the court a quo to grant an injunctive writ must be exercised based on the grounds and
in the manner provided by law. Thus, the Court declared in Garcia v. Burgos:

It has been consistently held that there is no power the exercise of which is more delicate, which requires greater
caution, deliberation and sound discretion, or more dangerous in a doubtful case, than the issuance of an injunction.
It is the strong arm of equity that should never be extended unless to cases of great injury, where courts of law cannot
afford an adequate or commensurate remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of the defendant and should
not be granted lightly or precipitately. It should be granted only when the court is fully satisfied that the law permits it
and the emergency demands it [citations omitted]. (Underscoring supplied)

To repeat, the purpose of the writ of preliminary injunction is to preserve the status quo until the court could hear the
merits of the case.31 The status quo is the last actual peaceable uncontested status that preceded the
controversy32 which, in the instant case, is the holding of the annual stockholders’ meeting on March 1, 2004 and the
ensuing election of the directors and officers of STRADEC. But instead of preserving the status quo, Judge Emuslan’s
Order messed it up when, in compliance therewith, a special stockholders’ meeting was held anew and a new set of
directors and officers of STRADEC was elected. That effectively resolved respondents’ principal action without even
a full-blown trial on the merits since the Order impliedly ruled that the March 1, 2004 annual stockholders’ meeting
and election are void. Verily, the issuance of the questioned Order violates the established principle that courts should
avoid granting a writ of preliminary injunction that would in effect dispose of the main case without trial.33

Equally important is the fact that the Order was issued even though respondents’ right to an injunctive relief is doubtful
or has been vehemently disputed. We note that petitioners, in their answer with counterclaim, raised serious and valid
defenses, among which is that the action is premature since the principal office of STRADEC in Bayambang,
Pangasinan is yet to be established, as authorized by the SEC.34 Obviously, pending the establishment of a principal
office in Bayambang, Pangasinan, all the stockholders’ meetings of STRADEC have been properly held in their
principal office in Pasig City.
Another weighty defense raised by petitioners is that the action has prescribed. One of the reliefs sought by
respondents in the complaint is the nullification of the election of the Board of Directors and corporate officers held
during the March 1, 2004 annual stockholders’ meeting on the ground of improper venue, in violation of the
Corporation Code. Hence, the action involves an election contest, falling squarely under the Interim Rules of
Procedure Governing Intra-Corporate Controversies under R.A. No. 8799. Sections 1 and 2, Rule 6 of the Interim
Rules provide:

SEC. 1. Cases covered. – The provisions of this rule shall apply to election contests in stock and non-stock
corporations.

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any elective
office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the
qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer
directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles
of incorporation or by-laws so provide. (Underscoring supplied)1avvphi1.net

It is important to note that the Court of Appeals itself ruled that respondents’ action before the RTC, Branch 48,
Urdaneta City is an election contest, thus:

Likewise, as clearly provided in Section 1, Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies under R.A. No. 8799, among the intra-corporate controversies transferred to the special courts are:

xxx

(3) Controversies in the election or appointment of directors, trustees, officers, or managers of corporation,
partnerships or associations;

xxx

Undoubtedly, therefore, the instant case is an intra-corporate controversy among the stockholders themselves relative
to the election of directors or officers of STRADEC, specifically between respondents x x x on one hand and petitioners
x x x on the other. x x x. If there is still any doubt that the Special Corporate Court can call for a stockholders’ meeting,
Rule 6 (citing Sections 1 and 2) of the Interim Rules completely puts to rest said issue.

xxx

Clearly, therefore, said Rule empowers the special corporate courts to decide election cases x x x.35 (Underscoring
supplied)

As pointed out by petitioners in their answer with counterclaim, under Section 3, Rule 6 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, an election contest must be "filed within 15
days from the date of the election."36 It was only on August 16, 2004 that respondents instituted an action questioning
the validity of the March 1, 2004 stockholders’ election, clearly beyond the 15-day prescriptive period.

In sum, Judge Emuslan, in granting the writ of preliminary injunction, acted with grave abuse of discretion amounting
to lack or excess of jurisdiction.

WHEREFORE, we GRANT the instant petition and reverse the assailed Decision and Resolution of the Court of
Appeals in CA-G.R. SP No. 87785.

The Order dated November 25, 2004 of Judge Meliton G. Emuslan, RTC, Branch 48, Urdaneta City in Civil (SEC)
Case No. U-14 and the special stockholders’ meeting and election held on December 10, 2004 in Bayambang,
Pangasinan are SET ASIDE.

The last actual peaceable uncontested status of the parties prior to the filing by respondents herein of Civil (SEC)
Case No. U-14 is RESTORED. This case is REMANDED to the RTC, Branch 48, Urdaneta City for further proceedings
with dispatch. SO ORDERED.
 3. Matling Industrial And Commercial Corp v. Coros

G.R. No. 157802 October 13, 2010

MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, RICHARD K. SPENCER, CATHERINE SPENCER,

AND ALEX MANCILLA, Petitioners,
vs.
RICARDO R. COROS, Respondent.

BERSAMIN, J.:

This case reprises the jurisdictional conundrum of whether a complaint for illegal dismissal is cognizable by the Labor
Arbiter (LA) or by the Regional Trial Court (RTC). The determination of whether the dismissed officer was a regular
employee or a corporate officer unravels the conundrum. In the case of the regular employee, the LA has jurisdiction;
otherwise, the RTC exercises the legal authority to adjudicate.

In this appeal via petition for review on certiorari, the petitioners challenge the decision dated September 13, 20021and
the resolution dated April 2, 2003,2 both promulgated in C.A.-G.R. SP No. 65714 entitled Matling Industrial and
Commercial Corporation, et al. v. Ricardo R. Coros and National Labor Relations Commission, whereby by the Court
of Appeals (CA) sustained the ruling of the National Labor Relations Commission (NLRC) to the effect that the LA had
jurisdiction because the respondent was not a corporate officer of petitioner Matling Industrial and Commercial
Corporation (Matling).

Antecedents

After his dismissal by Matling as its Vice President for Finance and Administration, the respondent filed on August 10,
2000 a complaint for illegal suspension and illegal dismissal against Matling and some of its corporate officers
(petitioners) in the NLRC, Sub-Regional Arbitration Branch XII, Iligan City.3

The petitioners moved to dismiss the complaint,4 raising the ground, among others, that the complaint pertained to
the jurisdiction of the Securities and Exchange Commission (SEC) due to the controversy being intra-corporate
inasmuch as the respondent was a member of Matling’s Board of Directors aside from being its Vice-President for
Finance and Administration prior to his termination.

The respondent opposed the petitioners’ motion to dismiss,5 insisting that his status as a member of Matling’s Board
of Directors was doubtful, considering that he had not been formally elected as such; that he did not own a single
share of stock in Matling, considering that he had been made to sign in blank an undated indorsement of the certificate
of stock he had been given in 1992; that Matling had taken back and retained the certificate of stock in its custody;
and that even assuming that he had been a Director of Matling, he had been removed as the Vice President for
Finance and Administration, not as a Director, a fact that the notice of his termination dated April 10, 2000 showed.

On October 16, 2000, the LA granted the petitioners’ motion to dismiss,6 ruling that the respondent was a corporate
officer because he was occupying the position of Vice President for Finance and Administration and at the same time
was a Member of the Board of Directors of Matling; and that, consequently, his removal was a corporate act of Matling
and the controversy resulting from such removal was under the jurisdiction of the SEC, pursuant to Section 5,
paragraph (c) of Presidential Decree No. 902.

Ruling of the NLRC

The respondent appealed to the NLRC,7 urging that:

THE HONORABLE LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETION GRANTING APPELLEE’S
MOTION TO DISMISS WITHOUT GIVING THE APPELLANT AN OPPORTUNITY TO FILE HIS OPPOSITION
THERETO THEREBY VIOLATING THE BASIC PRINCIPLE OF DUE PROCESS.
II

THE HONORABLE LABOR ARBITER COMMITTED AN ERROR IN DISMISSING THE CASE FOR LACK OF
JURISDICTION.

On March 13, 2001, the NLRC set aside the dismissal, concluding that the respondent’s complaint for illegal dismissal
was properly cognizable by the LA, not by the SEC, because he was not a corporate officer by virtue of his position
in Matling, albeit high ranking and managerial, not being among the positions listed in Matling’s Constitution and By-
Laws.8 The NLRC disposed thuswise:

WHEREFORE, the Order appealed from is SET ASIDE. A new one is entered declaring and holding that the case at
bench does not involve any intracorporate matter. Hence, jurisdiction to hear and act on said case is vested with the
Labor Arbiter, not the SEC, considering that the position of Vice-President for Finance and Administration being held
by complainant-appellant is not listed as among respondent's corporate officers.

Accordingly, let the records of this case be REMANDED to the Arbitration Branch of origin in order that the Labor
Arbiter below could act on the case at bench, hear both parties, receive their respective evidence and position papers
fully observing the requirements of due process, and resolve the same with reasonable dispatch.

SO ORDERED.

The petitioners sought reconsideration,9 reiterating that the respondent, being a member of the Board of Directors,
was a corporate officer whose removal was not within the LA’s jurisdiction.

The petitioners later submitted to the NLRC in support of the motion for reconsideration the certified machine copies
of Matling’s Amended Articles of Incorporation and By Laws to prove that the President of Matling was thereby granted
"full power to create new offices and appoint the officers thereto, and the minutes of special meeting held on June 7,
1999 by Matling’s Board of Directors to prove that the respondent was, indeed, a Member of the Board of Directors.10

Nonetheless, on April 30, 2001, the NLRC denied the petitioners’ motion for reconsideration.11

Ruling of the CA

The petitioners elevated the issue to the CA by petition for certiorari, docketed as C.A.-G.R. No. SP 65714, contending
that the NLRC committed grave abuse of discretion amounting to lack of jurisdiction in reversing the correct decision
of the LA.

In its assailed decision promulgated on September 13, 2002,12 the CA dismissed the petition for certiorari, explaining:

For a position to be considered as a corporate office, or, for that matter, for one to be considered as a corporate
officer, the position must, if not listed in the by-laws, have been created by the corporation's board of directors, and
the occupant thereof appointed or elected by the same board of directors or stockholders. This is the implication of
the ruling in Tabang v. National Labor Relations Commission, which reads:

"The president, vice president, secretary and treasurer are commonly regarded as the principal or executive officers
of a corporation, and modern corporation statutes usually designate them as the officers of the corporation.
However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors
may be empowered under the by-laws of a corporation to create additional offices as may be necessary.

It has been held that an 'office' is created by the charter of the corporation and the officer is elected by the directors
or stockholders. On the other hand, an 'employee' usually occupies no office and generally is employed not by action
of the directors or stockholders but by the managing officer of the corporation who also determines the compensation
to be paid to such employee."

This ruling was reiterated in the subsequent cases of Ongkingco v. National Labor Relations Commission and De
Rossi v. National Labor Relations Commission.
The position of vice-president for administration and finance, which Coros used to hold in the corporation, was not
created by the corporation’s board of directors but only by its president or executive vice-president pursuant to the by-
laws of the corporation. Moreover, Coros’ appointment to said position was not made through any act of the board of
directors or stockholders of the corporation. Consequently, the position to which Coros was appointed and later on
removed from, is not a corporate office despite its nomenclature, but an ordinary office in the corporation.

Coros’ alleged illegal dismissal therefrom is, therefore, within the jurisdiction of the labor arbiter.

WHEREFORE, the petition for certiorari is hereby DISMISSED.

SO ORDERED.

The CA denied the petitioners’ motion for reconsideration on April 2, 2003.13

Issue

Thus, the petitioners are now before the Court for a review on certiorari, positing that the respondent was a
stockholder/member of the Matling’s Board of Directors as well as its Vice President for Finance and Administration;
and that the CA consequently erred in holding that the LA had jurisdiction.

The decisive issue is whether the respondent was a corporate officer of Matling or not. The resolution of the issue
determines whether the LA or the RTC had jurisdiction over his complaint for illegal dismissal.

Ruling

The appeal fails.

The Law on Jurisdiction in Dismissal Cases

As a rule, the illegal dismissal of an officer or other employee of a private employer is properly cognizable by the LA.
This is pursuant to Article 217 (a) 2 of the Labor Code, as amended, which provides as follows:

Article 217. Jurisdiction of the Labor Arbiters and the Commission. - (a) Except as otherwise provided under this Code,
the Labor Arbiters shall have original and exclusive jurisdiction to hear and decide, within thirty (30) calendar days
after the submission of the case by the parties for decision without extension, even in the absence of stenographic
notes, the following cases involving all workers, whether agricultural or non-agricultural:

1. Unfair labor practice cases;

2. Termination disputes;

3. If accompanied with a claim for reinstatement, those cases that workers may file involving wages,
rates of pay, hours of work and other terms and conditions of employment;

4. Claims for actual, moral, exemplary and other forms of damages arising from the employer-
employee relations;

5. Cases arising from any violation of Article 264 of this Code, including questions involving the legality
of strikes and lockouts; and

6. Except claims for Employees Compensation, Social Security, Medicare and maternity benefits, all
other claims arising from employer-employee relations, including those of persons in domestic or
household service, involving an amount exceeding five thousand pesos (₱5,000.00) regardless of
whether accompanied with a claim for reinstatement.
 (b) The Commission shall have exclusive appellate jurisdiction over all cases decided by Labor Arbiters.

(c) Cases arising from the interpretation or implementation of collective bargaining agreements and those
arising from the interpretation or enforcement of company personnel policies shall be disposed of by the Labor
Arbiter by referring the same to the grievance machinery and voluntary arbitration as may be provided in said
agreements. (As amended by Section 9, Republic Act No. 6715, March 21, 1989).

Where the complaint for illegal dismissal concerns a corporate officer, however, the controversy falls under the
jurisdiction of the Securities and Exchange Commission (SEC), because the controversy arises out of intra-corporate
or partnership relations between and among stockholders, members, or associates, or between any or all of them and
the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; and
between such corporation, partnership, or association and the State insofar as the controversy concerns their
individual franchise or right to exist as such entity; or because the controversy involves the election or appointment of
a director, trustee, officer, or manager of such corporation, partnership, or association.14 Such controversy, among
others, is known as an intra-corporate dispute.

Effective on August 8, 2000, upon the passage of Republic Act No. 8799,15 otherwise known as The Securities
Regulation Code, the SEC’s jurisdiction over all intra-corporate disputes was transferred to the RTC, pursuant to
Section 5.2 of RA No. 8799, to wit:

5.2. The Commission’s jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is
hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, that the
Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code.
The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.

Considering that the respondent’s complaint for illegal dismissal was commenced on August 10, 2000, it might come
under the coverage of Section 5.2 of RA No. 8799, supra, should it turn out that the respondent was a corporate, not
a regular, officer of Matling.

II

Was the Respondent’s Position of Vice President for Administration and Finance a Corporate Office?

We must first resolve whether or not the respondent’s position as Vice President for Finance and Administration was
a corporate office. If it was, his dismissal by the Board of Directors rendered the matter an intra-corporate dispute
cognizable by the RTC pursuant to RA No. 8799.

The petitioners contend that the position of Vice President for Finance and Administration was a corporate office,
having been created by Matling’s President pursuant to By-Law No. V, as amended,16 to wit:

BY LAW NO. V Officers

The President shall be the executive head of the corporation; shall preside over the meetings of the stockholders and
directors; shall countersign all certificates, contracts and other instruments of the corporation as authorized by the
Board of Directors; shall have full power to hire and discharge any or all employees of the corporation; shall have full
power to create new offices and to appoint the officers thereto as he may deem proper and necessary in the operations
of the corporation and as the progress of the business and welfare of the corporation may demand; shall make reports
to the directors and stockholders and perform all such other duties and functions as are incident to his office or are
properly required of him by the Board of Directors. In case of the absence or disability of the President, the Executive
Vice President shall have the power to exercise his functions.

The petitioners argue that the power to create corporate offices and to appoint the individuals to assume the offices
was delegated by Matling’s Board of Directors to its President through By-Law No. V, as amended; and that any office
the President created, like the position of the respondent, was as valid and effective a creation as that made by the
Board of Directors, making the office a corporate office. In justification, they cite Tabang v. National Labor Relations
Commission,17 which held that "other offices are sometimes created by the charter or by-laws of a corporation, or the
board of directors may be empowered under the by-laws of a corporation to create additional officers as may be
necessary."

The respondent counters that Matling’s By-Laws did not list his position as Vice President for Finance and
Administration as one of the corporate offices; that Matling’s By-Law No. III listed only four corporate officers, namely:
President, Executive Vice President, Secretary, and Treasurer; 18 that the corporate offices contemplated in the
phrase "and such other officers as may be provided for in the by-laws" found in Section 25 of the Corporation Code
should be clearly and expressly stated in the By-Laws; that the fact that Matling’s By-Law No. III dealt with Directors
& Officers while its By-Law No. V dealt with Officers proved that there was a differentiation between the officers
mentioned in the two provisions, with those classified under By-Law No. V being ordinary or non-corporate officers;
and that the officer, to be considered as a corporate officer, must be elected by the Board of Directors or the
stockholders, for the President could only appoint an employee to a position pursuant to By-Law No. V.

We agree with respondent.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum.--Immediately after their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in
the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall
act as president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws
of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a
majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

Conformably with Section 25, a position must be expressly mentioned in the By-Laws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or under a By-Law enabling provision is not enough to
make a position a corporate office. Guerrea v. Lezama,19 the first ruling on the matter, held that the only officers of a
corporation were those given that character either by the Corporation Code or by the By-Laws; the rest of the corporate
officers could be considered only as employees or subordinate officials. Thus, it was held in Easycall Communications
Phils., Inc. v. King:20

An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On
the other hand, an employee occupies no office and generally is employed not by the action of the directors or
stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such
employee.

In this case, respondent was appointed vice president for nationwide expansion by Malonzo, petitioner’'s general
manager, not by the board of directors of petitioner. It was also Malonzo who determined the compensation package
of respondent. Thus, respondent was an employee, not a "corporate officer." The CA was therefore correct in ruling
that jurisdiction over the case was properly with the NLRC, not the SEC (now the RTC).

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that the
corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for in the By-
Laws. Accordingly, the corporate officers in the context of PD No. 902-A are exclusively those who are given that
character either by the Corporation Code or by the corporation’s By-Laws.
A different interpretation can easily leave the way open for the Board of Directors to circumvent the constitutionally
guaranteed security of tenure of the employee by the expedient inclusion in the By-Laws of an enabling clause on the
creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering the Corporation Code, adopted
a similar interpretation of Section 25 of the Corporation Code in its Opinion dated November 25, 1993,21 to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate officers
enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power to create other
Offices without amending first the corporate By-laws. However, the Board may create appointive positions other
than the positions of corporate Officers, but the persons occupying such positions are not considered as
corporate officers within the meaning of Section 25 of the Corporation Code and are not empowered to exercise
the functions of the corporate Officers, except those functions lawfully delegated to them. Their functions and duties
are to be determined by the Board of Directors/Trustees.

Moreover, the Board of Directors of Matling could not validly delegate the power to create a corporate office to the
President, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate
officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in
the Board of Directors, and could not be delegated to subordinate officers or agents.22 The office of Vice President for
Finance and Administration created by Matling’s President pursuant to By Law No. V was an ordinary, not a corporate,
office.

To emphasize, the power to create new offices and the power to appoint the officers to occupy them vested by By-
Law No. V merely allowed Matling’s President to create non-corporate offices to be occupied by ordinary employees
of Matling. Such powers were incidental to the President’s duties as the executive head of Matling to assist him in the
daily operations of the business.

The petitioners’ reliance on Tabang, supra, is misplaced. The statement in Tabang, to the effect that offices not
expressly mentioned in the By-Laws but were created pursuant to a By-Law enabling provision were also considered
corporate offices, was plainly obiter dictum due to the position subject of the controversy being mentioned in the By-
Laws. Thus, the Court held therein that the position was a corporate office, and that the determination of the rights
and liabilities arising from the ouster from the position was an intra-corporate controversy within the SEC’s jurisdiction.

In Nacpil v. Intercontinental Broadcasting Corporation,23 which may be the more appropriate ruling, the position
subject of the controversy was not expressly mentioned in the By-Laws, but was created pursuant to a By-Law
enabling provision authorizing the Board of Directors to create other offices that the Board of Directors might see fit
to create. The Court held there that the position was a corporate office, relying on the obiter dictum in Tabang.

Considering that the observations earlier made herein show that the soundness of their dicta is not
unassailable, Tabang and Nacpil should no longer be controlling.

III

Did Respondent’s Status as Director and Stockholder Automatically Convert his Dismissal into an Intra-
Corporate Dispute?

Yet, the petitioners insist that because the respondent was a Director/stockholder of Matling, and relying on Paguio
v. National Labor Relations Commission24 and Ongkingko v. National Labor Relations Commission,25 the NLRC had
no jurisdiction over his complaint, considering that any case for illegal dismissal brought by a stockholder/officer
against the corporation was an intra-corporate matter that must fall under the jurisdiction of the SEC conformably with
the context of PD No. 902-A.

The petitioners’ insistence is bereft of basis.

To begin with, the reliance on Paguio and Ongkingko is misplaced. In both rulings, the complainants were undeniably
corporate officers due to their positions being expressly mentioned in the By-Laws, aside from the fact that both of
them had been duly elected by the respective Boards of Directors. But the herein respondent’s position of Vice
President for Finance and Administration was not expressly mentioned in the By-Laws; neither was the position of
Vice President for Finance and Administration created by Matling’s Board of Directors. Lastly, the President, not the
Board of Directors, appointed him.

True it is that the Court pronounced in Tabang as follows:

Also, an intra-corporate controversy is one which arises between a stockholder and the corporation. There is no
distinction, qualification or any exemption whatsoever. The provision is broad and covers all kinds of controversies
between stockholders and corporations.26

However, the Tabang pronouncement is not controlling because it is too sweeping and does not accord with reason,
justice, and fair play. In order to determine whether a dispute constitutes an intra-corporate controversy or not, the
Court considers two elements instead, namely: (a) the status or relationship of the parties; and (b) the nature of the
question that is the subject of their controversy. This was our thrust in Viray v. Court of Appeals:27

The establishment of any of the relationships mentioned above will not necessarily always confer jurisdiction over the
dispute on the SEC to the exclusion of regular courts. The statement made in one case that the rule admits of no
exceptions or distinctions is not that absolute. The better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but also the nature of the question that is the
subject of their controversy.

Not every conflict between a corporation and its stockholders involves corporate matters that only the SEC can resolve
in the exercise of its adjudicatory or quasi-judicial powers. If, for example, a person leases an apartment owned by a
corporation of which he is a stockholder, there should be no question that a complaint for his ejectment for non-
payment of rentals would still come under the jurisdiction of the regular courts and not of the SEC. By the same token,
if one person injures another in a vehicular accident, the complaint for damages filed by the victim will not come under
the jurisdiction of the SEC simply because of the happenstance that both parties are stockholders of the same
corporation. A contrary interpretation would dissipate the powers of the regular courts and distort the meaning and
intent of PD No. 902-A.

In another case, Mainland Construction Co., Inc. v. Movilla,28 the Court reiterated these determinants thuswise:

In order that the SEC (now the regular courts) can take cognizance of a case, the controversy must pertain to any of
the following relationships:

a) between the corporation, partnership or association and the public;

b) between the corporation, partnership or association and its stockholders, partners, members or officers;

c) between the corporation, partnership or association and the State as far as its franchise, permit or license
to operate is concerned; and

d) among the stockholders, partners or associates themselves.

The fact that the parties involved in the controversy are all stockholders or that the parties involved are the
stockholders and the corporation does not necessarily place the dispute within the ambit of the jurisdiction of SEC.
The better policy to be followed in determining jurisdiction over a case should be to consider concurrent factors such
as the status or relationship of the parties or the nature of the question that is the subject of their controversy. In the
absence of any one of these factors, the SEC will not have jurisdiction. Furthermore, it does not necessarily follow
that every conflict between the corporation and its stockholders would involve such corporate matters as only the SEC
can resolve in the exercise of its adjudicatory or quasi-judicial powers.29

The criteria for distinguishing between corporate officers who may be ousted from office at will, on one hand, and
ordinary corporate employees who may only be terminated for just cause, on the other hand, do not depend on the
nature of the services performed, but on the manner of creation of the office. In the respondent’s case, he was
supposedly at once an employee, a stockholder, and a Director of Matling. The circumstances surrounding his
appointment to office must be fully considered to determine whether the dismissal constituted an intra-corporate
controversy or a labor termination dispute. We must also consider whether his status as Director and stockholder had
any relation at all to his appointment and subsequent dismissal as Vice President for Finance and Administration.

Obviously enough, the respondent was not appointed as Vice President for Finance and Administration because of
his being a stockholder or Director of Matling. He had started working for Matling on September 8, 1966, and had
been employed continuously for 33 years until his termination on April 17, 2000, first as a bookkeeper, and his climb
in 1987 to his last position as Vice President for Finance and Administration had been gradual but steady, as the
following sequence indicates:

1966 – Bookkeeper
1968 – Senior Accountant
1969 – Chief Accountant
1972 – Office Supervisor
1973 – Assistant Treasurer
1978 – Special Assistant for Finance
1980 – Assistant Comptroller
1983 – Finance and Administrative Manager
1985 – Asst. Vice President for Finance and Administration
1987 to April 17, 2000 – Vice President for Finance and Administration

Even though he might have become a stockholder of Matling in 1992, his promotion to the position of Vice President
for Finance and Administration in 1987 was by virtue of the length of quality service he had rendered as an employee
of Matling. His subsequent acquisition of the status of Director/stockholder had no relation to his promotion. Besides,
his status of Director/stockholder was unaffected by his dismissal from employment as Vice President for Finance and
Administration.1avvphi1

In Prudential Bank and Trust Company v. Reyes,30 a case involving a lady bank manager who had risen from the
ranks but was dismissed, the Court held that her complaint for illegal dismissal was correctly brought to the NLRC,
because she was deemed a regular employee of the bank. The Court observed thus:

It appears that private respondent was appointed Accounting Clerk by the Bank on July 14, 1963. From that position
she rose to become supervisor. Then in 1982, she was appointed Assistant Vice-President which she occupied until
her illegal dismissal on July 19, 1991. The bank’s contention that she merely holds an elective position and that
in effect she is not a regular employee is belied by the nature of her work and her length of service with the
Bank. As earlier stated, she rose from the ranks and has been employed with the Bank since 1963 until the termination
of her employment in 1991. As Assistant Vice President of the Foreign Department of the Bank, she is tasked, among
others, to collect checks drawn against overseas banks payable in foreign currency and to ensure the collection of
foreign bills or checks purchased, including the signing of transmittal letters covering the same. It has been stated that
"the primary standard of determining regular employment is the reasonable connection between the particular activity
performed by the employee in relation to the usual trade or business of the employer. Additionally, "an employee is
regular because of the nature of work and the length of service, not because of the mode or even the reason for hiring
them." As Assistant Vice-President of the Foreign Department of the Bank she performs tasks integral to the
operations of the bank and her length of service with the bank totaling 28 years speaks volumes of her status as a
regular employee of the bank. In fine, as a regular employee, she is entitled to security of tenure; that is, her services
may be terminated only for a just or authorized cause. This being in truth a case of illegal dismissal, it is no wonder
then that the Bank endeavored to the very end to establish loss of trust and confidence and serious misconduct on
the part of private respondent but, as will be discussed later, to no avail.

WHEREFORE, we deny the petition for review on certiorari, and affirm the decision of the Court of Appeals.

Costs of suit to be paid by the petitioners.

SO ORDERED
 4. Reyes vs. RTC of Makati

G.R. No. 165744 August 11, 2008

OSCAR C. REYES, petitioner,

vs. HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH INSURANCE CORPORATION, and
RODRIGO C. REYES, respondents.

BRION, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision of the Court
of Appeals (CA)1 promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The CA Decision affirmed the Order of the
Regional Trial Court (RTC), Branch 142, Makati City dated November 29, 20022 in Civil Case No. 00-1553 (entitled
"Accounting of All Corporate Funds and Assets, and Damages") which denied petitioner Oscar C. Reyes’ (Oscar)
Motion to Declare Complaint as Nuisance or Harassment Suit.

BACKGROUND FACTS

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the spouses Pedro and
Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith Insurance Corporation
(Zenith), a domestic corporation established by their family. Pedro died in 1964, while Anastacia died in 1993. Although
Pedro’s estate was judicially partitioned among his heirs sometime in the 1970s, no similar settlement and partition
appear to have been made with Anastacia’s estate, which included her shareholdings in Zenith. As of June 30, 1990,
Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively.3

On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange Commission (SEC) against
Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated that it is "a derivative suit initiated and filed by
the complainant Rodrigo C. Reyes to obtain an accounting of the funds and assets of ZENITH INSURANCE
CORPORATION which are now or formerly in the control, custody, and/or possession of respondent [herein petitioner
Oscar] and to determine the shares of stock of deceased spouses Pedro and Anastacia Reyes that were
arbitrarily and fraudulently appropriated [by Oscar] for himself [and] which were not collated and taken into account in
the partition, distribution, and/or settlement of the estate of the deceased spouses, for which he should be ordered to
account for all the income from the time he took these shares of stock, and should now deliver to his brothers and
sisters their just and respective shares."5 [Emphasis supplied.]

In his Answer with Counterclaim,6 Oscar denied the charge that he illegally acquired the shares of Anastacia Reyes.
He asserted, as a defense, that he purchased the subject shares with his own funds from the unissued stocks of
Zenith, and that the suit is not a bona fide derivative suit because the requisites therefor have not been complied with.
He thus questioned the SEC’s jurisdiction to entertain the complaint because it pertains to the settlement of the estate
of Anastacia Reyes.

When Republic Act (R.A.) No. 87997 took effect, the SEC’s exclusive and original jurisdiction over cases enumerated
in Section 5 of Presidential Decree (P.D.) No. 902-A was transferred to the RTC designated as a special commercial
court.8The records of Rodrigo’s SEC case were thus turned over to the RTC, Branch 142, Makati, and docketed as
Civil Case No. 00-1553.

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment Suit.9 He claimed that
the complaint is a mere nuisance or harassment suit and should, according to the Interim Rules of Procedure for Intra-
Corporate Controversies, be dismissed; and that it is not a bona fide derivative suit as it partakes of the nature of a
petition for the settlement of estate of the deceased Anastacia that is outside the jurisdiction of a special commercial
court. The RTC, in its Order dated November 29, 2002 (RTC Order), denied the motion in part and declared:

A close reading of the Complaint disclosed the presence of two (2) causes of action, namely: a) a derivative
suit for accounting of the funds and assets of the corporation which are in the control, custody, and/or
possession of the respondent [herein petitioner Oscar] with prayer to appoint a management committee; and
b) an action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes
allegedly taken by respondent, its accounting and the corresponding delivery of these shares to the parties’
 brothers and sisters. The latter is not a derivative suit and should properly be threshed out in a petition for
settlement of estate.

Accordingly, the motion is denied. However, only the derivative suit consisting of the first cause of action will
be taken cognizance of by this Court.10

Oscar thereupon went to the CA on a petition for certiorari, prohibition, and mandamus11 and prayed that the RTC
Order be annulled and set aside and that the trial court be prohibited from continuing with the proceedings. The
appellate court affirmed the RTC Order and denied the petition in its Decision dated May 26, 2004. It likewise denied
Oscar’s motion for reconsideration in a Resolution dated October 21, 2004.

Petitioner now comes before us on appeal through a petition for review on certiorari under Rule 45 of the Rules of
Court.

ASSIGNMENT OF ERRORS

Petitioner Oscar presents the following points as conclusions the CA should have made:

1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the Interim Rules of
Procedure of Intra-Corporate Controversies; and

2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for settlement of estate;
hence, it is outside the jurisdiction of the RTC acting as a special commercial court.

Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and the dismissal of
Rodrigo’s complaint before the RTC.

THE COURT’S RULING

We find the petition meritorious.

The core question for our determination is whether the trial court, sitting as a special commercial court, has jurisdiction
over the subject matter of Rodrigo’s complaint. To resolve it, we rely on the judicial principle that "jurisdiction over the
subject matter of a case is conferred by law and is determined by the allegations of the complaint, irrespective of
whether the plaintiff is entitled to all or some of the claims asserted therein."12

JURISDICTION OF SPECIAL COMMERCIAL COURTS

P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special commercial court)
exercises exclusive jurisdiction:

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnership, and other forms of associations registered with it as expressly
granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving:

a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholders, partners, members of associations or organizations registered
with the Commission.

b) Controversies arising out of intra-corporate or partnership relations, between and among

stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members, or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns their individual franchise
or right to exist as such entity; and
 c) Controversies in the election or appointment of directors, trustees, officers, or managers of such
corporations, partnerships, or associations.

The allegations set forth in Rodrigo’s complaint principally invoke Section 5, paragraphs (a) and (b) above as basis
for the exercise of the RTC’s special court jurisdiction. Our focus in examining the allegations of the complaint shall
therefore be on these two provisions.

Fraudulent Devices and Schemes

The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate facts constituting the
plaintiff’s cause of action and must specify the relief sought.13 Section 5, Rule 8 of the Revised Rules of Court provides
that in all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated with
particularity.14These rules find specific application to Section 5(a) of P.D. No. 902-A which speaks of corporate devices
or schemes that amount to fraud or misrepresentation detrimental to the public and/or to the stockholders.

In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the following:

3. This is a complaint…to determine the shares of stock of the deceased spouses Pedro and Anastacia Reyes
that were arbitrarily and fraudulently appropriated for himself [herein petitioner Oscar] which were not collated
and taken into account in the partition, distribution, and/or settlement of the estate of the deceased Spouses
Pedro and Anastacia Reyes, for which he should be ordered to account for all the income from the time he
took these shares of stock, and should now deliver to his brothers and sisters their just and respective shares
with the corresponding equivalent amount of P7,099,934.82 plus interest thereon from 1978 representing his
obligations to the Associated Citizens’ Bank that was paid for his account by his late mother, Anastacia C.
Reyes. This amount was not collated or taken into account in the partition or distribution of the estate of their
late mother, Anastacia C. Reyes.

3.1. Respondent Oscar C. Reyes, through other schemes of fraud including misrepresentation, unilaterally,
and for his own benefit, capriciously transferred and took possession and control of the management of Zenith
Insurance Corporation which is considered as a family corporation, and other properties and businesses
belonging to Spouses Pedro and Anastacia Reyes.

xxxx

4.1. During the increase of capitalization of Zenith Insurance Corporation, sometime in 1968, the property
covered by TCT No. 225324 was illegally and fraudulently used by respondent as a collateral.

xxxx

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the shareholdings of
their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic] valued in the corporate books at
P7,699,934.28, more or less, excluding interest and/or dividends, had been transferred solely in the name of
respondent. By such fraudulent manipulations and misrepresentation, the shareholdings of said respondent
Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith
Insurance Corporation, which portion of said shares must be distributed equally amongst the brothers and
sisters of the respondent Oscar C. Reyes including the complainant herein.

xxxx

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at P7,099,934.28
were illegally and fraudulently transferred solely to the respondent’s [herein petitioner Oscar] name and
installed himself as a majority stockholder of Zenith Insurance Corporation [and] thereby deprived his brothers
and sisters of their respective equal shares thereof including complainant hereto.

xxxx
 10.1 By refusal of the respondent to account of his [sic] shareholdings in the company, he illegally and
fraudulently transferred solely in his name wherein [sic] the shares of stock of the deceased Anastacia C.
Reyes [which] must be properly collated and/or distributed equally amongst the children, including the
complainant Rodrigo C. Reyes herein, to their damage and prejudice.

xxxx

11.1 By continuous refusal of the respondent to account of his [sic] shareholding with Zenith Insurance
Corporation[,] particularly the number of shares of stocks illegally and fraudulently transferred to him from their
deceased parents Sps. Pedro and Anastacia Reyes[,] which are all subject for collation and/or partition in
equal shares among their children. [Emphasis supplied.]

Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions of law that,
without supporting statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective
cause of action.15 The late Justice Jose Feria, a noted authority in Remedial Law, declared that fraud and mistake are
required to be averred with particularity in order to enable the opposing party to controvert the particular facts allegedly
constituting such fraud or mistake.16

Tested against these standards, we find that the charges of fraud against Oscar were not properly supported by the
required factual allegations. While the complaint contained allegations of fraud purportedly committed by him, these
allegations are not particular enough to bring the controversy within the special commercial court’s jurisdiction; they
are not statements of ultimate facts, but are mere conclusions of law: how and why the alleged appropriation of shares
can be characterized as "illegal and fraudulent" were not explained nor elaborated on.

Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring the case within
the special commercial court’s jurisdiction. To fall within this jurisdiction, there must be sufficient nexus showing that
the corporation’s nature, structure, or powers were used to facilitate the fraudulent device or scheme. Contrary to this
concept, the complaint presented a reverse situation. No corporate power or office was alleged to have facilitated the
transfer of the shares; rather, Oscar, as an individual and without reference to his corporate personality, was alleged
to have transferred the shares of Anastacia to his name, allowing him to become the majority and controlling
stockholder of Zenith, and eventually, the corporation’s President. This is the essence of the complaint read as a
whole and is particularly demonstrated under the following allegations:

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the shareholdings of
their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic] valued in the corporate books at
P7,699,934.28, more or less, excluding interest and/or dividends, had been transferred solely in the name of
respondent. By such fraudulent manipulations and misrepresentation, the shareholdings of said respondent
Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith
Insurance Corporation, which portion of said shares must be distributed equally amongst the brothers and
sisters of the respondent Oscar C. Reyes including the complainant herein.

xxxx

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at
P7,099,934.28 were illegally and fraudulently transferred solely to the respondent’s [herein petitioner Oscar]
name and installed himself as a majority stockholder of Zenith Insurance Corporation [and] thereby deprived
his brothers and sisters of their respective equal shares thereof including complainant hereto. [Emphasis
supplied.]

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for dismissal since
such defect can be cured by a bill of particulars. In cases governed by the Interim Rules of Procedure on Intra-
Corporate Controversies, however, a bill of particulars is a prohibited pleading.17 It is essential, therefore, for the
complaint to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes to invoke
the court’s special commercial jurisdiction.

We note that twice in the course of this case, Rodrigo had been given the opportunity to study the propriety of
amending or withdrawing the complaint, but he consistently refused. The court’s function in resolving issues of
jurisdiction is limited to the review of the allegations of the complaint and, on the basis of these allegations, to the
determination of whether they are of such nature and subject that they fall within the terms of the law defining the
court’s jurisdiction. Regretfully, we cannot read into the complaint any specifically alleged corporate fraud that will call
for the exercise of the court’s special commercial jurisdiction. Thus, we cannot affirm the RTC’s assumption of
jurisdiction over Rodrigo’s complaint on the basis of Section 5(a) of P.D. No. 902-A.18

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Court’s approach in classifying what constitutes an
intra-corporate controversy. Initially, the main consideration in determining whether a dispute constitutes an intra-
corporate controversy was limited to a consideration of the intra-corporate relationship existing between or among the
parties.19 The types of relationships embraced under Section 5(b), as declared in the case of Union Glass & Container
Corp. v. SEC,20were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and the State as far as its franchise, permit or license
to operate is concerned; and
d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC, regardless
of the subject matter of the dispute. This came to be known as the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,21 the Court introduced
the nature of the controversy test. We declared in this case that it is not the mere existence of an intra-corporate
relationship that gives rise to an intra-corporate controversy; to rely on the relationship test alone will divest the regular
courts of their jurisdiction for the sole reason that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or minimizing the value of the nature of the
transactions which gives rise to the dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate.22 The controversy must not only be rooted in the
existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties’ correlative
rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the
corporation. If the relationship and its incidents are merely incidental to the controversy or if there will still be conflict
even if the relationship does not exist, then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by considering not only
the status or relationship of the parties, but also the nature of the question under controversy.23 This two-tier test was
adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals:24

To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the
branches of the RTC specifically designated by the Court to try and decide such cases, two elements must
concur: (a) the status or relationship of the parties; and (2) the nature of the question that is the subject of their
controversy.

The first element requires that the controversy must arise out of intra-corporate or partnership relations
between any or all of the parties and the corporation, partnership, or association of which they are
stockholders, members or associates; between any or all of them and the corporation, partnership, or
association of which they are stockholders, members, or associates, respectively; and between such
corporation, partnership, or association and the State insofar as it concerns their individual franchises. The
second element requires that the dispute among the parties be intrinsically connected with the regulation of
the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily,
the case does not involve an intra-corporate controversy.

Given these standards, we now tackle the question posed for our determination under the specific circumstances of
this case:
Application of the Relationship Test

Is there an intra-corporate relationship between the parties that would characterize the case as an intra-corporate
dispute?

We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two capacities: in his
own right with respect to the 4,250 shares registered in his name, and as one of the heirs of Anastacia Reyes with
respect to the 136,598 shares registered in her name. What is material in resolving the issues of this case under the
allegations of the complaint is Rodrigo’s interest as an heir since the subject matter of the present controversy centers
on the shares of stocks belonging to Anastacia, not on Rodrigo’s personally-owned shares nor on his personality as
shareholder owning these shares. In this light, all reference to shares of stocks in this case shall pertain to the
shareholdings of the deceased Anastacia and the parties’ interest therein as her heirs.

Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of death of the
decedent. Accordingly, upon Anastacia’s death, her children acquired legal title to her estate (which title includes her
shareholdings in Zenith), and they are, prior to the estate’s partition, deemed co-owners thereof.25 This status as co-
owners, however, does not immediately and necessarily make them stockholders of the corporation. Unless and until
there is compliance with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not
become registered stockholders of the corporation. Section 63 provides:

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided
into shares for which certificates signed by the president or vice-president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates, and the number of shares
transferred. [Emphasis supplied.]

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of
the corporation.

Simply stated, the transfer of title by means of succession, though effective and valid between the parties involved
(i.e., between the decedent’s estate and her heirs), does not bind the corporation and third parties. The transfer must
be registered in the books of the corporation to make the transferee-heir a stockholder entitled to recognition as such
both by the corporation and by third parties.26

We note, in relation with the above statement, that in Abejo v. Dela Cruz27 and TCL Sales Corporation v. Court of
Appeals28we did not require the registration of the transfer before considering the transferee a stockholder of the
corporation (in effect upholding the existence of an intra-corporate relation between the parties and bringing the case
within the jurisdiction of the SEC as an intra-corporate controversy). A marked difference, however, exists between
these cases and the present one.

In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific number of shares of the
corporation; after the transferee had established prima facie ownership over the shares of stocks in question,
registration became a mere formality in confirming their status as stockholders. In the present case, each of
Anastacia’s heirs holds only an undivided interest in the shares. This interest, at this point, is still inchoate and subject
to the outcome of a settlement proceeding; the right of the heirs to specific, distributive shares of inheritance will not
be determined until all the debts of the estate of the decedent are paid. In short, the heirs are only entitled to what
remains after payment of the decedent’s debts;29whether there will be residue remains to be seen. Justice Jurado
aptly puts it as follows:

No succession shall be declared unless and until a liquidation of the assets and debts left by the decedent
shall have been made and all his creditors are fully paid. Until a final liquidation is made and all the debts are
paid, the right of the heirs to inherit remains inchoate. This is so because under our rules of
procedure, liquidation is necessary in order to determine whether or not the decedent has left any liquid assets
which may be transmitted to his heirs.30 [Emphasis supplied.]
Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith with respect to the
shareholdings originally belonging to Anastacia. First, he must prove that there are shareholdings that will be left to
him and his co-heirs, and this can be determined only in a settlement of the decedent’s estate. No such proceeding
has been commenced to date. Second, he must register the transfer of the shares allotted to him to make it binding
against the corporation. He cannot demand that this be done unless and until he has established his specific allotment
(and prima facieownership) of the shares. Without the settlement of Anastacia’s estate, there can be no definite
partition and distribution of the estate to the heirs. Without the partition and distribution, there can be no registration
of the transfer. And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the
existence of an intra-corporate relationship as premise for an intra-corporate controversy within the jurisdiction of a
special commercial court.

In sum, we find that – insofar as the subject shares of stock (i.e., Anastacia’s shares) are concerned – Rodrigo cannot
be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-corporate relationship exists
that would serve as basis to bring this case within the special commercial court’s jurisdiction under Section 5(b) of PD
902-A, as amended. Rodrigo’s complaint, therefore, fails the relationship test.

Application of the Nature of Controversy Test

The body rather than the title of the complaint determines the nature of an action.31 Our examination of the complaint
yields the conclusion that, more than anything else, the complaint is about the protection and enforcement of
successional rights. The controversy it presents is purely civil rather than corporate, although it is denominated as a
"complaint for accounting of all corporate funds and assets."

Contrary to the findings of both the trial and appellate courts, we read only one cause of action alleged in the complaint.
The "derivative suit for accounting of the funds and assets of the corporation which are in the control, custody, and/or
possession of the respondent [herein petitioner Oscar]" does not constitute a separate cause of action but is, as
correctly claimed by Oscar, only an incident to the "action for determination of the shares of stock of deceased spouses
Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the corresponding delivery of these
shares to the parties’ brothers and sisters." There can be no mistake of the relationship between the "accounting"
mentioned in the complaint and the objective of partition and distribution when Rodrigo claimed in paragraph 10.1 of
the complaint that:

10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he illegally and
fraudulently transferred solely in his name wherein [sic] the shares of stock of the deceased Anastacia C.
Reyes [which] must be properly collated and/or distributed equally amongst the children including the
complainant Rodrigo C. Reyes herein to their damage and prejudice.

We particularly note that the complaint contained no sufficient allegation that justified the need for an accounting other
thanto determine the extent of Anastacia’s shareholdings for purposes of distribution.

Another significant indicator that points us to the real nature of the complaint are Rodrigo’s repeated claims of illegal
and fraudulent transfers of Anastacia’s shares by Oscar to the prejudice of the other heirs of the decedent; he cited
these allegedly fraudulent acts as basis for his demand for the collation and distribution of Anastacia’s shares to the
heirs. These claims tell us unequivocally that the present controversy arose from the parties’ relationship as heirs of
Anastacia and not as shareholders of Zenith. Rodrigo, in filing the complaint, is enforcing his rights as a co-heir and
not as a stockholder of Zenith. The injury he seeks to remedy is one suffered by an heir (for the impairment of his
successional rights) and not by the corporation nor by Rodrigo as a shareholder on record.

More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his allegations of illegal
acquisition by Oscar is the distribution of Anastacia’s shareholdings without a prior settlement of her estate – an
objective that, by law and established jurisprudence, cannot be done. The RTC of Makati, acting as a special
commercial court, has no jurisdiction to settle, partition, and distribute the estate of a deceased. A relevant provision
– Section 2 of Rule 90 of the Revised Rules of Court – that contemplates properties of the decedent held by one of
the heirs declares:

Questions as to advancement made or alleged to have been made by the deceased to any heir may be heard
and determined by the court having jurisdiction of the estate proceedings; and the final order of the court
thereon shall be binding on the person raising the questions and on the heir. [Emphasis supplied.]
Worth noting are this Court’s statements in the case of Natcher v. Court of Appeals:32

Matters which involve settlement and distribution of the estate of the decedent fall within the exclusive province
of the probate court in the exercise of its limited jurisdiction.

xxxx

It is clear that trial courts trying an ordinary action cannot resolve to perform acts pertaining to a special
proceeding because it is subject to specific prescribed rules. [Emphasis supplied.]

That an accounting of the funds and assets of Zenith to determine the extent and value of Anastacia’s shareholdings
will be undertaken by a probate court and not by a special commercial court is completely consistent with the probate
court’s limited jurisdiction. It has the power to enforce an accounting as a necessary means to its authority to determine
the properties included in the inventory of the estate to be administered, divided up, and distributed. Beyond this, the
determination of title or ownership over the subject shares (whether belonging to Anastacia or Oscar) may be
conclusively settled by the probate court as a question of collation or advancement. We had occasion to recognize
the court’s authority to act on questions of title or ownership in a collation or advancement situation in Coca v.
Pangilinan33 where we ruled:

It should be clarified that whether a particular matter should be resolved by the Court of First Instance in the
exercise of its general jurisdiction or of its limited probate jurisdiction is in reality not a jurisdictional question.
In essence, it is a procedural question involving a mode of practice "which may be waived."

As a general rule, the question as to title to property should not be passed upon in the testate or intestate
proceeding. That question should be ventilated in a separate action. That general rule has qualifications or
exceptions justified by expediency and convenience.

Thus, the probate court may provisionally pass upon in an intestate or testate proceeding the question of
inclusion in, or exclusion from, the inventory of a piece of property without prejudice to its final determination
in a separate action.

Although generally, a probate court may not decide a question of title or ownership, yet if the interested parties
are all heirs, or the question is one of collation or advancement, or the parties consent to the assumption of
jurisdiction by the probate court and the rights of third parties are not impaired, the probate court is competent
to decide the question of ownership. [Citations omitted. Emphasis supplied.]

In sum, we hold that the nature of the present controversy is not one which may be classified as an intra-corporate
dispute and is beyond the jurisdiction of the special commercial court to resolve. In short, Rodrigo’s complaint also
fails the nature of the controversy test.

DERIVATIVE SUIT

Rodrigo’s bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on the RTC (as a special
commercial court) if he cannot comply with the requisites for the existence of a derivative suit. These requisites are:

a. the party bringing suit should be a shareholder during the time of the act or transaction complained of, the
number of shares not being material;

b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief, but the latter has failed or refused to heed his plea; and

c. the cause of action actually devolves on the corporation; the wrongdoing or harm having been or being
caused to the corporation and not to the particular stockholder bringing the suit.34

Based on these standards, we hold that the allegations of the present complaint do not amount to a derivative suit.
First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings originally belonging
to Anastacia; he only stands as a transferee-heir whose rights to the share are inchoate and unrecorded. With respect
to his own individually-held shareholdings, Rodrigo has not alleged any individual cause or basis as a shareholder on
record to proceed against Oscar.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must allege with some
particularity in his complaint that he has exhausted his remedies within the corporation by making a sufficient demand
upon the directors or other officers for appropriate relief with the expressed intent to sue if relief is denied.35 Paragraph
8 of the complaint hardly satisfies this requirement since what the rule contemplates is the exhaustion of
remedies within the corporate setting:

8. As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and exhausted all legal
means of resolving the dispute with the end view of amicably settling the case, but the dispute between them
ensued.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to Oscar’s acts. If
indeed he illegally and fraudulently transferred Anastacia’s shares in his own name, then the damage is not to the
corporation but to his co-heirs; the wrongful transfer did not affect the capital stock or the assets of Zenith. As already
mentioned, neither has Rodrigo alleged any particular cause or wrongdoing against the corporation that he can
champion in his capacity as a shareholder on record.36

In summary, whether as an individual or as a derivative suit, the RTC – sitting as special commercial court – has no
jurisdiction to hear Rodrigo’s complaint since what is involved is the determination and distribution of successional
rights to the shareholdings of Anastacia Reyes. Rodrigo’s proper remedy, under the circumstances, is to institute a
special proceeding for the settlement of the estate of the deceased Anastacia Reyes, a move that is not foreclosed
by the dismissal of his present complaint.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of Appeals dated May 26,
2004 in CA-G.R. SP No. 74970. The complaint before the Regional Trial Court, Branch 142, Makati, docketed as Civil
Case No. 00-1553, is ordered DISMISSED for lack of jurisdiction. SO ORDERED.

Nationality of Corporations
1. People vs. Quashsa

G.R. No. L-6055 June 12, 1953

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs. WILLIAM H. QUASHA, defendant-appellant.

REYES, J.:

William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance of Manila with the crime
of falsification of a public and commercial document in that, having been entrusted with the preparation and registration
of the article of incorporation of the Pacific Airways Corporation, a domestic corporation organized for the purpose of
engaging in business as a common carrier, he caused it to appear in said article of incorporation that one Arsenio
Baylon, a Filipino citizen, had subscribed to and was the owner of 60.005 per cent of the subscribed capital stock of
the corporation when in reality, as the accused well knew, such was not the case, the truth being that the owner of
the portion of the capital stock subscribed to by Baylon and the money paid thereon were American citizen whose
name did not appear in the article of incorporation, and that the purpose for making this false statement was to
circumvent the constitutional mandate that no corporation shall be authorize to operate as a public utility in the
Philippines unless 60 per cent of its capital stock is owned by Filipinos.

Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has appealed to this Court.

The essential facts are not in dispute. On November 4,1946, the Pacific Airways Corporation registered its articles of
incorporation with the Securities and Exchanged Commission. The article were prepared and the registration was
effected by the accused, who was in fact the organizer of the corporation. The article stated that the primary purpose
of the corporation was to carry on the business of a common carrier by air, land or water; that its capital stock was
P1,000,000, represented by 9,000 preferred and 100,000 common shares, each preferred share being of the par
value of p100 and entitled to 1/3 vote and each common share, of the par value of P1 and entitled to one vote; that
the amount capital stock actually subscribed was P200,000, and the names of the subscribers were Arsenio Baylon,
Eruin E. Shannahan, Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being a
Filipino and the other five all Americans; that Baylon's subscription was for 1,145 preferred shares, of the total value
of P114,500, and for 6,500 common shares, of the total par value of P6,500, while the aggregate subscriptions of the
American subscribers were for 200 preferred shares, of the total par value of P20,000, and 59,000 common shares,
of the total par value of P59,000; and that Baylon and the American subscribers had already paid 25 per cent of their
respective subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of
the corporation, Baylon nevertheless did not have the controlling vote because of the difference in voting power
between the preferred shares and the common shares. Still, with the capital structure as it was, the article of
incorporation were accepted for registration and a certificate of incorporation was issued by the Securities and
Exchange Commission.

There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed capital stock of the
corporation. But it is admitted that the money paid on his subscription did not belong to him but to the Americans
subscribers to the corporate stock. In explanation, the accused testified, without contradiction, that in the process of
organization Baylon was made a trustee for the American incorporators, and that the reason for making Baylon such
trustee was as follows:

Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135 preferred shares with a total
value of P1,135. Do you know how that came to be?

A. Yes.

The people who were desirous of forming the corporation, whose names are listed on page 7 of this certified copy
came to my house, Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and Anastasakas one evening. There was
considerable difficulty to get them all together at one time because they were pilots. They had difficulty in deciding
what their respective share holdings would be. Onstott had invested a certain amount of money in airplane surplus
property and they had obtained a considerable amount of money on those planes and as I recall they were desirous
of getting a corporation formed right away. And they wanted to have their respective shares holdings resolved at a
latter date. They stated that they could get together that they feel that they had no time to settle their respective share
holdings. We discussed the matter and finally it was decided that the best way to handle the things was not to put the
shares in the name of anyone of the interested parties and to have someone act as trustee for their respective shares
holdings. So we looked around for a trustee. And he said "There are a lot of people whom I trust." He said, "Is there
someone around whom we could get right away?" I said, "There is Arsenio. He was my boy during the liberation and
he cared for me when i was sick and i said i consider him my friend." I said. They all knew Arsenio. He is a very kind
man and that was what was done. That is how it came about.

Defendant is accused under article 172 paragraph 1, in connection with article 171, paragraph 4, of the Revised Penal
Code, which read:

ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister. — The penalty of prision
mayor and a fine not to exceed 5,000 pesos shall be imposed upon any public officer, employee, or notary
who, taking advantage of his official position, shall falsify a document by committing any of the following acts:

xxx xxx xxx

4. Making untruthful statements in a narration of facts.

ART. 172. Falsification by private individuals and use of falsified documents. — The penalty of prision
correccional in its medium and maximum period and a fine of not more than 5,000 pesos shall be imposed
upon:

xxx xxx xxx

 1. Any private individual who shall commit any of the falsifications enumerated in the next preceding article in
any public or official document or letter of exchange or any other kind of commercial document.

Commenting on the above provision, Justice Albert, in his well-known work on the Revised Penal Code ( new edition,
pp. 407-408), observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that the perversion of truth in the narration
of facts must be made with the wrongful intent of injuring a third person; and on the authority of U.S. vs. Lopez (15
Phil., 515), the same author further maintains that even if such wrongful intent is proven, still the untruthful statement
will not constitute the crime of falsification if there is no legal obligation on the part of the narrator to disclose the truth.
Wrongful intent to injure a third person and obligation on the part of the narrator to disclose the truth are thus essential
to a conviction for a crime of falsification under the above article of the Revised Penal Code.

Now, as we see it, the falsification imputed in the accused in the present case consists in not disclosing in the articles
of incorporation that Baylon was a mere trustee ( or dummy as the prosecution chooses to call him) of his American
co-incorporators, thus giving the impression that Baylon was the owner of the shares subscribed to by him which, as
above stated, amount to 60.005 per cent of the sub-scribed capital stock. This, in the opinion of the trial court, is a
malicious perversion of the truth made with the wrongful intent circumventing section 8, Article XIV of the Constitution,
which provides that " no franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporation or other entities organized under the law of the
Philippines, sixty per centum of the capital of which is owned by citizens of the Philippines . . . ." Plausible though it
may appear at first glance, this opinion loses validity once it is noted that it is predicated on the erroneous assumption
that the constitutional provision just quoted was meant to prohibit the mere formation of a public utility corporation
without 60 per cent of its capital being owned by the Filipinos, a mistaken belief which has induced the lower court to
that the accused was under obligation to disclose the whole truth about the nationality of the subscribed capital stock
of the corporation by revealing that Baylon was a mere trustee or dummy of his American co-incorporators, and that
in not making such disclosure defendant's intention was to circumvent the Constitution to the detriment of the public
interests. Contrary to the lower court's assumption, the Constitution does not prohibit the mere formation of a public
utility corporation without the required formation of Filipino capital. What it does prohibit is the granting of a franchise
or other form of authorization for the operation of a public utility to a corporation already in existence but without the
requisite proportion of Filipino capital. This is obvious from the context, for the constitutional provision in question
qualifies the terms " franchise", "certificate", or "any other form of authorization" with the phrase "for the operation of
a public utility," thereby making it clear that the franchise meant is not the "primary franchise" that invest a body of
men with corporate existence but the "secondary franchise" or the privilege to operate as a public utility after the
corporation has already come into being.

If the Constitution does not prohibit the mere formation of a public utility corporation with the alien capital, then how
can the accused be charged with having wrongfully intended to circumvent that fundamental law by not revealing in
the articles of incorporation that Baylon was a mere trustee of his American co-incorporation and that for that reason
the subscribed capital stock of the corporation was wholly American? For the mere formation of the corporation such
revelation was not essential, and the Corporation Law does not require it. Defendant was, therefore, under no
obligation to make it. In the absence of such obligation and of the allege wrongful intent, defendant cannot be legally
convicted of the crime with which he is charged.

It is urged, however, that the formation of the corporation with 60 per cent of its subscribed capital stock appearing in
the name of Baylon was an indispensable preparatory step to the subversion of the constitutional prohibition and the
laws implementing the policy expressed therein. This view is not correct. For a corporation to be entitled to operate a
public utility it is not necessary that it be organized with 60 per cent of its capital owned by Filipinos from the start. A
corporation formed with capital that is entirely alien may subsequently change the nationality of its capital through
transfer of shares to Filipino citizens. conversely, a corporation originally formed with Filipino capital may subsequently
change the national status of said capital through transfer of shares to foreigners. What need is there then for a
corporation that intends to operate a public utility to have, at the time of its formation, 60 per cent of its capital owned
by Filipinos alone? That condition may anytime be attained thru the necessary transfer of stocks. The moment for
determining whether a corporation is entitled to operate as a public utility is when it applies for a franchise, certificate,
or any other form of authorization for that purpose. And that can be done after the corporation has already come into
being and not while it is still being formed. And at that moment, the corporation must show that it has complied not
only with the requirement of the Constitution as to the nationality of its capital, but also with the requirements of the
Civil Aviation Law if it is a common carrier by air, the Revised Administrative Code if it is a common carrier by water,
and the Public Service Law if it is a common carrier by land or other kind of public service.
Equally untenable is the suggestion that defendant should at least be held guilty of an "impossible crime" under article
59 of the Revised Penal Code. It not being possible to suppose that defendant had intended to commit a crime for the
simple reason that the alleged constitutional prohibition which he is charged for having tried to circumvent does not
exist, conviction under that article is out of the question.

The foregoing consideration can not but lead to the conclusion that the defendant can not be held guilty of the crime
charged. The majority of the court, however, are also of the opinion that, even supposing that the act imputed to the
defendant constituted falsification at the time it was perpetrated, still with the approval of the Party Amendment to the
Constitution in March, 1947, which placed Americans on the same footing as Filipino citizens with respect to the right
to operate public utilities in the Philippines, thus doing away with the prohibition in section 8, Article XIV of the
Constitution in so far as American citizens are concerned, the said act has ceased to be an offense within the meaning
of the law, so that defendant can no longer be held criminally liable therefor.

In view of the foregoing, the judgment appealed from is reversed and the defendant William H. Quasha acquitted, with
costs de oficio.

2. Gamboa vs. Teves

G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND
COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION
COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC
CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,
CHAIR FE BARIN OF THE SECURITIES EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the sale of shares of
stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the
Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone Company
(PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise and the right
to engage in telecommunications business. In 1969, General Telephone and Electronics Corporation (GTE), an
American company and a major PLDT stockholder, sold 26 percent of the outstanding common shares of PLDT to
PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons, including Roland Gapud and Jose
Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of
stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government (PCGG). The
111,415 PTIC shares, which represent about 46.125 percent of the outstanding capital stock of PTIC, were later
declared by this Court to be owned by the Republic of the Philippines.2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54 percent of
the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of the
Philippine Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent of the outstanding
capital stock of PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently, the public bidding
was reset to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of ₱25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the
111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do so by the 1 February
2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2 March 2007
to buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional
Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of
PTIC, with the Philippine Government for the price of ₱25,217,556,000 or US$510,580,189. The sale was completed
on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC shares is
actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common shares of PLDT. With
the sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing
the common shareholdings of foreigners in PLDT to about 81.47 percent. This violates Section 11, Article XII of the
1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and
PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment holdings. PTIC
held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding common shares. PHI, on the
other hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125 percent of the
outstanding capital stock of PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and Luis
Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC
shares were reconveyed to the Republic of the Philippines in accordance with this Court’s decision 4 which became
final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the outstanding
common shares of stock of PLDT, and designated the Inter-Agency Privatization Council (IPC), composed of the
Department of Finance and the PCGG, as the disposing entity. An invitation to bid was published in seven different
newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid conference was held, and the original
deadline for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The extension was published in
nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder with a bid of
₱25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares, of the bidding results and
gave First Pacific until 1 February 2007 to exercise its right of first refusal in accordance with PTIC’s Articles of
Incorporation. First Pacific announced its intention to match Parallax’s bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a public hearing
on the particulars of the then impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were
among those who attended the public hearing. The HR Committee Report No. 2270 concluded that: (a) the auction of
the government’s 111,415 PTIC shares bore due diligence, transparency and conformity with existing legal
procedures; and (b) First Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting in First
Pacific’s 100% ownership of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public
utility since PTIC holds only 13.847 percent of the total outstanding common shares of PLDT.5 On 28 February 2007,
First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for the sale of
111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares
was already owned by First Pacific and its affiliates); (b) Parallax offered the highest bid amounting to
₱25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its shareholders granted in PTIC’s
Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the highest bid
offered for PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH
paid IPC ₱25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares. Respondent
Pangilinan denies the other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration
of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares
would result in an increase in First Pacific’s common shareholdings in PLDT from 30.7 percent to 37 percent, and this,
combined with Japanese NTT DoCoMo’s common shareholdings in PLDT, would result to a total foreign common
shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0 percent of its
common – or voting- stockholdings, x x x. Hence, the consummation of the sale will put the two largest foreign
investors in PLDT – First Pacific and Japan’s NTT DoCoMo, which is the world’s largest wireless telecommunications
firm, owning 51.56 percent of PLDT common equity. x x x With the completion of the sale, data culled from the official
website of the New York Stock Exchange (www.nyse.com) showed that those foreign entities, which own at least five
percent of common equity, will collectively own 81.47 percent of PLDT’s common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT submitted to the New
York Stock Exchange for the period 2003-2005, revealed that First Pacific and several other foreign entities breached
the constitutional limit of 40 percent ownership as early as 2003. x x x"7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of 111,415 PTIC
shares to First Pacific violates the constitutional limit on foreign ownership of a public utility; (2) whether public
respondents committed grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First Pacific; and
(3) whether the sale of common shares to foreigners in excess of 40 percent of the entire subscribed common capital
stock violates the constitutional limit on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and Admit Attached
Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the motion and noted the Petition-in-
Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin and/or nullify the
sale by respondents of the 111,415 PTIC shares to First Pacific or assignee." Petitioners-in-intervention claim that, as
PLDT subscribers, they have a "stake in the outcome of the controversy x x x where the Philippine Government is
completing the sale of government owned assets in [PLDT], unquestionably a public utility, in violation of the nationality
restrictions of the Philippine Constitution."

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which indisputably demand a
thorough examination of the evidence of the parties, are generally beyond this Court’s jurisdiction. Adhering to this
well-settled principle, the Court shall confine the resolution of the instant controversy solely on the threshold and
purely legal issue of whether the term "capital" in Section 11, Article XII of the Constitution refers to the total common
shares only or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of
PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only the petition for
prohibition is within the original jurisdiction of this court, which however is not exclusive but is concurrent with the
Regional Trial Court and the Court of Appeals. The actions for declaratory relief, 10 injunction, and annulment of sale
are not embraced within the original jurisdiction of the Supreme Court. On this ground alone, the petition could have
been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall nevertheless refrain from
discussing the grounds in support of the petition for prohibition since on 28 February 2007, the questioned sale was
consummated when MPAH paid IPC ₱25,217,556,000 and the government delivered the certificates for the 111,415
PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in Section 11, Article XII of
the Constitution has far-reaching implications to the national economy, the Court treats the petition for declaratory
relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief as one for
mandamus considering the grave injustice that would result in the interpretation of a banking law. In that case, which
involved the crime of rape committed by a foreign tourist against a Filipino minor and the execution of the final
judgment in the civil case for damages on the tourist’s dollar deposit with a local bank, the Court declared Section 113
of Central Bank Circular No. 960, exempting foreign currency deposits from attachment, garnishment or any other
order or process of any court, inapplicable due to the peculiar circumstances of the case. The Court held that "injustice
would result especially to a citizen aggrieved by a foreign guest like accused x x x" that would "negate Article 10 of
the Civil Code which provides that ‘in case of doubt in the interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail.’" The Court therefore required respondents Central Bank of the
Philippines, the local bank, and the accused to comply with the writ of execution issued in the civil case for damages
and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the procedural infirmity of
the petition for declaratory relief and treated the same as one for mandamus. In Alliance, the issue was whether the
government unlawfully excluded petitioners, who were government employees, from the enjoyment of rights to which
they were entitled under the law. Specifically, the question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled corporations included among the four
‘employers’ under Presidential Decree No. 851 which are required to pay their employees x x x a thirteenth (13th)
month pay x x x ?" The Constitutional principle involved therein affected all government employees, clearly justifying
a relaxation of the technical rules of procedure, and certainly requiring the interpretation of the assailed presidential
decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if the issue
involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However, exceptions to this
rule have been recognized. Thus, where the petition has far-reaching implications and raises questions that should
be resolved, it may be treated as one for mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section 11, Article XII of the
Constitution. He prays that this Court declare that the term "capital" refers to common shares only, and that such
shares constitute "the sole basis in determining foreign equity in a public utility." Petitioner further asks this Court to
declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-reaching implications to the
national economy. In fact, a resolution of this issue will determine whether Filipinos are masters, or second class
citizens, in their own country. What is at stake here is whether Filipinos or foreigners will have effective control of
the national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation, and
to future generations of Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article XII of the Constitution
in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case involved the same public utility
(PLDT) and substantially the same private respondents. Despite the importance and novelty of the constitutional issue
raised therein and despite the fact that the petition involved a purely legal question, the Court declined to resolve the
case on the merits, and instead denied the same for disregarding the hierarchy of courts.17There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Court’s Decision of 21 February 2003 via a petition for review
under Rule 45. The Court’s Resolution, denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle this purely legal issuewhich
is of transcendental importance to the national economy and a fundamental requirement to a faithful adherence to our
Constitution. The Court must forthwith seize such opportunity, not only for the benefit of the litigants, but more
significantly for the benefit of the entire Filipino people, to ensure, in the words of the Constitution, "a self-reliant and
independent national economy effectively controlled by Filipinos."18 Besides, in the light of vague and confusing
positions taken by government agencies on this purely legal issue, present and future foreign investors in this country
deserve, as a matter of basic fairness, a categorical ruling from this Court on the extent of their participation in the
capital of public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained unresolved for over
75 years since the 1935 Constitution. There is no reason for this Court to evade this ever recurring fundamental issue
and delay again defining the term "capital," which appears not only in Section 11, Article XII of the Constitution, but
also in Section 2, Article XII on co-production and joint venture agreements for the development of our natural
resources,19 in Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of educational institutions,22 and
in Section 11(2), Article XVI on the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the subject sale,
which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution. If the
sale indeed violates the Constitution, then there is a possibility that PLDT’s franchise could be revoked, a dire
consequence directly affecting petitioner’s interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of transcendental importance to the
public. The fundamental and threshold legal issue in this case, involving the national economy and the economic
welfare of the Filipino people, far outweighs any perceived impediment in the legal personality of the petitioner to bring
this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of transcendental importance
to the public, thus:

In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of mandamus is
to obtain the enforcement of a public duty, the people are regarded as the real parties in interest; and because it is
sufficient that petitioner is a citizen and as such is interested in the execution of the laws, he need not show that he
has any legal or special interest in the result of the action. In the aforesaid case, the petitioners sought to enforce their
right to be informed on matters of public concern, a right then recognized in Section 6, Article IV of the 1973
Constitution, in connection with the rule that laws in order to be valid and enforceable must be published in the Official
Gazette or otherwise effectively promulgated. In ruling for the petitioners’ legal standing, the Court declared that the
right they sought to be enforced ‘is a public right recognized by no less than the fundamental law of the land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a mandamus proceeding
involves the assertion of a public right, the requirement of personal interest is satisfied by the mere fact that petitioner
is a citizen and, therefore, part of the general ‘public’ which possesses the right.’

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved under the
questioned contract for the development, management and operation of the Manila International Container Terminal,
‘public interest [was] definitely involved considering the important role [of the subject contract] . . . in the economic
development of the country and the magnitude of the financial consideration involved.’ We concluded that, as a
consequence, the disclosure provision in the Constitution would constitute sufficient authority for upholding the
petitioner’s standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public importance, the
petitioner has the requisite locus standi.
Definition of the Term "Capital" in Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of public
utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate,
or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress
when the common good so requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the executive and managing officers of such corporation or association
must be citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of the capital of which is owned by such citizens, nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the National Assembly when the public interest so requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935 Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or other entities organized under the laws of the
Philippines sixty per centum of the capital of which is owned by citizens of the Philippines,nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years. No franchise or right shall
be granted to any individual, firm, or corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us that the
Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism which gripped the
1935 Constitutional Convention.25 The 1987 Constitution "provides for the Filipinization of public utilities by requiring
that any form of authorization for the operation of public utilities should be granted only to ‘citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose
capital is owned by such citizens.’ The provision is [an express] recognition of the sensitive and vital position of public
utilities both in the national economy and for national security."26 The evident purpose of the citizenship requirement
is to prevent aliens from assuming control of public utilities, which may be inimical to the national interest. 27 This
specific provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding economic
goal of the 1987 Constitution: to "conserve and develop our patrimony"28 and ensure "a self-reliant and independent
national economy effectively controlled by Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality
requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to be granted authority
to operate a public utility, at least 60 percent of its "capital" must be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section 11, Article XII of
the Constitution refer to common shares or to the total outstanding capital stock (combined total of common and non-
voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to common shares
because such shares are entitled to vote and it is through voting that control over a corporation is exercised. Petitioner
posits that the term "capital" in Section 11, Article XII of the Constitution refers to "the ownership of common capital
stock subscribed and outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and
elect members of the board of directors." It is undisputed that PLDT’s non-voting preferred shares are held mostly by
Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by then President
Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to
pay for the investment cost of installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s definition of the term
"capital."33 Petitioners-in-intervention allege that "the approximate foreign ownership of common capital stock of PLDT
x x x already amounts to at least 63.54% of the total outstanding common stock," which means that foreigners exercise
significant control over PLDT, patently violating the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11, Article XII of the
Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do not dispute that more than
40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the procedural infirmities
of the petition and the supposed violation of the due process rights of the "affected foreign common shareholders."
Respondent Nazareno does not deny petitioner’s allegation of foreigners’ dominating the common shareholdings of
PLDT. Nazareno stressed mainly that the petition "seeks to divest foreign common shareholders purportedly
exceeding 40% of the total common shareholdings in PLDT of their ownership over their shares." Thus, "the foreign
natural and juridical PLDT shareholders must be impleaded in this suit so that they can be heard." 34 Essentially,
Nazareno invokes denial of due process on behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among the factual assertions
that need to be established to counter petitioner’s allegations is the uniform interpretation by government agencies
(such as the SEC), institutions and corporations (such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and common shares in "controlling interest" in view of
testing compliance with the 40% constitutional limitation on foreign ownership in public utilities."35

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11, Article XII of the
Constitution. Neither does he refute petitioner’s claim of foreigners holding more than 40 percent of PLDT’s common
shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition and the alleged violation of the
due process rights of foreigners. Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this
Court’s jurisdiction over the petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4) non-availability
of declaratory relief; and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges that the issue
should be whether "owners of shares in PLDT as well as owners of shares in companies holding shares in PLDT may
be required to relinquish their shares in PLDT and in those companies without any law requiring them to surrender
their shares and also without notice and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution] imposes no nationality
requirement on the shareholders of the utility company as a condition for keeping their shares in the utility company."
According to him, "Section 11 does not authorize taking one person’s property (the shareholder’s stock in the utility
company) on the basis of another party’s alleged failure to satisfy a requirement that is a condition only for that other
party’s retention of another piece of property (the utility company being at least 60% Filipino-owned to keep its
franchise)."36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term "capital." In its
Memorandum37 dated 24 September 2007, the OSG also limits its discussion on the supposed procedural defects of
the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties, and lack of basis for injunction.
The OSG does not present any definition or interpretation of the term "capital" in Section 11, Article XII of the
Constitution. The OSG contends that "the petition actually partakes of a collateral attack on PLDT’s franchise as a
public utility," which in effect requires a "full-blown trial where all the parties in interest are given their day in court."38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock Exchange
(PSE), does not also define the term "capital" and seeks the dismissal of the petition on the following grounds: (1)
failure to state a cause of action against Lim; (2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs prayed for in the petition would
adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of record of
PLDT, contended that the term "capital" in the 1987 Constitution refers to shares entitled to vote or the common
shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares, considering that it is through voting that control is being
exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on fully nationalized and
partially nationalized activities is for Filipino nationals to be always in control of the corporation undertaking said
activities. Otherwise, if the Trial Court’s ruling upholding respondents’ arguments were to be given credence, it would
be possible for the ownership structure of a public utility corporation to be divided into one percent (1%) common
stocks and ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling adopting respondents’
arguments, the common shares can be owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial ownership and the
controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e., common shares. Furthermore, ownership of record of
shares will not suffice but it must be shown that the legal and beneficial ownership rests in the hands of Filipino
citizens. Consequently, in the case of petitioner PLDT, since it is already admitted that the voting interests of foreigners
which would gain entry to petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions
is equivalent to 82.99%, and the nominee arrangements between the foreign principals and the Filipino owners is
likewise admitted, there is, therefore, a violation of Section 11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to support the
proposition that the meaning of the word "capital" as used in Section 11, Article XII of the Constitution allegedly refers
to the sum total of the shares subscribed and paid-in by the shareholder and it allegedly is immaterial how the stock
is classified, whether as common or preferred, cannot stand in the face of a clear legislative policy as stated in the
FIA which took effect in 1991 or way after said opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the law and an opinion rendered by an administrative
agency, the law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail over the clear
intent of the framers of the Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best merely advisory for it
is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano, Helen Y.
Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno,
Albert F. Del Rosario, and Orlando B. Vea, argued that the term "capital" in Section 11, Article XII of the Constitution
includes preferred shares since the Constitution does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s "capital," without distinction as to
classes of shares. x x x

In this connection, the Corporation Code – which was already in force at the time the present (1987) Constitution was
drafted – defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in this Code, means
the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred shares, nor exclude
either class of shares, in determining the outstanding capital stock (the "capital") of a corporation. Consequently,
petitioner’s suggestion to reckon PLDT’s foreign equity only on the basis of PLDT’s outstanding common shares is
without legal basis. The language of the Constitution should be understood in the sense it has in common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary, there is nothing
in the Record of the Constitutional Commission (Vol. III) – which petitioner misleadingly cited in the Petition x x x –
which supports petitioner’s view that only common shares should form the basis for computing a public utility’s foreign
equity.

xxxx

18. In addition, the SEC – the government agency primarily responsible for implementing the Corporation Code, and
which also has the responsibility of ensuring compliance with the Constitution’s foreign equity restrictions as regards
nationalized activities x x x – has categorically ruled that both common and preferred shares are properly considered
in determining outstanding capital stock and the nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11, Article XII of the Constitution
refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common
shares,41 and not to the total outstanding capital stock comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all
of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in
the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five (₱5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be
equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of
such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act
as provided in this Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the
corporation.43 This is exercised through his vote in the election of directors because it is the board of directors that
controls or manages the corporation.44 In the absence of provisions in the articles of incorporation denying voting
rights to preferred shares, preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and
on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in
the same manner as bondholders.45 In fact, under the Corporation Code only preferred or redeemable shares can be
deprived of the right to vote.46 Common shares cannot be deprived of the right to vote in any corporate meeting, and
any provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the election of directors, then the term "capital"
shall include such preferred shares because the right to participate in the control or management of the corporation
is exercised through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino
citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional
Commission, "capital" refers to the voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-
40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement,
is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation"?
Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who
provided us a draft. The phrase that is contained here which we adopted from the UP draft is "60 percent of voting
stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity
invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling
interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations
at least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have
a situation where the corporation is controlled by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that
according to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the corporation. Reinforcing
this interpretation of the term "capital," as referring to controlling interest or shares entitled to vote, is the definition of
a "Philippine national" in the Foreign Investments Act of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association
wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at
least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national." (Emphasis supplied)

In explaining the definition of a "Philippine national," the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned
by the citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty
percent [60%] of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or
a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that
where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC]
registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent [60%] of the members
of the Board of Directors of each of both corporation must be citizens of the Philippines, in order that the corporation
shall be considered a Philippine national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough
to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine
nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]."

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the Philippines or to corporations
or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments." Thus, in numerous laws Congress has reserved certain areas
of investments to Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by Filipino
citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No.
6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act
of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521. Hence, the term "capital" in Section 11, Article XII of the Constitution is also used in the
same context in numerous laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both common and non-
votingpreferred shares, grossly contravenes the intent and letter of the Constitution that the "State shall develop a
self-reliant and independent national economy effectively controlled by Filipinos." A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us assume that a corporation
has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with
both classes of share having a par value of one peso (₱1.00) per share. Under the broad definition of the term "capital,"
such corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of directors,
even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control
over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in
the election of directors and hence, have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. It also renders illusory the State policy of an independent national economy effectively
controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. PLDT’s Articles
of Incorporation expressly state that "the holders of Serial Preferred Stock shall not be entitled to vote at any meeting
of the stockholders for the election of directors or for any other purpose or otherwise participate in any action taken
by the corporation or its stockholders, or to receive notice of any meeting of stockholders."51

On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors.
PLDT’s Articles of Incorporation52 state that "each holder of Common Capital Stock shall have one vote in respect of
each share of such stock held by him on all matters voted upon by the stockholders, and the holders of Common
Capital Stock shall have the exclusive right to vote for the election of directors and for all other purposes."53

In short, only holders of common shares can vote in the election of directors, meaning only common shareholders
exercise control over PLDT. Conversely, holders of preferred shares, who have no voting rights in the election of
directors, do not have any control over PLDT. In fact, under PLDT’s Articles of Incorporation, holders of common
shares have voting rights for all purposes, while holders of preferred shares have no voting right for any purpose
whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of PLDT.
In fact, based on PLDT’s 2010 General Information Sheet (GIS),54 which is a document required to be submitted
annually to the Securities and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners hold 64.27% of the total number
of PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates
to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the
allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the
Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per share the
SIP58preferred shares earn a pittance in dividends compared to the common shares. PLDT declared dividends for the
common shares at ₱70.00 per share, while the declared dividends for the preferred shares amounted to a measly
₱1.00 per share.59 So the preferred shares not only cannot vote in the election of directors, they also have very little
and obviously negligible dividend earning capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is ₱5.00 per share,
whereas the par value of preferred shares is ₱10.00 per share. In other words, preferred shares have twice the par
value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover,
99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred
shares.61 Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred
shares but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control
and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is constitutionally required for the State’s grant of authority to operate a
public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn
only 1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends, of
PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that "[n]o franchise,
certificate, or any other form of authorization for the operation of a public utility shall be granted except to x x x
corporations x x x organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens x x x."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises the sole right
to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s
common shares, constituting a minority of the voting stock, and thus do not exercise control over PLDT; (3) preferred
shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that
common shares earn;63 (5) preferred shares have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership
and control of a public utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current stock market value of
₱2,328.00 per share,64 while PLDT preferred shares with a par value of ₱10.00 per share have a current stock market
value ranging from only ₱10.92 to ₱11.06 per share,65 is a glaring confirmation by the market that control and
beneficial ownership of PLDT rest with the common shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to include both voting and non-
voting shares will result in the abject surrender of our telecommunications industry to foreigners, amounting to a clear
abdication of the State’s constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving certain areas of investment to Filipino citizens, such as
the exploitation of natural resources as well as the ownership of land, educational institutions and advertising
businesses. The Court should never open to foreign control what the Constitution has expressly reserved to Filipinos
for that would be a betrayal of the Constitution and of the national interest. The Court must perform its solemn duty to
defend and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, "a self-reliant
and independent national economy effectively controlled by Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the development of natural resources and ownership of land,
educational institutions and advertising business, is self-executing. There is no need for legislation to implement these
self-executing provisions of the Constitution. The rationale why these constitutional provisions are self-executing was
explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a constitutional mandate, the
presumption now is that all provisions of the constitution are self-executing. If the constitutional provisions are treated
as requiring legislation instead of self-executing, the legislature would have the power to ignore and practically nullify
the mandate of the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always
been, that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-executing. . . . Unless
the contrary is clearly intended, the provisions of the Constitution should be considered self-executing, as a contrary
rule would give the legislature discretion to determine when, or whether, they shall be effective. These provisions
would be subordinated to the will of the lawmaking body, which could make them entirely meaningless by simply
refusing to pass the needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later Chief Justice,
agreed that constitutional provisions are presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring future legislation
for their enforcement. The reason is not difficult to discern. For if they are not treated as self-executing, the mandate
of the fundamental law ratified by the sovereign people can be easily ignored and nullified by Congress. Suffused with
wisdom of the ages is the unyielding rule that legislative actions may give breath to constitutional rights but
congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and seizures, the
rights of a person under custodial investigation, the rights of an accused, and the privilege against self-incrimination.
It is recognized that legislation is unnecessary to enable courts to effectuate constitutional provisions guaranteeing
the fundamental rights of life, liberty and the protection of property. The same treatment is accorded to constitutional
provisions forbidding the taking or damaging of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied directly the provisions
of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to an alien, and
as both the citizen and the alien have violated the law, none of them should have a recourse against the other, and it
should only be the State that should be allowed to intervene and determine what is to be done with the property
subject of the violation. We have said that what the State should do or could do in such matters is a matter of public
policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996,
June 27, 1956.) While the legislature has not definitely decided what policy should be followed in cases of violations
against the constitutional prohibition, courts of justice cannot go beyond by declaring the disposition to be null and
void as violative of the Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935 Constitution,
or over the last 75 years, not one of the constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the "capital" of which is owned by Filipinos, was enforceable. In short, the framers
of the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos specific areas of
investment, like the operation by corporations of public utilities, the exploitation by corporations of mineral resources,
the ownership by corporations of real estate, and the ownership of educational institutions. All the legislatures that
convened since 1935 also miserably failed to enact legislations to implement these vital constitutional provisions that
determine who will effectively control the national economy, Filipinos or foreigners. This Court cannot allow such an
absurd interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under its regulatory functions,
the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully neglects to perform the same.
Under its adjudicative or quasi-judicial functions, the SEC can be also be compelled by mandamus to hear and decide
a possible violation of any law it administers or enforces when it is mandated by law to investigate such
violation.1awphi1

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or disapprove the Articles
of Incorporation of any corporation where "the required percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by existing laws or the Constitution." Thus, the SEC
is the government agency tasked with the statutory duty to enforce the nationality requirement prescribed in Section
11, Article XII of the Constitution on the ownership of public utilities. This Court, in a petition for declaratory relief that
is treated as a petition for mandamus as in the present case, can direct the SEC to perform its statutory duty under
the law, a duty that the SEC has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the "power and function" to "suspend
or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law." The SEC is mandated under Section 5(d) of the same Code
with the "power and function" to "investigate x x x the activities of persons to ensure compliance" with the laws and
regulations that SEC administers or enforces. The GIS that all corporations are required to submit to SEC annually
should put the SEC on guard against violations of the nationality requirement prescribed in the Constitution and
existing laws. This Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a possible violation of Section 11, Article XII of the Constitution
in view of the ownership structure of PLDT’s voting shares, as admitted by respondents and as stated in PLDT’s 2010
GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the
term "capital" in determining the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law. SO ORDERED.

3. Gamboa vs. Teves

G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA, AND
COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR
OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine Stock Exchange's
(PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the
Securities and Exchange Commission (SEC)4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe SEC, 5 assailing the
28 June 2011 Decision. However, it subsequently filed a Consolidated Comment on behalf of the State,6declaring
expressly that it agrees with the Court's definition of the term "capital" in Section 11, Article XII of the Constitution.
During the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's 28 June 2011
Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify treatment of petition for declaratory relief as one for
mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in Section 11, Article
XII of the Constitution has far-reaching implications to the national economy. In fact, a resolution of this issue will
determine whether Filipinos are masters, or second-class citizens, in their own country. What is at stake here is
whether Filipinos or foreigners will have effective control of the Philippine national economy. Indeed, if ever there is
a legal issue that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the
threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the interpretation of the term
"capital" in Section 11, Article XII of the Constitution undoubtedly demand an immediate adjudication of this
issue. Simply put, the far-reaching implications of this issue justify the treatment of the petition as one for
mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to resolve the case
although the petition for declaratory relief could be outrightly dismissed for being procedurally defective. There,
appellant admittedly had already committed a breach of the Public Service Act in relation to the Anti-Dummy Law
since it had been employing non- American aliens long before the decision in a prior similar case. However, the main
issue in Luzon Stevedoring was of transcendental importance, involving the exercise or enjoyment of rights,
franchises, privileges, properties and businesses which only Filipinos and qualified corporations could exercise or
enjoy under the Constitution and the statutes. Moreover, the same issue could be raised by appellant in an appropriate
action. Thus, in Luzon Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of
all concerned, despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the petition and the
pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently, in the interest of substantial justice
and faithful adherence to the Constitution, we opted to resolve this case for the guidance of the public and all
concerned parties.

II.
No change of any long-standing rule; thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled and defined
to refer to the total outstanding shares of stock, whether voting or non-voting. In fact, movants claim that the SEC,
which is the administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in
the Constitution and various statutes, has consistently adopted this particular definition in its numerous opinions.
Movants point out that with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition"9 of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term "capital" found
in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent
interpreting the term "capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and
utterly baseless to claim that the Court in defining the term "capital" in its 28 June 2011 Decision modified, reversed,
or set aside the purported long-standing definition of the term "capital," which supposedly refers to the total outstanding
shares of stock, whether voting or non-voting. To repeat, until the present case there has never been a Court ruling
categorically defining the term "capital" found in the various economic provisions of the 1935, 1973 and 1987
Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term "capital" as
referring to both voting and non-voting shares (combined total of common and preferred shares) are, in the first place,
conflicting and inconsistent. There is no basis whatsoever to the claim that the SEC and the DOJ have consistently
and uniformly adopted a definition of the term "capital" contrary to the definition that this Court adopted in its 28 June
2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section 9, Article XIV of
the 1973 Constitution was raised, that is, whether the term "capital" includes "both preferred and common stocks."
The issue was raised in relation to a stock-swap transaction between a Filipino and a Japanese corporation, both
stockholders of a domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P.
Mendoza ruled that the resulting ownership structure of the corporation would be unconstitutional because 60% of the
voting stock would be owned by Japanese while Filipinos would own only 40% of the voting stock, although when the
non-voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock. This ownership
structure is remarkably similar to the current ownership structure of PLDT. Minister Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and preferred) while the
Japanese investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word "capital," which is construed
"to include both preferred and common shares" and "that where the law does not distinguish, the courts shall not
distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may not be
constitutionally upheld. While it may be ordinary corporate practice to classify corporate shares into common voting
shares and preferred non-voting shares, any arrangement which attempts to defeat the constitutional purpose should
be eschewed. Thus, the resultant equity arrangement which would place ownership of 60%11 of the common (voting)
shares in the Japanese group, while retaining 60% of the total percentage of common and preferred shares in Filipino
hands would amount to circumvention of the principle of control by Philippine stockholders that is implicit in the 60%
Philippine nationality requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article XIV of the 1973
Constitution includes "both preferred and common stocks" treated as the same class of shares regardless of
differences in voting rights and privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor
of Filipino citizens in the Constitution is not complied with unless the corporation "satisfies the criterion of beneficial
ownership" and that in applying the same "the primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San
Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control Test, that is, using only the
voting stock to determine whether a corporation is a Philippine national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national because: (1) sixty
percent (60%) of its outstanding capital stock entitled to vote is owned by a Philippine national, the Trustee; and (2)
at least sixty percent (60%) of the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control
Test, MLRC’s investment in 60% of BFDC’s outstanding capital stock entitled to vote shall be deemed as of Philippine
nationality, thereby qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering that: (1) sixty
percent (60%) of their respective outstanding capital stock entitled to vote is owned by a Philippine national (i.e., by
the Trustee, in the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their respective board
of directors are Filipino citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40 ownership
requirement in favor of Filipino citizens mandated by the Constitution for certain economic activities. At the same time,
these opinions highlight the conflicting, contradictory, and inconsistent positions taken by the DOJ and the SEC on
the definition of the term "capital" found in the economic provisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations because only
the SEC en banc can adopt rules and regulations. As expressly provided in Section 4.6 of the Securities Regulation
Code,12 the SEC cannot delegate to any of its individual Commissioner or staff the power to adopt any rule or
regulation. Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and not any of its legal
officers, that is empowered to issue opinions and approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the
Commission, an individual Commissioner or staff member of the Commission except its review or appellate authority
and its power to adopt, alter and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party any action of any
department or office, individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and shall have
the powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment
Houses Law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have,
among others, the following powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and
supervise compliance with such rules, regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of
SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue
opinions" that have the force and effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc from
delegating to any individual Commissioner or staff the power to adopt rules or regulations. In short, any opinion of
individual Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual commissioners
or legal staff, is empowered to issue opinions which have the same binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
That’s correct, Your Honor.
JUSTICE CARPIO:
Can the Commission En Banc delegate this function to an SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General Counsel.
JUSTICE CARPIO:
It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner or an
individual employee of the Commission?
COMMISSIONER GAITE:
 Novel opinions that [have] to be decided by the En Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the power to adopt or amend rules and regulations,
correct?
COMMISSIONER GAITE:
That’s correct, Your Honor.
JUSTICE CARPIO:
So, you combine the two (2), the SEC officer, if delegated that power, can issue an opinion but that
opinion does not constitute a rule or regulation, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned they are not rules and regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply only to that particular situation and will not constitute
a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf
of the SEC, has adopted even the Grandfather Rule in determining compliance with the 60-40 ownership requirement
in favor of Filipino citizens mandated by the Constitution for certain economic activities. This prevailing SEC ruling,
which the SEC correctly adopted to thwart any circumvention of the required Filipino "ownership and control," is laid
down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et
al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right
through the legal fiction of corporate ownership and control. But the constitutional provision, as interpreted and
practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the
Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by
ascertaining if 60% of the investing corporation’s outstanding capital stock is owned by "Filipino citizens", or as
interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent by
another investing corporation, the same process must be observed. One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of investing corporations have been established, the very essence
of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In one of the discussions
on what is now Article XII of the present Constitution, the framers made the following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-
40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base the equity requirement,
is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation’?
Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who
provided us a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of voting
stock.’
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in favor of
Filipino citizens in the Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation
is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which respondents
relied upon, is merely preliminary and an opinion only of such officers. To repeat, any such opinion does not constitute
an SEC rule or regulation. In fact, many of these opinions contain a disclaimer which expressly states: "x x x the
foregoing opinion is based solely on facts disclosed in your query and relevant only to the particular issue raised
therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of
similar or dissimilar circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute binding
precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither conclusive nor
controlling and thus, do not bind the Court. It is hornbook doctrine that any interpretation of the law that administrative
or quasi-judicial agencies make is only preliminary, never conclusive on the Court. The power to make a final
interpretation of the law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this
Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications Commission v.
Court of Appeals17 and Philippine Long Distance Telephone Company v. National Telecommunications
Commission18 in arguing that the Court has already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of
Appeals20 and Philippine Long Distance Telephone Company v. National Telecommunications Commission,21 the
Court did not define the term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact, these two
cases never mentioned, discussed or cited Section 11, Article XII of the Constitution or any of its economic
provisions, and thus cannot serve as precedent in the interpretation of Section 11, Article XII of the Constitution. These
two cases dealt solely with the determination of the correct regulatory fees under Section 40(e) and (f) of the Public
Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other public services
and/or in the regulation or fixing of their rates, twenty centavos for each one hundred pesos or fraction thereof, of
the capital stock subscribed or paid, or if no shares have been issued, of the capital invested, or of the property and
equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction thereof, of the
increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid," "capital stock" and
"capital" does not pertain to, and cannot control, the definition of the term "capital" as used in Section 11, Article XII
of the Constitution, or any of the economic provisions of the Constitution where the term "capital" is found. The
definition of the term "capital" found in the Constitution must not be taken out of context. A careful reading of these
two cases reveals that the terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely
to determine the basis for computing the supervision and regulation fees under Section 40(e) and (f) of the Public
Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the ideals that the
Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane society, and
establish a Government that shall embody our ideals and aspirations, promote the common good, conserve and
develop our patrimony, and secure to ourselves and our posterity, the blessings of independence and democracy
under the rule of law and a regime of truth, justice, freedom, love, equality, and peace, do ordain and promulgate this
Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the development
of a national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national
interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of
whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation and operation of enterprises
whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give
preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in
accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments." Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the "capital" of
which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A.
No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium
Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No.
10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate,
or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress
when the common good so requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to
their proportionate share in its capital, and all the executive and managing officers of such corporation or association
must be citizens of the Philippines. (Emphasis supplied)
This provision, which mandates the Filipinization of public utilities, requires that any form of authorization for the
operation of public utilities shall be granted only to "citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens." "The
provision is [an express] recognition of the sensitive and vital position of public utilities both in the national economy
and for national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2)
corporations or associations at least 60 percent of whose "capital" is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public utility. In the case of corporations or associations,
at least 60 percent of their "capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII
of the 1987 Constitution, to own and operate a public utility a corporation’s capital must at least be 60 percent owned
by Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted Republic Act
No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which defined a "Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association
wholly owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at
least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national." (Boldfacing, italicization and
underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a domestic
corporation at least "60% of the capital stock outstanding and entitled to vote" is owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor
statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,25 which was issued by then President
Corazon C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held
by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national.
(Boldfacing, italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a ‘Philippine
national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that
such business or economic activity x x x would not conflict with the Constitution or laws of the Philippines."27 Thus, a
"non-Philippine national" cannot own and operate a reserved economic activity like a public utility. This means, of
course, that only a "Philippine national" can own and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a
reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held
by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national.
(Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a ‘Philippine national’
x x x shall do business x x x in the Philippines x x x without first securing a written certificate from the Board of
Investments to the effect that such business or economic activity x x x would not conflict with the Constitution or laws
of the Philippines."29 Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like a
public utility. Again, this means that only a "Philippine national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment Incentives Act, which took
effect on 16 September 1967, contained a similar definition of a "Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly owned by citizens
of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty per cent of the
capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine National and at least
sixty per cent of the fund will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its
non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent of the capital stock outstanding
and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that
the corporation shall be considered a Philippine National. (Boldfacing, italicization and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on 30 September
1968, if the investment in a domestic enterprise by non-Philippine nationals exceeds 30% of its outstanding capital
stock, such enterprise must obtain prior approval from the Board of Investments before accepting such investment.
Such approval shall not be granted if the investment "would conflict with existing constitutional provisions and laws
regulating the degree of required ownership by Philippine nationals in the enterprise."31 A "non-Philippine national"
cannot own and operate a reserved economic activity like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or a domestic
corporation "at least sixty percent (60%) of the capital stock outstanding and entitled to vote" is owned by Filipino
citizens. A domestic corporation is a "Philippine national" only if at least 60% of its voting stock is owned by Filipino
citizens. This definition of a "Philippine national" is crucial in the present case because the FIA reiterates and clarifies
Section 11, Article XII of the 1987 Constitution, which limits the ownership and operation of public utilities to Filipino
citizens or to corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of business and
area of investment. The FIA spells out the procedures by which non-Philippine nationals can invest in the Philippines.
Among the key features of this law is the concept of a negative list or the Foreign Investments Negative List.32 Section
8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List]. - The Foreign
Investment Negative List shall have two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and
specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the Department of National
Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms,
ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine
national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs;
all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses and massage clinics.
(Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign Investment Negative
List A consists of "areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws,"
where foreign equity participation in any enterprise shall be limited to the maximum percentage expressly prescribed
by the Constitution and other specific laws. In short, to own and operate a public utility in the Philippines one must be
a "Philippine national" as defined in the FIA. The FIA is abundant notice to foreign investors to what extent they can
invest in public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the ownership and
operation of public utilities, which the Constitution expressly reserves to Filipino citizens and to corporations at least
60% owned by Filipino citizens. In other words, Negative List A of the FIA reserves the ownership and operation of
public utilities only to "Philippine nationals," defined in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x
or (3) a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation organized
abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus Investments Code
of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the passage of the present Foreign
Investments Act of 1991, or for more than four decades, the statutory definition of the term "Philippine national" has
been uniform and consistent: it means a Filipino citizen, or a domestic corporation at least 60% of the voting stock is
owned by Filipinos. Likewise, these same statutes have uniformly and consistently required that only "Philippine
nationals" could own and operate public utilities in the Philippines. The following exchange during the Oral Arguments
is revealing:

JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x? And
the FIA of 1991 took effect in 1991, correct? That’s over twenty (20) years ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals can own
and operate public utilities[], correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a citizen of the
Philippines, or if it is a corporation at least sixty percent (60%) of the voting stock is owned by citizens
of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
 And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991, the
Omnibus Investments Act of 1987, the same provisions apply: x x x only Philippine nationals can own
and operate a public utility and the Philippine national, if it is a corporation, x x x sixty percent (60%)
of the capital stock of that corporation must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments Act of 1981,
the same rules apply: x x x only a Philippine national can own and operate a public utility and a
Philippine national, if it is a corporation, sixty percent (60%) of its x x x voting stock, must be owned
by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to that, under [the]1967 Investments Incentives Act and the Foreign Company Act of
1968, the same rules applied, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has been very consistent – only a Philippine national
can own and operate a public utility, and a Philippine national, if it is a corporation, x x x at least sixty
percent (60%) of the voting stock must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which categorically prescribe
that certain economic activities, like the ownership and operation of public utilities, are reserved to corporations "at
least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines." Foreign Investment Negative List A refers to "activities reserved to Philippine nationals by mandate of
the Constitution and specific laws." The FIA is the basic statute regulating foreign investments in the Philippines.
Government agencies tasked with regulating or monitoring foreign investments, as well as counsels of foreign
investors, should start with the FIA in determining to what extent a particular foreign investment is allowed in the
Philippines. Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and
their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red flag. There
are already numerous opinions of SEC legal officers that cite the definition of a "Philippine national" in Section 3(a) of
the FIA in determining whether a particular corporation is qualified to own and operate a nationalized or partially
nationalized business in the Philippines. This shows that SEC legal officers are not only aware of, but also rely on and
invoke, the provisions of the FIA in ascertaining the eligibility of a corporation to engage in partially nationalized
industries. The following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas Employment
Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine national" in the FIA
signifies their lack of integrity and competence in resolving issues on the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited and interpreted to
refer to corporations seeking to avail of tax and fiscal incentives under investment incentives laws and cannot be
equated with the term "capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly contends that
the FIA and its predecessor statutes do not apply to "companies which have not registered and obtained special
incentives under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise. Tax and
fiscal incentives to investments are granted separately under the Omnibus Investments Code of 1987, not under the
FIA. In fact, the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which
articles previously regulated foreign investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized industries. There
is nothing in the FIA, or even in the Omnibus Investments Code of 1987 or its predecessor statutes, that states,
expressly or impliedly, that the FIA or its predecessor statutes do not apply to enterprises not availing of tax and fiscal
incentives under the Code. The FIA and its predecessor statutes apply to investments in all domestic enterprises,
whether or not such enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its
predecessor statutes. The reason is quite obvious – mere non-availment of tax and fiscal incentives by a non-
Philippine national cannot exempt it from Section 11, Article XII of the Constitution regulating foreign investments in
public utilities. In fact, the Board of Investments’ Primer on Investment Policies in the Philippines,34 which is given out
to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives, (i.e., the activity is
not listed in the IPP, and they are not exporting at least 70% of their production) may go ahead and make the
investments without seeking incentives. They only have to be guided by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas outside of this list
are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to engage in
certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of
the corporation. To repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by "a trustee
of funds for pension or other employee retirement or separation benefits," the trustee is a Philippine national if "at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the
Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the
corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising
the capital of a corporation. Under the Corporation Code, capital stock 35 consists of all classes of shares issued to
stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or
restrictions as stated in the articles of incorporation.36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows denial of
the right to vote in specific corporate matters. Thus, common shares have the right to vote in the election of directors,
while preferred shares may be denied such right. Nonetheless, preferred shares, even if denied the right to vote in
the election of directors, are entitled to vote on the following corporate matters: (1) amendment of articles of
incorporation; (2) increase and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness;
(4) sale, lease, mortgage or other disposition of substantially all corporate assets; (5) investment of funds in another
business or corporation or for a purpose other than the primary purpose for which the corporation was organized; (6)
adoption, amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a
corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution
must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the
right to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters
mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and
preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-
voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of
Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred
voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino
citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be
reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-
40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights,
privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in public utilities
always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry that foreigners,
owning most of the non-voting shares, will exercise greater control over fundamental corporate matters requiring two-
thirds or majority vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the Constitutional
Commission to support his claim that the term "capital" refers to the total outstanding shares of stock, whether voting
or non-voting, the following excerpts of the deliberations reveal otherwise. It is clear from the following exchange that
the term "capital" refers to controlling interest of a corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-
40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity requirement,
is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation"?
Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who
provided us a draft. The phrase that is contained here which we adopted from the UP draft is "60 percent of voting
stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity
invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or controlling
interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or associations
at least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the
capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have
a situation where the corporation is controlled by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935 Constitutions is that
according to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the corporation.

The use of the term "capital" was intended to replace the word "stock" because associations without stocks can
operate public utilities as long as they meet the 60-40 ownership requirement in favor of Filipino citizens prescribed
in Section 11, Article XII of the Constitution. However, this did not change the intent of the framers of the Constitution
to reserve exclusively to Philippine nationals the "controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the nationalists in the
Convention."41 The same battle-cry resulted in the nationalization of the public utilities.42 This is also the same intent
of the framers of the 1987 Constitution who adopted the exact formulation embodied in the 1935 and 1973
Constitutions on foreign equity limitations in partially nationalized industries.

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s interpretation of the term
"capital." In its Consolidated Comment, the OSG explains that the deletion of the phrase "controlling interest" and
replacement of the word "stock" with the term "capital" were intended specifically to extend the scope of the entities
qualified to operate public utilities to include associations without stocks. The framers’ omission of the phrase
"controlling interest" did not mean the inclusion of all shares of stock, whether voting or non-voting. The OSG reiterated
essentially the Court’s declaration that the Constitution reserved exclusively to Philippine nationals the ownership and
operation of public utilities consistent with the State’s policy to "develop a self-reliant and independent national
economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding capital stock,
treated as a single class regardless of the actual classification of shares, grossly contravenes the intent and letter of
the Constitution that the "State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos." We illustrated the glaring anomaly which would result in defining the term "capital" as the
total outstanding capital stock of a corporation, treated as a single class of shares regardless of the actual
classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par value of one peso (₱ 1.00) per share. Under the
broad definition of the term "capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority, or more than 99.999 percent,
of the total outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of directors,
even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control
over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in
the election of directors and hence, have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board of directors,
this situation does not guarantee Filipino control and does not in any way cure the violation of the Constitution. The
independence of the Filipino board members so elected by such foreign shareholders is highly doubtful. As the OSG
pointed out, quoting Justice George Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that
one who holds his office only during the pleasure of another cannot be depended upon to maintain an attitude of
independence against the latter’s will." Allowing foreign shareholders to elect a controlling majority of the board, even
if all the directors are Filipinos, grossly circumvents the letter and intent of the Constitution and defeats the very
purpose of our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or association must
be citizens of the Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the framers of the
Constitution to limit foreign ownership, and assure majority Filipino ownership and control of public utilities. The OSG
argued, "while the delegates disagreed as to the percentage threshold to adopt, x x x the records show they clearly
understood that Filipino control of the public utility corporation can only be and is obtained only through the election
of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23 August 1986 was
the extent of majority Filipino control of public utilities. This is evident from the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase "two thirds of
whose voting stock or controlling interest," and instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL"
so that the sentence will read: "No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous sections in which we
fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It is only in this Section 15 with respect to
public utilities that the committee proposal was increased to two-thirds. I think it would be better to harmonize this
provision by providing that even in the case of public utilities, the minimum equity for Filipino citizens should be 60
percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with representatives
of the Filipino majority owners of the international record carriers, and the subsequent memoranda they submitted to
me. x x x

Their second point is that under the Corporation Code, the management and control of a corporation is vested in the
board of directors, not in the officers but in the board of directors. The officers are only agents of the board. And they
believe that with 60 percent of the equity, the Filipino majority stockholders undeniably control the board. Only on
important corporate acts can the 40-percent foreign equity exercise a veto, x x x.

x x x x45
MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the spokesman of
the Philippine Chamber of Communications on why they would like to maintain the present equity, I am referring to
the 66 2/3. They would prefer to have a 75-25 ratio but would settle for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-thirds rather than
the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the framers of the
Constitution intended public utilities to be majority Filipino-owned and controlled. To ensure that Filipinos control
public utilities, the framers of the Constitution approved, as additional safeguard, the inclusion of the last sentence of
Section 11, Article XII of the Constitution commanding that "[t]he participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines." In other words, the last
sentence of Section 11, Article XII of the Constitution mandates that (1) the participation of foreign investors in the
governing body of the corporation or association shall be limited to their proportionate share in the capital of such
entity; and (2) all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of the corporation
or association to be Filipino citizens specifically to prevent management contracts, which were designed primarily to
circumvent the Filipinization of public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a phrase which states:
"THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE
CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which Commissioner Romulo
mentioned – Philippine Global Communications, Eastern Telecommunications, Globe Mackay Cable – are 40-percent
owned by foreign multinational companies and 60-percent owned by their respective Filipino partners. All three,
however, also have management contracts with these foreign companies – Philcom with RCA, ETPI with Cable and
Wireless PLC, and GMCR with ITT. Up to the present time, the general managers of these carriers are foreigners.
While the foreigners in these common carriers are only minority owners, the foreign multinationals are the ones
managing and controlling their operations by virtue of their management contracts and by virtue of their strength in
the governing bodies of these carriers.47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an amendment with
respect to the operating management of public utilities, and in this amendment, we are associated with Fr. Bernas,
Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENT BODY OF EVERY
CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the committee assure us
that this amendment will insure that past activities such as management contracts will no longer be possible under
this amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads: "THE
PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE
SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS AND
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC
UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF..."
I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the amendment. Is
that all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.
xxxx
MR. DE LOS REYES. The governing body refers to the board of directors and trustees.
MR. VILLEGAS. That is right.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
xxxx
The results show 29 votes in favor and none against; so the proposed amendment is approved.
xxxx
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by
such citizens." May I request Commissioner Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC
UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF
AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST
BE CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE EXCLUSIVE IN
CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE THAN
TWENTY-FIVE YEARS. Neither shall any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is approved.48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the limited
participation of foreign investors in the governing body of public utilities, is a reiteration of the last sentence of Section
5, Article XIV of the 1973 Constitution,49 signifying its importance in reserving ownership and control of public utilities
to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the common shares
of PLDT, which class of shares exercises the sole right to vote in the election of directors, and thus foreigners control
PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus
Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred
shares earn only 1/70 of the dividends that common shares earn;50 (5) preferred shares have twice the par value of
common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common
shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question of whether PLDT
violated the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the 1987 Constitution.
Such question indisputably calls for a presentation and determination of evidence through a hearing, which is generally
outside the province of the Court’s jurisdiction, but well within the SEC’s statutory powers. Thus, for obvious reasons,
the Court limited its decision on the purely legal and threshold issue on the definition of the term "capital" in Section
11, Article XII of the Constitution and directed the SEC to apply such definition in determining the exact percentage of
foreign ownership in PLDT.

IX.
PLDT is not an indispensable party; SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is the sole basis
in determining foreign equity in a public utility and that any other government rulings, opinions, and regulations
inconsistent with this declaratory relief be declared unconstitutional and a violation of the intent and spirit of the 1987
Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess of 40 percent
of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock Exchange to
require PLDT to make a public disclosure of all of its foreign shareholdings and their actual and real beneficial
owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its statutory duty to
investigate whether "the required percentage of ownership of the capital stock to be owned by citizens of the
Philippines has been complied with [by PLDT] as required by x x x the Constitution." 51 Such plea clearly negates
SEC’s argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to order the SEC’s
compliance with its directive contained in the 28 June 2011 Decision in view of the far-reaching implications of this
case. In Domingo v. Scheer,52 the Court dispensed with the amendment of the pleadings to implead the Bureau of
Customs considering (1) the unique backdrop of the case; (2) the utmost need to avoid further delays; and (3) the
issue of public interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition should not be
dismissed because the second action would only be a repetition of the first. In Salvador, et al., v. Court of Appeals, et
al., we held that this Court has full powers, apart from that power and authority which is inherent, to amend the
processes, pleadings, proceedings and decisions by substituting as party-plaintiff the real party-in-interest. The Court
has the power to avoid delay in the disposition of this case, to order its amendment as to implead the BOC as party-
respondent. Indeed, it may no longer be necessary to do so taking into account the unique backdrop in this case,
involving as it does an issue of public interest. After all, the Office of the Solicitor General has represented the
petitioner in the instant proceedings, as well as in the appellate court, and maintained the validity of the deportation
order and of the BOC’s Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not afforded
its day in court, simply because only the petitioner, the Chairperson of the BOC, was the respondent in the CA, and
the petitioner in the instant recourse. In Alonso v. Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to facilitate the
application of justice to the rival claims of contending parties. They were created, not to hinder and delay, but to
facilitate and promote, the administration of justice. They do not constitute the thing itself, which courts are always
striving to secure to litigants. They are designed as the means best adapted to obtain that thing. In other words, they
are a means to an end. When they lose the character of the one and become the other, the administration of justice
is at fault and courts are correspondingly remiss in the performance of their obvious duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision and defer to the Court’s
definition of the term "capital" in Section 11, Article XII of the Constitution. Further, the SEC entered its special
appearance in this case and argued during the Oral Arguments, indicating its submission to the Court’s jurisdiction. It
is clear, therefore, that there exists no legal impediment against the proper and immediate implementation of the
Court’s directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are concerned. In
other words, PLDT must be impleaded in order to fully resolve the issues on (1) whether the sale of 111,415 PTIC
shares to First Pacific violates the constitutional limit on foreign ownership of PLDT; (2) whether the sale of common
shares to foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3) whether the total percentage of
the PLDT common shares with voting rights complies with the 60-40 ownership requirement in favor of Filipino citizens
under the Constitution for the ownership and operation of PLDT. These issues indisputably call for an examination of
the parties’ respective evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT must be
impleaded, and must necessarily be heard, in the proceedings before the SEC where the factual issues will be
thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual issues raised by
Gamboa, except the single and purely legal issue on the definition of the term "capital" in Section 11, Article XII of the
Constitution. The Court confined the resolution of the instant case to this threshold legal issue in deference to the fact-
finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in this case even
without the participation of PLDT since defining the term "capital" in Section 11, Article XII of the Constitution does
not, in any way, depend on whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete
resolution of the purely legal question in this case.55 In fact, the Court, by treating the petition as one for
mandamus,56 merely directed the SEC to apply the Court’s definition of the term "capital" in Section 11, Article XII of
the Constitution in determining whether PLDT committed any violation of the said constitutional provision. The
dispositive portion of the Court’s ruling is addressed not to PLDT but solely to the SEC, which is the administrative
agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in Section 11,
Article XII of the 1987 Constitution, and directed the SEC to investigate any violation by PLDT of the 60-40 ownership
requirement in favor of Filipino citizens under the Constitution,57 there is no deprivation of PLDT’s property or denial
of PLDT’s right to due process, contrary to Pangilinan and Nazareno’s misimpression. Due process will be afforded
to PLDT when it presents proof to the SEC that it complies, as it claims here, with Section 11, Article XII of the
Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a sudden flight
of existing foreign investors to "friendlier" countries and simultaneously deterring new foreign investors to our country.
In particular, the PSE claims that the 28 June 2011 Decision may result in the following: (1) loss of more than ₱ 630
billion in foreign investments in PSE-listed shares; (2) massive decrease in foreign trading transactions; (3) lower PSE
Composite Index; and (4) local investors not investing in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’ apprehension. Without
providing specific details, he pointed out the depressing state of the Philippine economy compared to our neighboring
countries which boast of growing economies. Further, Dr. Villegas explained that the solution to our economic woes
is for the government to "take-over" strategic industries, such as the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this high FDI59 countries in
East Asia have allowed foreigners x x x control [of] their public utilities, so that we can compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic, their solution is not
to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make sure that those industries are in the hands of
state enterprises. So, in these countries, nationalization means the government takes over. And because their
governments are competent and honest enough to the public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public utilities serve no
purpose. Obviously, there can never be foreign investments in public utilities if, as Dr. Villegas claims, the "solution is
to make sure that those industries are in the hands of state enterprises." Dr. Villegas’s argument that foreign
investments in telecommunication companies like PLDT are badly needed to save our ailing economy contradicts his
own theory that the solution is for government to take over these companies. Dr. Villegas is barking up the wrong tree
since State ownership of public utilities and foreign investments in such industries are diametrically opposed concepts,
which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the present case
differently for two reasons. First, the governments of our neighboring countries have, as claimed by Dr. Villegas, taken
over ownership and control of their strategic public utilities like the telecommunications industry. Second, our
Constitution has specific provisions limiting foreign ownership in public utilities which the Court is sworn to uphold
regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities to Filipino citizens,
or corporations or associations at least 60 percent of whose capital belongs to Filipinos. Following Dr. Villegas’s claim,
the Philippines appears to be more liberal in allowing foreign investors to own 40 percent of public utilities, unlike in
other Asian countries whose governments own and operate such industries.

XI.
Prospective Application of Sanctions
In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application and
imposition of appropriate sanctions against PLDT if found violating Section 11, Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated Section 11, Article
XII of the Constitution. Thus, there is no dispute that it is only after the SEC has determined PLDT’s violation, if any
exists at the time of the commencement of the administrative case or investigation, that the SEC may impose the
statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC shall
impose the appropriate sanctions only if it finds after due hearing that, at the start of the administrative case or
investigation, there is an existing violation of Section 11, Article XII of the Constitution. Under prevailing jurisprudence,
public utilities that fail to comply with the nationality requirement under Section 11, Article XII and the FIA can cure
their deficiencies prior to the start of the administrative case or investigation.61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy "effectively controlled" by
Filipinos. Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public
utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or
corporations or associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The FIA’s
implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation
that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as
with full beneficial ownership. This is precisely because the right to vote in the election of directors, coupled with full
beneficial ownership of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the letter and
intent of the Constitution. Any other meaning of the term "capital" openly invites alien domination of economic activities
reserved exclusively to Philippine nationals. Therefore, respondents’ interpretation will ultimately result in handing
over effective control of our national economy to foreigners in patent violation of the Constitution, making Filipinos
second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment, which gave
Americans the same rights as Filipinos in the exploitation of natural resources, and in the ownership and control of
public utilities, in the Philippines. To do this the 1935 Constitution, which contained the same 60 percent Filipino
ownership and control requirement as the present 1987 Constitution, had to be amended to give Americans parity
rights with Filipinos. There was bitter opposition to the Parity Amendment62 and many Filipinos eagerly awaited its
expiration. In late 1968, PLDT was one of the American-controlled public utilities that became Filipino-controlled when
the controlling American stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July
1974.63 No economic suicide happened when control of public utilities and mining corporations passed to Filipinos’
hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the Parity
Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without any amendment to the
present Constitution. Worse, movants’ interpretation opens up our national economy to effective control not only by
Americans but also by all foreigners, be they Indonesians, Malaysians or Chinese, even in the absence of reciprocal
treaty arrangements. At least the Parity Amendment, as implemented by the Laurel-Langley Agreement, gave the
capital-starved Filipinos theoretical parity – the same rights as Americans to exploit natural resources, and to own and
control public utilities, in the United States of America. Here, movants’ interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without any reciprocal arrangements. That would
mean that Indonesians, Malaysians and Chinese nationals could effectively control our mining companies and public
utilities while Filipinos, even if they have the capital, could not control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control requirement for
public utilities like PLOT. Any deviation from this requirement necessitates an amendment to the Constitution as
exemplified by the Parity Amendment. This Court has no power to amend the Constitution for its power and duty is
only to faithfully apply and interpret the Constitution. WHEREFORE, we DENY the motions for reconsideration WITH
FINALITY. No further pleadings shall be entertained. SO ORDERED.
 4. Jose Roy vs. Chairperson Teresita Herbosa

G.R. No. 207246, November 22, 2016

JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA,THE SECURITIES AND EXCHANGE
COMMISSION, AND PHILILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondents.

WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE, ANTONIO V. PESINA, JR.,
MODESTO MARTIN Y. MAMON III, AND GERARDO C. EREBAREN, Petitioners-in-Intervention,

PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention,

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.

DECISION

CAGUIOA, J.:

The petitions1 before the Court are special civil actions for certiorari under Rule 65 of the Rules of Court seeking to
annul Memorandum Circular No. 8, Series of 2013 ("SEC-MC No. 8") issued by the Securities and Exchange
Commission ("SEC") for allegedly being in violation of the Court's Decision2 ("GamboaDecision") and
Resolution3 ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No. 176579, respectively
promulgated on June 28, 2011, and October 9, 2012, which jurisprudentially established the proper interpretation of
Section 11, Article XII of the Constitution.

The Antecedents

On June 28, 2011, the Court issued the Gamboa Decision, the dispositive portion of which
reads:chanRoblesvirtualLawlibrary
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the
term "capital" in determining the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law.
SO ORDERED.4
Several motions for reconsideration were filed assailing the Gamboa Decision. They were denied in
the Gamboa Resolution issued by the Court on October 9, 2012, viz:

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.

SO ORDERED.5
The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was thereafter issued on
December 11, 2012.6

On November 6, 2012, the SEC posted a Notice in its website inviting the public to attend a public dialogue and to
submit comments on the draft memorandum circular (attached thereto) on the guidelines to be followed in determining
compliance with the Filipino ownership requirement in public utilities under Section 11, Article XII of the Constitution
pursuant to the Court's directive in the Gamboa Decision.7

On November 9, 2012, the SEC held the scheduled dialogue and more than 100 representatives from various
organizations, government agencies, the academe and the private sector attended.8

On January 8, 2013, the SEC received a copy of the Entry of Judgment9 from the Court certifying that on October 18,
2012, the Gamboa Decision had become final and executory.10
On March 25, 2013, the SEC posted another Notice in its website soliciting from the public comments and suggestions
on the draft guidelines.11

On April 22, 2013, petitioner Atty. Jose M. Roy III ("Roy") submitted his written comments on the draft guidelines.12

On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued SEC-MC No. 8 entitled
"Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or
Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities." It was published in
the Philippine Daily Inquirer and the Business Mirror on May 22, 2013.13Section 2 of SEC-MC No. 8 provides:

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement.
For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to
BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

Corporations covered by special laws which provide specific citizenship requirements shall comply with the provisions
of said law.14
On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the Petition,15 assailing the validity of SEC-MC No.
8 for not conforming to the letter and spirit of the Gamboa Decision and Resolution and for having been issued by the
SEC with grave abuse of discretion. Petitioner Roy seeks to apply the 60-40 Filipino ownership requirement separately
to each class of shares of a public utility corporation, whether common, preferred nonvoting, preferred voting or any
other class of shares. Petitioner Roy also questions the ruling of the SEC that respondent Philippine Long Distance
Telephone Company ("PLDT") is compliant with the constitutional rule on foreign ownership. He prays that the Court
declare SEC-MC No. 8 unconstitutional and direct the SEC to issue new guidelines regarding the determination of
compliance with Section 11, Article XII of the Constitution in accordance with Gamboa.

Wilson C. Gamboa, Jr.,16 Daniel V. Cartagena, John Warren P. Gabinete, Antonio V. Pesina, Jr., Modesto Martin Y.
Mamon III, and Gerardo C. Erebaren ("intervenors Gamboa, et al.") filed a Motion for Leave to File Petition-in-
Intervention17 on July 30, 2013, which the Court granted. The Petition-in-Intervention18filed by intervenors Gamboa, et
al. mirrored the issues, arguments and prayer of petitioner Roy.

On September 5, 2013, respondent PLDT filed its Comment (on the Petition dated 10 June 2013).19 PLDT posited
that the Petition should be dismissed because it violates the doctrine of hierarchy of courts as there are no compelling
reasons to invoke the Court's original jurisdiction; it is prematurely filed because petitioner Roy failed to exhaust
administrative remedies before the SEC; the principal actions/remedies of mandamus and declaratory relief are not
within the exclusive and/or original jurisdiction of the Court; the petition for certiorari is an inappropriate remedy since
the SEC issued SEC-MC No. 8 in the exercise of its quasi-legislative power; it deprives the necessary and
indispensable parties of their constitutional right to due process; and the SEC merely implemented the dispositive
portion of the Gamboa Decision.

On September 20, 2013, respondents Chairperson Teresita Herbosa and SEC filed their Consolidated
Comment.20 They sought the dismissal of the petitions on the following grounds: (1) the petitioners do not
possess locus standi to assail the constitutionality of SEC-MC No. 8; (2) a petition for certiorari under Rule 65 is not
the appropriate and proper remedy to assail the validity and constitutionality of the SEC-MC No. 8; (3) the direct resort
to the Court violates the doctrine of hierarchy of courts; (4) the SEC did not abuse its discretion; (5) on PLDT's
compliance with the capital requirement as stated in the Gamboaruling, the petitioners' challenge is premature
considering that the SEC has not yet issued a definitive ruling thereon.

On October 22, 2013, PLDT filed its Comment (on the Petition-in-Intervention dated 16 July 2013).21PLDT adopted
the position that intervenors Gamboa, et al. have no standing and are not the proper party to question the
constitutionality of SEC-MC No. 8; they are in no position to assail SEC-MC No. 8 considering that they did not
participate in the public consultations or give comments thereon; and their Petition-in-Intervention is a disguised
motion for reconsideration of the Gamboa Decision and Resolution.

On May 7, 2014, Petitioner Roy and intervenors Gamboa, et al.22 filed their Joint Consolidated Reply with Motion for
Issuance of Temporary Restraining Order.23
On May 22, 2014, PLDT filed its Rejoinder [To Petitioner and Petitioners-in-Intervention's Joint Consolidated Reply
dated 7 May 2014] and Opposition [To Petitioner and Petitioners-in-Intervention's Motion for Issuance of a Temporary
Restraining Order dated 7 May 2014].24

On June 18, 2014, the Philippine Stock Exchange, Inc. ("PSE") filed its Motion to Intervene with Leave of Court25 and
its Comment-in Intervention.26 The PSE alleged that it has standing to intervene as the primary regulator of the stock
exchange and will sustain direct injury should the petitions be granted. The PSE argued that in the Gamboa ruling,
"capital" refers only to shares entitled to vote in the election of directors, and excludes those not so entitled; and the
dispositive portion of the decision is the controlling factor that determines and settles the questions presented in the
case. The PSE further argued that adopting a new interpretation of Section 11, Article XII of the Constitution violates
the policy of conclusiveness of judgment, stare decisis, and the State's obligation to maintain a stable and predictable
legal framework for foreign investors under international treaties; and adopting a new definition of "capital" will prove
disastrous for the Philippine stock market. The Court granted the Motion to Intervene filed by PSE. 27

PLDT filed its Consolidated Memorandum28 on February 10, 2015.

On June 1, 2016, Shareholders' Association of the Philippines, Inc.29 ("SHAREPHIL") filed an Omnibus Motion [1] For
Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention.30 The Court granted the Omnibus Motion of
SHAREPHIL.31

On June 30, 2016, petitioner Roy filed his Opposition and Reply to Interventions of Philippine Stock Exchange and
Sharephil.32 Intervenors Gamboa, et al. then filed on September 14, 2016, their Reply (to Interventions by Philippine
Stock Exchange and Sharephil).33

The Issues

The twin issues of the Petition and the Petition-in-Intervention are: (1) whether the SEC gravely abused its discretion
in issuing SEC-MC No. 8 in light of the Gamboa Decision and Gamboa Resolution, and (2) whether the SEC gravely
abused its discretion in ruling that PLDT is compliant with the constitutional limitation on foreign ownership.

The Court's Ruling

At the outset, the Court disposes of the second issue for being without merit. In its Consolidated Comment dated
September 13, 2013,34 the SEC already clarified that it "has not yet issued a definitive ruling anent PLDT's compliance
with the limitation on foreign ownership imposed under the Constitution and relevant laws [and i]n fact, a careful
perusal of x x x SEC-MC No. 8 readily reveals that all existing covered corporations which are non-compliant with
Section 2 thereof were given a period of one (1) year from the effectivity of the same within which to comply with said
ownership requirement. x x x."35 Thus, in the absence of a definitive ruling by the SEC on PLDT's compliance with the
capital requirement pursuant to the Gamboa Decision and Resolution, any question relative to the inexistent ruling is
premature.

Also, considering that the Court is not a trier of facts and is in no position to make a factual determination of PLDT's
compliance with the constitutional provision under review, the Court can only resolve the first issue, which is a pure
question of law. However, before the Court tackles the first issue, it has to rule on certain procedural challenges that
have been raised.

The Procedural Issues

The Court may exercise its power of judicial review and take cognizance of a case when the following specific
requisites are met: (1) there is an actual case or controversy calling for the exercise of judicial power; (2) the petitioner
has standing to question the validity of the subject act or issuance, i.e., he has a personal and substantial interest in
the case that he has sustained, or will sustain, direct injury as a result of the enforcement of the act or issuance; (3)
the question of constitutionality is raised at the earliest opportunity; and (4) the constitutional question is the very lis
mota of the case.36

The first two requisites of judicial review are not met.

Petitioners' failure to sufficiently allege, much less establish, the existence of the first two requisites for the exercise
of judicial review warrants the perfunctory dismissal of the petitions.
a. No actual controversy.

Regarding the first requisite, the Court in Belgica v. Ochoa37 stressed anew that an actual case or controversy is one
which involves a conflict of legal rights, an assertion of opposite legal claims, susceptible of judicial resolution as
distinguished from a hypothetical or abstract difference or dispute since the courts will decline to pass upon
constitutional issues through advisory opinions, bereft as they are of authority to resolve hypothetical or moot
questions. Related to the requirement of an actual case or controversy is the requirement of "ripeness", and a question
is ripe for adjudication when the act being challenged has a direct adverse effect on the individual challenging it.

Petitioners have failed to show that there IS an actual case or controversy which is ripe for adjudication.

The Petition and the Petition-in-Intervention identically allege:

3. The standing interpretation of the SEC found in MC8 practically encourages circumvention of the 60-40 ownership
rule by impliedly allowing the creation of several classes of voting shares with different degrees of beneficial ownership
over the same, but at the same time, not imposing a 40% limit on foreign ownership of the higher yielding stocks. 38

4. For instance, a situation may arise where a corporation may issue several classes of shares of stock, one of which
are common shares with rights to elect directors, another are preferred shares with rights to elect directors but with
much lesser entitlement to dividends, and still another class of preferred shares with no rights to elect the directors
and even less dividends. In this situation, the corporation may issue common shares to foreigners amounting to forty
percent (40%) of the outstanding capital stock and issue preferred shares entitled to vote the directors of the
corporation to Filipinos consisting of 60%39 percent (sic) of the outstanding capital stock entitled to vote. Although it
may appear that the 60-40 rule has been complied with, the beneficial ownership of the corporation remains with the
foreign stockholder since the Filipino owners of the preferred shares have only a miniscule share in the dividends and
profit of the corporation. Plainly, this situation runs contrary to the Constitution and the ruling of this x x x Court.40
Petitioners' hypothetical illustration as to how SEC-MC No. 8 "practically encourages circumvention of the 60-40
ownership rule" is evidently speculative and fraught with conjectures and assumptions. There is clearly wanting
specific facts against which the veracity of the conclusions purportedly following from the speculations and
assumptions can be validated. The lack of a specific factual milieu from which the petitions originated renders any
pronouncement from the Court as a purely advisory opinion and not a decision binding on identified and definite
parties and on a known set of facts.

Firstly, unlike in Gamboa, the identity of the public utility corporation, the capital of which is at issue, is unknown. Its
outstanding capital stock and the actual composition thereof in terms of numbers, classes, preferences and features
are all theoretical. The description "preferred shares with rights to elect directors but with much lesser entitlement to
dividends, and still another class of preferred shares with no rights to elect the directors and even less dividends" is
ambiguous. What are the specific dividend policies or entitlements of the purported preferred shares? How are the
preferred shares' dividend policies different from those of the common shares? Why and how did the fictional public
utility corporation issue those preferred shares intended to be owned by Filipinos? What are the actual features of the
foreign-owned common shares which make them superior over those owned by Filipinos? How did it come to be that
Filipino holders of preferred shares ended up with "only a miniscule share in the dividends and profit of the
[hypothetical] corporation"? Any answer to any of these questions will, at best, be contingent, conjectural, indefinite
or anticipatory.

Secondly, preferred shares usually have preference over the common shares in the payment of dividends. If most of
the "preferred shares with rights to elect directors but with much lesser entitlement to dividends" and the other "class
of preferred shares with no rights to elect the directors and even less dividends" are owned by Filipinos, they stand to
receive their dividend entitlement ahead of the foreigners, who are common shareholders. For the common
shareholders to have "bigger dividends" as compared to the dividends paid to the preferred shareholders, which are
supposedly predominantly owned by Filipinos, there must still be unrestricted retained earnings of the fictional
corporation left after payment of the dividends declared in favor of the preferred shareholders. The fictional illustration
does not even intimate how this situation can be possible. No permutation of unrestricted retained earnings of the
hypothetical corporation is shown that makes the present conclusion of the petitioners achievable. Also, no concrete
meaning to the petitioners' claim of the Filipinos' "miniscule share in the dividends and profit of the [fictional]
corporation" is demonstrated.

Thirdly, petitioners fail to allege or show how their hypothetical illustration will directly and adversely affect them. That
is impossible since their relationship to the fictional corporation is a matter of guesswork.
From the foregoing, it is evident that the Court can only surmise or speculate on the situation or controversy that the
petitioners contemplate to present for judicial determination. Petitioners are likewise conspicuously silent on the direct
adverse impact to them of the implementation of SEC-MC No. 8. Thus, the petitions must fail because the Court is
barred from rendering a decision based on assumptions, speculations, conjectures and hypothetical or fictional
illustrations, more so in the present case which is not even ripe for decision.

b. No locus standi.

The personal and substantial interest that enables a party to have legal standing is one that is both material, an
interest in issue and to be affected by the government action, as distinguished from mere interest in the issue involved,
or a mere incidental interest, and real, which means a present substantial interest, as distinguished from a mere
expectancy or a future, contingent, subordinate, or consequential interest.41cralawred

As to injury, the party must show that (1) he will personally suffer some actual or threatened injury because of the
allegedly illegal conduct of the government; (2) the injury is fairly traceable to the challenged action; and (3) the injury
is likely to be redressed by a favorable action.42 If the asserted injury is more imagined than real, or is merely
superficial and insubstantial, an excursion into constitutional adjudication by the courts is not warranted.43

Petitioners have no legal standing to question the constitutionality of SEC-MC No. 8.

To establish his standing, petitioner Roy merely claimed that he has standing to question SEC-MC No. 8 "as a
concerned citizen, an officer of the Court and as a taxpayer" as well as "the senior law partner of his own law firm[,
which] x x x is a subscriber of PLDT."44 On the other hand, intervenors Gamboa, et al.allege, as basis of their locus
standi, their "[b]eing lawyers and officers of the Court" and "citizens x x x and taxpayers."45

The Court has previously emphasized that the locus standi requisite is not met by the expedient invocation of one's
citizenship or membership in the bar who has an interest in ensuring that laws and orders of the Philippine government
are legally and validly issued as these supposed interests are too general, which are shared by other groups and by
the whole citizenry.46 Per their allegations, the personal interest invoked by petitioners as citizens and members of
the bar in the validity or invalidity of SEC-MC No. 8 is at best equivocal, and totally insufficient.

Petitioners' status as taxpayers is also of no moment. As often reiterated by the Court, a taxpayer's suit is allowed
only when the petitioner has demonstrated the direct correlation of the act complained of and the disbursement of
public funds in contravention of law or the Constitution, or has shown that the case involves the exercise of the
spending or taxing power of Congress.47 SEC-MC No. 8 does not involve an additional expenditure of public funds
and the taxing or spending power of Congress.

The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is ambiguous. It is unclear whether his law firm
is a "subscriber" of PLDT's shares of stock or of its various telecommunication services. Petitioner Roy has not
identified the specific direct and substantial injury he or his law firm stands to suffer as "subscriber of PLDT" as a
result of the issuance of SEC-MC No. 8 and its enforcement.

As correctly observed by respondent PLDT, "(w]hether or not the constitutionality of SEC-MC No. 8 is upheld, the
rights and privileges of all PLDT subscribers, as with all the rest of subscribers of other corporations, are necessarily
and equally preserved and protected. Nothing is added [to] or removed from a PLDT subscriber in terms of the extent
of his or her participation, relative to what he or she had originally enjoyed from the beginning. In the most practical
sense, a PLDT subscriber loses or gains nothing in the event that SEC-MC No. 8 is either sustained or struck down
by [the Court]."48

More importantly, the issue regarding PLDT's compliance with Section 11, Article XII of the Constitution has been
earlier ruled as premature and beyond the Court's jurisdiction. Thus, petitioner Roy's allegation that his law firm is a
"subscriber of PLDT" is insufficient to clothe him with locus standi.

Petitioners' cursory incantation of "transcendental importance x x x of the rules on foreign ownership of corporations
or entities vested with public interest"49 does not automatically justify the brushing aside of the strict observance of
the requisites for the Court's exercise of judicial review. An indiscriminate disregard of the requisites every time
"transcendental or paramount importance or significance" is invoked would result in an unacceptable corruption of the
settled doctrine of locus standi, as every worthy cause is an interest shared by the general public.50
In the present case, the general and equivocal allegations of petitioners on their legal standing do not justify the
relaxation of the locus standi rule. While the Court has taken an increasingly liberal approach to the rule of locus
standi, evolving from the stringent requirements of personal injury to the broader transcendental importance doctrine,
such liberality is not to be abused.51

The Rule on the Hierarchy of Courts has been violated.

The Court in Bañez, Jr. v. Concepcion52 stressed that:

The Court must enjoin the observance of the policy on the hierarchy of courts, and now affirms that the policy is not
to be ignored without serious consequences. The strictness of the policy is designed to shied the Court from having
to deal with causes that are also well within the competence of the lower courts, and thus leave time to the Court to
deal with the more fundamental and more essential tasks that the Constitution has assigned to it. The Court may act
on petitions for the extraordinary writs of certiorari, prohibition and mandamus only when absolutely necessary or
when serious and important reasons exist to justifY an exception to the policy. x x x
x x x Where the issuance of an extraordinary writ is also within the competence of the Court of Appeals or a Regional
Trial Court, it is in either of these courts that the specific action for the writ's procurement must be presented. This is
and should continue to be the policy in this regard, a policy that courts and lawyers must strictly observe. x x x53
Petitioners' invocation of "transcendental importance" is hollow and does not merit the relaxation of the rule on
hierarchy of courts. There being no special, important or compelling reason that justified the direct filing of the petitions
in the Court in violation of the policy on hierarchy of courts, their outright dismissal on this ground is further warranted.54

The petitioners failed to implead indispensable parties.

The cogent submissions of the PSE in its Comment-in-Intervention dated June 16, 201455 and SHAREPHIL in its
Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention dated May 30,
201656 demonstrate how petitioners should have impleaded not only PLDT but all other corporations in nationalized
and partlynationalized industries because the propriety of the SEC's enforcement of the Court's interpretation of
"capital" through SEC-MC No. 8 affects them as well.

Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without whom there can
be no final determination of an action. Indispensable parties are those with such a material and direct interest in the
controversy that a final decree would necessarily affect their rights, so that the court cannot proceed without their
presence.57 The interests of such indispensable parties in the subject matter of the suit and the relief are so bound
with those of the other parties that their legal presence as parties to the proceeding is an absolute necessity and a
complete and efficient determination of the equities and rights of the parties is not possible if they are not joined.58

Other than PLDT, the petitions failed to join or implead other public utility corporations subject to the same restriction
imposed by Section 11, Article XII of the Constitution. These corporations are in danger of losing their franchise and
property if they are found not compliant with the restrictive interpretation of the constitutional provision under review
which is being espoused by petitioners. They should be afforded due notice and opportunity to be heard, lest they be
deprived of their property without due process.

Not only are public utility corporations other than PLDT directly and materially affected by the outcome of the petitions,
their shareholders also stand to suffer in case they will be forced to divest their shareholdings to ensure compliance
with the said restrictive interpretation of the term "capital". As explained by SHAREPIDL, in five corporations alone,
more than Php158 Billion worth of shares must be divested by foreign shareholders and absorbed by Filipino investors
if petitioners' position is upheld.59

Petitioners' disregard of the rights of these other corporations and numerous shareholders constitutes another fatal
procedural flaw, justifYing the dismissal of their petitions. Without giving all of them their day in court, they will
definitely be deprived of their property without due process of law.

During the deliberations, Justice Velasco stressed on the foregoing procedural objections to the granting of the
petitions; and Justice Bersamin added that the special civil action for certiorari and prohibition is not the proper remedy
to assail SEC-MC No. 8 because it was not issued under the adjudicatory or quasi-judicial functions of the SEC.

The Substantive Issue

The only substantive issue that the petitions assert is whether the SEC's issuance of SEC-MC No. 8 is tainted with
grave abuse of discretion.
The Court holds that, even if the resolution of the procedural issues were conceded in favor of petitioners, the petitions,
being anchored on Rule 65, must nonetheless fail because the SEC did notcommit grave abuse of discretion
amounting to lack or excess of jurisdiction when it issued SEC-MC No. 8. To the contrary, the Court finds SEC-MC
No. 8 to have been issued in fealty to the Gamboa Decision and Resolution.

The ratio in the Gamboa Decision and Gamboa Resolution.

To determine what the Court directed the SEC to do - and therefore resolve whether what the SEC did amounted to
grave abuse of discretion - the Court resorts to the decretal portion of the GamboaDecision, as this is the portion of
the decision that a party relies upon to determine his or her rights and duties,60viz:chanRoblesvirtualLawlibrary
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section II, Article XII of the I987
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the
term "capital" in determining the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section II, Article XII of the Constitution, to impose the appropriate
sanctions under the law.61
In turn, the Gamboa Resolution stated:
In any event, the SEC has expressly manifested62 that it will abide by the Court's decision and defer to the Court's
definition of the term "capital" in Section II, Article XII of the Constitution. Further, the SEC entered its special
appearance in this case and argued during the Oral Arguments, indicating its submission to the Court's jurisdiction. It
is clear, therefore, that there exists no legal impediment against the proper and immediate implementation of the
Court's directive to the SEC.

x x x x

x x x The dispositive portion of the Court's ruling is addressed not to PLDT but solely to the SEC, which is the
administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.63
To recall, the sole issue in the Gamboa case was: "whether the term 'capital' in Section 11, Article XII of the
Constitution refers to the total common shares only or to the total outstanding capital stock (combined total of common
and non-voting preferred shares) of PLDT, a public utility."64

The Court directly answered the Issue and consistently defined the term "capital" as follows:

xxx

The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, and not to the total outstanding capital
stock comprising both common and non voting preferred shares.

xxxx

Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the election of directors, then the term "capital"
shall include such preferred shares because the right to participate in the control or management of the corporation
is exercised through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock that can vote in the election of directors.65
The decretal portion of the Gamboa Decision follows the definition of the term "capital" in the body of the decision, to
wit: "x x x we x x x rule that the term 'capital' in Section 11, Article XII of the 1987 Constitution refers only to shares of
stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the
total outstanding capital stock (common and non-voting preferred shares)."66
The Court adopted the foregoing definition of the term "capital" in Section 11, Article XII of the 1987 Constitution in
furtherance of "the intent and letter of the Constitution that the 'State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos' [because a] broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily equates to control of the public utility."67 The Court, recognizing that
the provision is an express recognition of the sensitive and vital position of public utilities both in the national economy
and for national security, also pronounced that the evident purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national interest.68 Further, the Court noted that
the foregoing interpretation is consistent with the intent of the framers of the Constitution to place in the hands of
Filipino citizens the control and management of public utilities; and, as revealed in the deliberations of the
Constitutional Commission, "capital" refers to the voting stock or controlling interest of a corporation.69

In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding shares of stock
entitled to vote directors, which is what the Constitution precisely requires, then the Filipino stockholders control the
corporation, i.e., they dictate corporate actions and decisions, and they have all the rights of ownership including, but
not limited to, offering certain preferred shares that may have greater economic interest to foreign investors - as the
need for capital for corporate pursuits (such as expansion), may be good for the corporation that they own. Surely,
these "true owners" will not allow any dilution of their ownership and control if such move will not be beneficial to them.

As owners of the corporation, the economic benefits will necessarily accrue to them. There is thus no logical reason
why Filipino shareholders will allow foreigners to have greater economic benefits than them. It is illogical to speculate
that they will create shares which have features that will give greater economic interests or benefits than they are
holding and not benefit from such offering, or that they will allow foreigners to profit more than them from their own
corporation - unless they are dummies. But, Commonwealth Act No. 108, the Anti-Dummy Law, is NOT in issue in
these petitions. Notably, even if the shares of a particular public utility were owned 100% Filipino, that does not
discount the possibility of a dummy situation from arising. Hence, even if the 60-40 ownership in favor of Filipinos rule
is applied separately to each class of shares of a public utility corporation, as the petitioners insist, the rule can easily
be side-stepped by a dummy relationship. In other words, even applying the 60-40 Filipino foreign ownership rule to
each class of shares will not assure the lofty purpose enunciated by petitioners.

The Court observed further in the Gamboa Decision that reinforcing this interpretation of the term "capital", as referring
to interests or shares entitled to vote, is the definition of a Philippine national in the Foreign Investments Act of 1991
("FIA"), which is explained in the Implementing Rules and Regulations of the FIA ("FIA-IRR"). The FIA-IRR provides:
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough
to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.70
Echoing the FIA-IRR, the Court stated in the Gamboa Decision that:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]."

xxxx
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is constitutionally required for the State's grant of authority to operate a
public utility. x x x71
Was the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution declared for the first time by
the Court in the Gamboa Decision modified in the Gamboa Resolution?

The Court is convinced that it was not. The Gamboa Resolution consists of 51 pages (excluding the dissenting
opinions of Associate Justices Velasco and Abad). For the most part of the Gamboa Resolution, the Court, after
reviewing SEC and DOJ72 Opinions as well as the provisions of the FIA and its predecessor statutes,73 reiterated that
both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation
is a "Philippine national"74 and that a "Philippine national," as defined in the FIA and all its predecessor statutes, is "a
Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital stock outstanding and
entitled to vote," is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60%
of its voting stock is owned by Filipino citizens."75 The Court also reiterated that, from the deliberations of the
Constitutional Commission, it is evident that the term "capital" refers to controlling interest of a corporation,76 and
the framers of the Constitution intended public utilities to be majority Filipino-owned and controlled.

The "Final Word" of the Gamboa Resolution put to rest the Court's interpretation of the term "capital", and this is
quoted verbatim, to wit:
XII.
Final Word

The Constitution expressly declares as State policy the development of an economy "effectively controlled" by
Filipinos. Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public
utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or
corporations or associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The FIA's
implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of stocks,
coupled with appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the
interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting
rights, as well as with full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.77
Everything told, the Court, in both the Gamboa Decision and Gamboa Resolution, finally settled with the PIA's
definition of "Philippine national" as expounded in the FIA-IRR in construing the term "capital" in Section 11, Article
XII of the 1987 Constitution.

The assailed SEC-MC No. 8.

The relevant provision in the assailed SEC-MC No. 8 IS Section 2, which provides:
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement.
For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to
BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote in the election of directors.78
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest requirement. In
fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in the voting stocks; it
moreover requires the 60-40 percentage ownership in the total number of outstanding shares of stock,
whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to the Court's unambiguous pronouncement
that "[f]ull beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights is required."79 Clearly, SEC-MC No. 8 cannot be said to have been issued with grave abuse of discretion.

A simple illustration involving Company X with three kinds of shares of stock, easily shows how compliance with the
requirements of SEC-MC No. 8 will necessarily result to full and faithful compliance with the Gamboa Decision as well
as the Gamboa Resolution.

The following is the composition of the outstanding capital stock of Company X:chanRoblesvirtualLawlibrary
100 common shares
100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)

SEC-MC No. 8 GAMBOA DECISION

(1) 60% (required percentage of Filipino) applied to the "shares of stock entitled to vote in the election of
total number of outstanding shares of stock entitled to directors"80 (60% of the voting rights)
vote in the election of directors

If at least a total of 120 of common shares and Class A preferred shares (in any combination) are owned and controlled
by Filipinos, Company X is compliant with the 60% of the voting rights in favor of Filipinos requirement of both SEC-
MC No. 8 and the Gamboa Decision.
 SEC-MC No. 8 GAMBOA DECISION/RESOLUTION

(2) 60% (required percentage of Filipino) applied to
BOTH (a) the total number of outstanding shares of
stock, entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of stock,
whether or not entitled to vote in the election of directors.
"Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the
voting rights"81 or "Full beneficial ownership of the
stocks, coupled with appropriate voting rights x x x
shares with voting rights, as well as with full beneficial
ownership"82

If at least a total of 180 shares of all the outstanding capital stock of Company X are owned and controlled by Filipinos,
provided that among those 180 shares a total of 120 of the common shares and Class A preferred shares (in any
combination) are owned and controlled by Filipinos, then Company X is compliant with both requirements of voting
rights and beneficial ownership under SEC-MC No. 8 and the Gamboa Decision and Resolution.

From the foregoing illustration, SEC-MC No. 8 simply implemented, and is fully in accordance with,
the Gamboa Decision and Resolution.

While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test or full beneficial ownership of stocks
requirement in the FIA, this will not, as it does not, render it invalid meaning, it does not follow that the SEC will not
apply this test in determining whether the shares claimed to be owned by Philippine nationals are Filipino, i.e., are
held by them by mere title or in full beneficial ownership. To be sure, the SEC takes its guiding lights also from the
FIA and its implementing rules, the Securities Regulation Code (Republic Act No. 8799; "SRC") and its implementing
rules.83

The full beneficial ownership test.

The minority justifies the application of the 60-40 Filipino-foreign ownership rule separately to each class of shares of
a public utility corporation in this fashion:chanRoblesvirtualLawlibrary
x x x The words "own and control," used to qualify the minimum Filipino participation in Section 11, Article XII of the
Constitution, reflects the importance of Filipinos having both the ability to influence the corporation through voting
rights and economic benefits. In other words, full ownership up to 60% of a public utility encompasses both
controland economic rights, both of which must stay in Filipino hands. Filipinos, who own 60% of the controlling
interest, must also own 60% of the economic interest in a public utility.
x x x In mixed class or dual structured corporations, however, there is variance in the proportion of stockholders'
controlling interest visa-vis their economic ownership rights. This resulting variation is recognized by the Implementing
Rules and Regulations (IRR) of the Securities Regulation Code, which defined beneficial ownership as that may exist
either through voting power and/or through investment returns. By using and/or in defining beneficial ownership,
the IRR, in effect, recognizes a possible situation where voting power is not commensurate to investment power.
The definition of "beneficial owner" or "beneficial ownership" in the Implementing Rules and Regulations of the
Securities Regulation Code ("SRC-IRR") is consistent with the concept of"full beneficial ownership" in the FIA-IRR.

As defined in the SRC-IRR, "[b]eneficial owner or beneficial ownership means any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power
(which includes the power to vote or direct the voting of such security) and/or investment returns or power (which
includes the power to dispose of, or direct the disposition of such security) x x x."84

While it is correct to state that beneficial ownership is that which may exist either through voting power and/or
investment returns, it does not follow, as espoused by the minority opinion, that the SRC-IRR, in effect, recognizes a
possible situation where voting power is not commensurate to investment power. That is a wrong syllogism. The
fallacy arises from a misunderstanding on what the definition is for. The "beneficial ownership" referred to in the
definition, while it may ultimately and indirectly refer to the overall ownership of the corporation, more pertinently refers
to the ownership of the share subject of the question: is it Filipino-owned or not?

As noted earlier, the FIA-IRR states:

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting
rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals.85
The emphasized portions in the foregoing provision is the equivalent of the so-called "beneficial ownership test". That
is all.

The term "full beneficial ownership" found in the FIA-IRR is to be understood in the context of the entire paragraph
defining the term "Philippine national". Mere legal title is not enough to meet the required Filipino equity, which means
that it is not sufficient that a share is registered in the name of a Filipino citizen or national, i.e., he should also have
full beneficial ownership of the share. If the voting right of a share held in the name of a Filipino citizen or national is
assigned or transferred to an alien, that share is not to be counted in the determination of the required Filipino equity.
In the same vein, if the dividends and other fruits and accessions of the share do not accrue to a Filipino citizen or
national, then that share is also to be excluded or not counted.

In this regard, it is worth reiterating the Court's pronouncement in the Gamboa Decision, which is consistent with the
FIA-IRR, viz:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
required. x x xx x x x
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is constitutionally required (or the State's grant of
authority to operate a public utility. x x x.86
And the "Final Word" of the Gamboa Resolution is in full accord with the foregoing pronouncement of the Court, to
wit:chanRoblesvirtualLawlibrary
XII.
Final Word

x x x The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of
the stocks, coupled with appropriate voting rights is essential."87
Given that beneficial ownership of the outstanding capital stock of the public utility corporation has to be determined
for purposes of compliance with the 60% Filipino ownership requirement, the definition in the SRC-IRR can now be
applied to resolve only the question of who is the beneficial owner or who has beneficial ownership of each "specific
stock" of the said corporation. Thus, if a "specific stock" is owned by a Filipino in the books of the corporation, but the
stock's voting power or disposing power belongs to a foreigner, then that "specific stock" will not be deemed as
"beneficially owned" by a Filipino.

Stated inversely, if the Filipino has the "specific stock's" voting power (he can vote the stock or direct another to vote
for him), or the Filipino has the investment power over the "specific stock" (he can dispose of the stock or direct
another to dispose it for him), or he has both (he can vote and dispose of the "specific stock" or direct another to vote
or dispose it for him), then such Filipino is the "beneficial owner" of that "specific stock" and that "specific stock" is
considered (or counted) as part of the 60% Filipino ownership of the corporation. In the end, all those "specific stocks"
that are determined to be Filipino (per definition of "beneficial owner" or "beneficial ownership") will be added together
and their sum must be equivalent to at least 60% of the total outstanding shares of stock entitled to vote in the election
of directors and at least 60% of the total number of outstanding shares of stock, whether or not entitled to vote in the
election of directors.

To reiterate, the "beneficial owner or beneficial ownership" definition in the SRC-IRR is understood only in determining
the respective nationalities of the outstanding capital stock of a public utility corporation in order to determine its
compliance with the percentage of Filipino ownership required by the Constitution.

The restrictive re-interpretation of "capital" as insisted by the petitioners is unwarranted.

Petitioners' insistence that the 60% Filipino equity requirement must be applied to each class of shares is simply
beyond the literal text and contemplation of Section 11, Article XII of the 1987 Constitution, viz:
Sec. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at
least sixty per centum or whose capital is owned by such citizens, nor shall such franchise, certificate or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted
except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such corporation or association must
be citizens of the Philippines.
As worded, effective control by Filipino citizens of a public utility is already assured in the provision. With respect to
a stock corporation engaged in the business of a public utility, the constitutional provision mandates three safeguards:
(1) 60% of its capital must be owned by Filipino citizens; (2) participation of foreign investors in its board of directors
is limited to their proportionate share in its capital; and (3) all its executive and managing officers must be citizens of
the Philippines.

In the exhaustive review made by the Court in the Gamboa Resolution of the deliberations of the Constitutional
Commission, the opinions of the framers of the 1987 Constitution, the opinions of the SEC and the DOJ as well as
the provisions of the FIA, its implementing rules and its predecessor statutes, the intention to apply the voting control
test and the beneficial ownership test was not mentioned in reference to "each class of shares." Even
the Gamboa Decision was silent on this point.

To be sure, the application of the 60-40 Filipino-foreign ownership requirement separately to each class of shares,
whether common, preferred non-voting, preferred voting or any other class of shares fails to understand and
appreciate the nature and features of stocks as financial instruments.88

There are basically only two types of shares or stocks, i.e., common stock and preferred stock. However, the classes
and variety of shares that a corporation may issue are dictated by the confluence of the corporation's financial position
and needs, business opportunities, short-term and long term targets, risks involved, to name a few; and they can be
classified and re-classified from time to time. With respect to preferred shares, there are cumulative preferred shares,
non-cumulative preferred shares, convertible preferred shares, participating preferred shares.

Because of the different features of preferred shares, it is required that the presentation and disclosure of these
financial instruments in financial statements should be in accordance with the substance of the contractual
arrangement and the definitions of a financial liability, a financial asset and an equity instrument. 89

Under IAS90 32.16, a financial instrument is an equity instrument only if (a) the instrument includes no contractual
obligation to deliver cash or another financial asset to another entity, and (b) if the instrument will or may be settled in
the issuer's own equity instruments, it is either: (i) a non derivative that includes no contractual obligation for the issuer
to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled only by the issuer
exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.91

The following are illustrations of how preferred shares should be presented and disclosed:

Illustration - preference shares

If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory redemption
feature at a future date, the substance is that they are a contractual obligation to deliver cash and, therefore, should
be recognized as a liability. [IAS 32.18(a)] In contrast, preference shares that do not have a fixed maturity, and where
the issuer does not have a contractual obligation to make any payment are equity. In this example even though both
instruments are legally termed preference shares they have different contractual terms and one is a financial liability
while the other is equity.

Illustration - issuance of fixed monetary amount of equity instruments

A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies
so that the fair value of the entity's own equity instruments to be received or delivered equals the fixed monetary
amount of the contractual right or obligation is a financial liability. [IAS 32.20]

Illustration - one party bas a choice over bow an instrument is settled

When a derivative financial instrument gives one party a choice over how it is settled (for instance, the issuer or the
holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability
unless all of the settlement alternatives would result in it being an equity instrument. [IAS 32.26]92
The fact that from an accounting standpoint, the substance or essence of the financial instrument is the key
determinant whether it should be categorized as a financial liability or an equity instrument, there is no compelling
reason why the same treatment may not be recognized from a legal perspective. Thus, to require Filipino shareholders
to acquire preferred shares that are substantially debts, in order to meet the "restrictive" Filipino ownership
requirement that petitioners espouse, may not bode well for the Philippine corporation and its Filipino shareholders.

Parenthetically, given the innumerable permutations that the types and classes of stocks may take, requiring the SEC
and other government agencies to keep track of the ever-changing capital classes of corporations will be
impracticable, if not downright impossible. And the law does not require the impossible. (Lex non cogit ad
impossibilia.)93

That stock corporations are allowed to create shares of different classes with varying features is a flexibility that is
granted, among others, for the corporation to attract and generate capital (funds) from both local and foreign capital
markets. This access to capital - which a stock corporation may need for expansion, debt relief/repayment, working
capital requirement and other corporate pursuits - will be greatly eroded with further unwarranted limitations that are
not articulated in the Constitution. The intricacies and delicate balance between debt instruments (liabilities) and equity
(capital) that stock corporations need to calibrate to fund their business requirements and achieve their financial
targets are better left to the judgment of their boards and officers, whose bounden duty is to steer their companies to
financial stability and profitability and who are ultimately answerable to their shareholders.

Going back to the illustration above, the restrictive meaning of the term "capital" espoused by petitioners will definitely
be complied with if 60% of each of the three classes of shares of Company X, consisting of 100 common shares, 100
Class A preferred shares (with right to elect directors) and 100 Class B preferred shares (without right to elect
directors), is owned by Filipinos. However, what if the 60% Filipino ownership in each class of preferred shares, i.e.,
60 Class A preferred shares and 60 Class B preferred shares, is not fully subscribed or achieved because there are
not enough Filipino takers? Company X will be deprived of capital that would otherwise be accessible to it were it not
for this unwarranted "restrictive" meaning of "capital".

The fact that all shares have the right to vote in 8 specific corporate actions as provided in Section 6 of the Corporation
Code does not per se justify the favorable adoption of the restrictive re-interpretation of "capital" as the petitioners
espouse. As observed in the Gamboa Decision, viz:

The Corporation Code of the Philippines classifies shares as common or preferred, thus:
Sec. 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all
of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in
the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.

xxxx
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be
equal in all respects to every other share.
Where the articles of incorporation provide for non voting shares in the cases allowed by this Code, the holders of
such shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate
act as provided in this Code shall be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the board of directors that
controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting rights
to preferred shares, preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and
on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in
the same manner as bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be
deprived of the right to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and
any provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.

Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the election of directors, then the term "capital"
shall include such preferred shares because the right to participate in the control or management of the corporation
is exercised through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino
citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional
Commission, "capital" refers to the voting stock or controlling interest of a corporation x x x.94
The Gamboa Decision held that preferred shares are to be factored in only if they are entitled to vote in the election
of directors. If preferred shares have no voting rights, then they cannot elect members of the board of directors, which
wields control of the corporation. As to the right of non voting preferred shares to vote in the 8 instances enumerated
in Section 6 of the Corporation Code, the Gamboa Decision considered them but, in the end, did not find them
significant in resolving the issue of the proper interpretation of the word "capital" in Section 11, Article XII of the
Constitution.

Therefore, to now insist in the present case that preferred shares be regarded differently from their unambiguous
treatment in the Gamboa Decision is enough proof that the Gamboa Decision, which had attained finality more than
4 years ago, is being drastically changed or expanded.

In this regard, it should be noted that the 8 corporate matters enumerated in Section 6 of the Corporation Code require,
at the outset, a favorable recommendation by the management to the board. As mandated by Section 11, Article XII
of the Constitution, all the executive and managing officers of a public utility company must be Filipinos. Thus, the all-
Filipino management team must first be convinced that any of the 8 corporate actions in Section 6 will be to the best
interest of the company. Then, when the all-Filipino management team recommends this to the board, a majority of
the board has to approve the recommendation and, as required by the Constitution, foreign participation in the board
cannot exceed 40% of the total number of board seats. Since the Filipino directors comprise the majority, they, if
united, do not even need the vote of the foreign directors to approve the intended corporate act. After approval by the
board, all the shareholders (with and without voting rights) will vote on the corporate action. The required vote in the
shareholders' meeting is 2/3 of the outstanding capital stock.95 Given the super majority vote requirement, foreign
shareholders cannot dictate upon their Filipino counterpart. However, foreigners (if owning at least a third of the
outstanding capital stock) must agree with Filipino shareholders for the corporate action to be approved. The 2/3
voting requirement applies to all corporations, given the significance of the 8 corporate actions contemplated in Section
6 of the Corporation Code.

In short, if the Filipino officers, directors and shareholders will not approve of the corporate act, the foreigners are
helpless.

Allowing stockholders holding preferred shares without voting rights to vote in the 8 corporate matters enumerated in
Section 6 is an acknowledgment of their right of ownership. If the owners of preferred shares without right to vote/elect
directors are not allowed to vote in any of those 8 corporate actions, then they will not be entitled to the appraisal right
provided under Section 8196 of the Corporation Code in the event that they dissent in the corporate act. As required
in Section 82, the appraisal right can only be exercised by any stockholder who voted against the proposed action.
Thus, without recognizing the right of every stockholder to vote in the 8 instances enumerated in Section 6, the
stockholder cannot exercise his appraisal right in case he votes against the corporate action. In simple terms, the right
to vote in the 8 instances enumerated in Section 6 is more in furtherance of the stockholder's right of ownership rather
than as a mode of control.

As to financial interest, giving short-lived preferred or superior terms to certain classes or series of shares may be a
welcome option to expand capital, without the Filipino shareholders putting up additional substantial capital and/or
losing ownership and control of the company. For shareholders who are not keen on the creation of those shares,
they may opt to avail themselves of their appraisal right. As acknowledged in the Gamboa Decision, preferred
shareholders are merely investors in the company for income in the same manner as bondholders. Without a lucrative
package, including an attractive return of investment, preferred shares will not be subscribed and the much-needed
additional capital will be elusive. A too restrictive definition of "capital", one which was never contemplated in
the GamboaDecision, will surely have a dampening effect on the business milieu by eroding the flexibility inherent in
the issuance of preferred shares with varying terms and conditions. Consequently, the rights and prerogatives of the
owners of the corporation will be unwarrantedly stymied.

Moreover, the restrictive interpretation of the term "capital" would have a tremendous impact on the country as a whole
and to all Filipinos.

The PSE's Comment-in-Intervention dated June 16, 201497 warns that:

80. [R]edefining "capital" as used in Section 11, Article XII of the 1987 Constitution and adopting the supposed
"Effective Control Test" will lead to disastrous consequences to the Philippine stock market.

81. Current data of the PSE show that, if the "Effective Control Test" were applied, the total value of shares that would
be deemed in excess of the foreign-ownership limits based on stock prices as of 30 April 2014 is One Hundred Fifty
Nine Billion Six Hundred Thirty Eight Million Eight Hundred Forty Five Thousand Two Hundred Six Pesos and
Eighty Nine Cents (Php159,638,845,206.89).
82. The aforementioned value of investments would have to be discharged by foreign holders, and consequently must
be absorbed by Filipino investors. Needless to state, the lack of investments may lead to shutdown of the affected
enterprises and to immeasurable consequences to the Philippine economy.98
In its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention dated May 30,
2016,99 SHAREPHIL further warns that "[t]he restrictive re-interpretation of the term "capital" will result in massive
forced divestment of foreign stockholdings in Philippine corporations."100SHAREPHIL explains:

4.51. On 16 October 2012, Deutsche Bank released a Market Research Study, which analyzed the implications of the
ruling in Gamboa. The Market Research Study stated that:
"If this thinking is applied and becomes established precedent, it would significantly expand on the rules for
determining nationality in partially nationalized industries. If that were to happen, not only will PLDT's move to issue
the 150m voting prefs be inadequate to address the issue, a large number of listed companies with similar capital
structures could also be affected."
4.52. In five (5) companies alone, One Hundred Fifty Eight Billion Pesos (PhP158,000,000,000.00) worth of shares
will have to be sold by foreign shareholders in a forced divestment, if the obiter in Gamboa were to be implemented.
Foreign shareholders of PLDT will have to divest One Hundred Three Billion Eight Hundred Sixty Million Pesos
(PhP103,860,000,000.00) worth of shares.
 a. Foreign shareholders of Globe Telecom will have to divest Thirty Eight Billion Two Hundred Fifty
Million Pesos (PhP38,250,000,000.00) worth of shares.

b. Foreign shareholders of Ayala Land will have to divest Seventeen Billion Five Hundred Fifty Million
Pesos (PhP17,550,000,000.00) worth of shares.

c. Foreign shareholders of ICTSI will have to divest Six Billion Four Hundred Ninety Million Pesos
(PhP6,490,000,000.00) worth of shares.

d. Foreign shareholders of MWC will have to divest Seven Billion Seven Hundred Fourteen Million Pesos
(PhP7,714,000,000.00) worth of shares.

4.53. Clearly, the local stock market which has an average value turn-over of Seven Billion Pesos cannot adequately
absorb the influx of shares caused by the forced divestment. As a result, foreign stockholders will have to sell these
shares at bargain prices just to comply with the Obiter.
4.54. These shares being part of the Philippine index, their forced divestment vis-a-vis the inability of the local stock
market to absorb these shares will necessarily bring immense downward pressure on the index. A domino-effect
implosion of the Philippine stock market and the Philippine economy, in general is not remote. x x x.101
Petitioners have failed to counter or refute these submissions of the PSE and SHAREPHIL. These unrefuted
observations indicate to the Court that a restrictive interpretation - or rather, re-interpretation, of "capital", as already
defined with finality in the Gamboa Decision and Resolution - directly affects the well-being of the country
and cannot be labelled as "irrelevant and impertinent concerns x x x add[ing] burden [to] the Court."102 These
observations by the PSE103 and SHAREPHIL,104 unless refuted, must be considered by the Court to be valid and
sound.

The Court in Abacus Securities Corp. v. Ampil105 observed that: "[s]tock market transactions affect the general public
and the national economy. The rise and fall of stock market indices reflect to a considerable degree the state of the
economy. Trends in stock prices tend to herald changes in business conditions. Consequently, securities transactions
are impressed with public interest x x x."106 The importance of the stock market in the economy cannot simply be
glossed over.

In view of the foregoing, the pronouncement of the Court in the Gamboa Resolution - the constitutional requirement
to apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising
the capital of a corporation107 - is clearly an obiter dictum that cannot override the Court's unequivocal definition of the
term "capital" in both the Gamboa Decision and Resolution.

Nowhere in the discussion of the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution in
the Gamboa Decision did the Court mention the 60% Filipino equity requirement to be applied to each class of shares.
The definition of "Philippine national" in the FIA and expounded in its IRR, which the Court adopted in its interpretation
of the term "capital", does not support such application. In fact, even the Final Word of the Gamboa Resolution does
not even intimate or suggest the need for a clarification or re-interpretation.

To revisit or even clarify the unequivocal definition of the term "capital" as referring "only to shares of stock entitled to
vote in the election of directors" and apply the 60% Filipino ownership requirement to each class of share is effectively
and unwarrantedly amending or changing the Gamboa Decision and Resolution. The Gamboa Decision and
Resolution Doctrine did NOT make any definitive ruling that the 60% Filipino ownership requirement was intended to
apply to each class of share.

In Malayang Manggagawa ng Stayfast Phils., Inc. v. NLRC,108 the Court stated:

Where a petition for certiorari under Rule 65 of the Rules of Court alleges grave abuse of discretion, the petitioner
should establish that the respondent court or tribunal acted in a capricious, whimsical, arbitrary or despotic
manner in the exercise of its jurisdiction as to be equivalent to lack of jurisdiction. This is so because "grave
abuse of discretion" is well-defined and not an amorphous concept that may easily be manipulated to suit one's
purpose. In this connection, Yu v. Judge Reyes-Carpio, is instructive:
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only be considered as
with grave abuse of discretion when such act is done in a "capricious or whimsical exercise of judgment as is
equivalent to lack of jurisdiction." The abuse of discretion must be so patent and gross as to amount to an "evasion of
a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as where
the power is exercised in an arbitrary and despotic manner by reason of passion and hostility." Furthermore, the use
of a petition for certiorari is restricted only to "truly extraordinary cases wherein the act of the lower court or quasi-
judicial body is wholly void." From the foregoing definition, it is clear that the special civil action of certiorari under Rule
65 can only strike an act down for having been done with grave abuse of discretion if the petitioner could manifestly
show that such act was patent and gross. x x x.
The onus rests on petitioners to clearly and sufficiently establish that the SEC, in issuing SEC-MC No. 8, acted in a
capricious, whimsical, arbitrary or despotic manner in the exercise of its jurisdiction as to be equivalent to lack of
jurisdiction or that the SEC's abuse of discretion is so patent and gross as to amount to an evasion of a positive duty
or to a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law and the Gamboa Decision
and Resolution. Petitioners miserably failed in this respect.

The clear and unequivocal definition of "capital" in Gamboa has attained finality.

It is an elementary principle in procedure that the resolution of the court in a given issue as embodied in the dispositive
portion or fallo of a decision controls the settlement of rights of the parties and the questions, notwithstanding
statement in the body of the decision which may be somewhat confusing, inasmuch as the dispositive part of a final
decision is definite, clear and unequivocal and can be wholly given effect without need of interpretation or
construction.109

As explained above, the fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are definite,
clear and unequivocaL While there is a passage in the body of the Gamboa Resolution that might have appeared
contrary to the fallo of the Gamboa Decision - capitalized upon by petitioners to espouse a restrictive re-interpretation
of "capital" - the definiteness and clarity of the fallo of the GamboaDecision must control over the obiter dictum in
the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign ownership requirement to "each class
of shares, regardless of differences in voting rights, privileges and restrictions."

The final judgment as rendered is the judgment of the court irrespective of all seemingly contrary statements in the
decision because at the root of the doctrine that the premises must yield to the conclusion is, side by side with the
need of writing finis to litigations, the recognition of the truth that "the trained intuition of the judge continually leads
him to right results for which he is puzzled to give unimpeachable legal reasons."110

Petitioners cannot, after Gamboa has attained finality, seek a belated correction or reconsideration of the Court's
unequivocal definition of the term "capital". At the core of the doctrine of finality of judgments is that public policy and
sound practice demand that, at the risk of occasional errors, judgments of courts should become final at some definite
date fixed by law and the very objects for which courts were instituted was to put an end to controversies.111 Indeed,
the definition of the term "capital" in the fallo of the Gamboa Decision has acquired finality.

Because the SEC acted pursuant to the Court's pronouncements in both the Gamboa Decision
and Gamboa Resolution, then it could not have gravely abused its discretion. That portion found in the body of
the Gamboa Resolution which the petitioners rely upon is nothing more than an obiter dictum and the SEC could not
be expected to apply it as it was not - is not - a binding pronouncement of the Court.112

Furthermore, as opined by Justice Bersamin during the deliberations, the doctrine of immutability of judgment
precludes the Court from re examining the definition of "capital" under Section 11, Article XII of the Constitution. Under
the doctrine of finality and immutability of judgment, a decision that has acquired finality becomes immutable and
unalterable, and may no longer be modified in any respect, even if the modification is meant to correct erroneous
conclusions of fact and law, and even if the modification is made by the court that rendered it or by the Highest Court
of the land. Any act that violates the principle must be immediately stricken down.113 The petitions have not succeeded
in pointing to any exceptions to the doctrine of finality of judgments, under which the present case falls, to wit: (1) the
correction of clerical errors; (2) the so-called nunc pro tunc entries which cause no prejudice to any party; (3) void
judgments; and (4) whenever circumstances transpire after the finality of the decision rendering its execution unjust
and inequitable.114

With the foregoing disquisition, the Court rules that SEC-MC No. 8 is not contrary to the Court's definition and
interpretation of the term "capital". Accordingly, the petitions must be denied for failing to show grave abuse of
discretion in the issuance of SEC-MC No. 8.

The petitions are second motions for Reconsideration, which are proscribed.
As Justice Bersamin further noted during the deliberations, the petitions are in reality second motions for
reconsideration prohibited by the Internal Rules of the Supreme Court.115 The parties, particularly intervenors
Gamboa, et al., could have filed a motion for clarification in Gamboa in order to fill in the perceived shortcoming
occasioned by the non-inclusion in the dispositive portion of the GamboaResolution of what was discussed in the
body.116 The statement in the fallo of the Gamboa Resolution to the effect that "[n]o further pleadings shall be
entertained" could not be a hindrance to a motion for clarification that sought an unadulterated inquiry arising upon an
ambiguity in the decision.117

Closing

Ultimately, the key to nationalism is in the individual. Particularly for a public utility corporation or association, whether
stock or non-stock, it starts with the Filipino shareholder or member who, together with other Filipino shareholders or
members wielding 60% voting power, elects the Filipino director who, in turn, together with other Filipino directors
comprising a majority of the board of directors or trustees, appoints and employs the all-Filipino management team.
This is what is envisioned by the Constitution to assure effective control by Filipinos. If the safeguards, which are
already stringent, fail, i.e., a public utility corporation whose voting stocks are beneficially owned by Filipinos, the
majority of its directors are Filipinos, and all its managing officers are Filipinos, is proalien (or worse, dummies), then
that is not the fault or failure of the Constitution. It is the breakdown of nationalism in each of the Filipino shareholders,
Filipino directors and Filipino officers of that corporation. No Constitution, no decision of the Court, no legislation, no
matter how ultranationalistic they are, can guarantee nationalism.

WHEREFORE, premises considered, the Court DENIES the Petition and Petition-in-Intervention. SO ORDERED.

5. Narra Nickel Mining and Dev Corp vs. Redmont Consolidated Mines

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and
MCARTHUR MINING, INC., Petitioners,
vs. REDMONT CONSOLIDATED MINES CORP., Respondent.

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and Mining Development
Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to
reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province of
Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the areas
where it wanted to undertake exploration and mining activities where already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an
MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the
Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which includes an area of 3,720 hectares
in Barangay Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to Madridejos Mining
Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining
& Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region IV-B,
DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277
hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed,
transferred and/or assigned its rights and interests over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly
EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of
Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said MPSA
application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for
the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and
controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a
considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the areas
covered by applications since it knows that it can only participate in mining activities through corporations which are
deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI, they
were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino
citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA)
7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in singular or plural,
shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a corporation, partnership,
association, or cooperative organized or authorized for the purpose of engaging in mining, with technical and financial
capability to undertake mineral resources development and duly registered in accordance with law at least sixty per
cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-
owned corporation shall be deemed a qualified person for purposes of granting an exploration permit, financial or
technical assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial or
Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and
AFTA-IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue
on nationality should not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their
capital is owned by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of McArthur)4 and 40%
of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner
of at least 60% of the capital stock of each of petitioners. They added that the best tool used in determining the
nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of
1991. They also claimed that the POA of DENR did not have jurisdiction over the issues in Redmont’s petition since
they are not enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue them
because it has no pending claim or application over the areas applied for by petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining activities. On the other
hand, [Redmont] having filed its own applications for an EPA over the areas earlier covered by the MPSA application
of respondents may be considered if and when they are qualified under the law. The violation of the requirements for
the issuance and/or grant of permits over mining areas is clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued under the premises is in order and open the areas covered
to other qualified applicants.

xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining and
Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for being considered as
Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND
VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a 100% Canadian
company and declared their MPSAs null and void. In the same Resolution, it gave due course to Redmont’s EPAs.
Thereafter, on February 7, 2008, the POA issued an Order7 denying the Motion for Reconsideration filed by
petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal 8 and
Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of
Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under the law. Also, through
a letter, they informed the MAB that they had their individual MPSA applications converted to FTAAs. McArthur’s
FTAA was denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application was converted to AFTA-
IVB-0813 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint15 with the Securities
and Exchange Commission (SEC), seeking the revocation of the certificates for registration of petitioners on the
ground that they are foreign-owned or controlled corporations engaged in mining in violation of Philippine laws.
Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB
praying for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92 (RTC)
a Complaint16 for injunction with application for issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for the deferral of the MAB proceedings
pending the resolution of the Complaint before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an Order
on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS ASIDE the
Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case
Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions for Reconsideration
of the Appellants. The Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby
ordered DISMISSED.17

Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application for a TRO and setting
the case for hearing the prayer for the issuance of a writ of preliminary injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the September 10, 2008 Order
of the MAB. Subsequently, it filed a Supplemental Motion for Reconsideration20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for Reconsideration,
Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No. 08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary injunction enjoining the
MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for Reconsideration and
Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On October
1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008 and July 1,
2009 of the Mining Adjudication Board are reversed and set aside. The findings of the Panel of Arbitrators of the
Department of Environment and Natural Resources that respondents McArthur, Tesoro and Narra are foreign
corporations is upheld and, therefore, the rejection of their applications for Mineral Product Sharing Agreement should
be recommended to the Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical Assistance
Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or approval is left for
determination by the Secretary of the DENR and the President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when it
realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians. Pursuant
to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the
1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the exploitation
of natural resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60%
of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens. 24(emphasis
supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and their corresponding
common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect owned majority of the
common stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of petitioners
through joint venture agreements. The CA found that through a "web of corporate layering, it is clear that one common
controlling investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners McArthur,
Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA applications suspicious
in nature and, as a consequence, it recommended the rejection of petitioners’ MPSA applications by the Secretary of
the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the POA has jurisdiction
over them and that it also has the power to determine the of nationality of petitioners as a prerequisite of the
Constitution prior the conferring of rights to "co-production, joint venture or production-sharing agreements" of the
state to mining rights. However, it also stated that the POA’s jurisdiction is limited only to the resolution of the dispute
and not on the approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with the
power to approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners
McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the POA’s declaration that
the MPSAs of McArthur, Tesoro and Narra are void is highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated May
7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision 26 on April 6, 2011, wherein it
canceled and revoked petitioners’ FTAAs for violating and circumventing the "Constitution x x x[,] the Small Scale
Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and
E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners
committed violations against the abovementioned laws and failed to submit evidence to negate them. The Decision
further quoted the December 14, 2007 Order of the POA focusing on the alleged misrepresentation and claims made
by petitioners of being domestic or Filipino corporations and the admitted continued mining operation of PMDC using
their locally secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which was
eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the FTAA applications by
petitioners is a clear admission that they are "not capable of conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign entity in their operation, that is why they sought the
participation of MBMI Resources, Inc."28 The Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the violations
and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA application
conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the respondent is not
Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI Resources,
Inc. furnished its stockholders in their head office in Canada suggest that they are conducting operation only through
their local counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30 dated July 6, 2011.
Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA, docketed
as CA-G.R. SP No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the Decision and Resolution
of the OP. Thereafter, petitioners appealed the same CA decision to this Court which is now pending with a different
division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners put forth the following
errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that the subject
matter of the controversy, the MPSA Applications, have already been converted into FTAA applications and
that the same have already been granted.

II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering that the Panel
of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on the
"Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign Investments Act of 1991,
as amended, and the FIA Rules.

V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into FTAA
Applications were of "suspicious nature" as the same is based on mere conjectures and surmises without any
shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable controversy by virtue of
supervening events, so that a declaration thereon would be of no practical use or value."32 Thus, the courts "generally
decline jurisdiction over the case or dismiss it on the ground of mootness."33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an issue of "mootness"
will not deter the courts from trying a case when there is a valid reason to do so. In David v. Macapagal-Arroyo (David),
the Court provided four instances where courts can decide an otherwise moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the bench, the bar,
and the public; and

4.) The case is capable of repetition yet evading review.34

All of the exceptions stated above are present in the instant case. We of this Court note that a grave violation of the
Constitution, specifically Section 2 of Article XII, is being committed by a foreign corporation right under our country’s
nose through a myriad of corporate layering under different, allegedly, Filipino corporations. The intricate corporate
layering utilized by the Canadian company, MBMI, is of exceptional character and involves paramount public interest
since it undeniably affects the exploitation of our Country’s natural resources. The corresponding actions of petitioners
during the lifetime and existence of the instant case raise questions as what principle is to be applied to cases with
similar issues. No definite ruling on such principle has been pronounced by the Court; hence, the disposition of the
issues or errors in the instant case will serve as a guide "to the bench, the bar and the public." 35 Finally, the instant
case is capable of repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing dummy
Filipino corporations through various schemes of corporate layering and conversion of applications to skirt the
constitutional prohibition against foreign mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both involve the
conversion of MPSA applications to FTAA applications. Petitioners propound that the CA erred in ruling against them
since the questioned MPSA applications were already converted into FTAA applications; thus, the issue on the
prohibition relating to MPSA applications of foreign mining corporations is academic. Also, petitioners would want us
to correct the CA’s finding which deemed the aforementioned conversions of applications as suspicious in nature,
since it is based on mere conjectures and surmises and not supported with evidence.

We disagree.

The CA’s analysis of the actions of petitioners after the case was filed against them by respondent is on point. The
changing of applications by petitioners from one type to another just because a case was filed against them, in truth,
would raise not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said conversion not stem
from the case challenging their citizenship and to have the case dismissed against them for being "moot"? It is quite
obvious that it is petitioners’ strategy to have the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the court or appropriate
government agency: on January 2, 2007, Redmont filed three separate petitions for denial of the MPSA applications
of petitioners before the POA. On June 15, 2007, petitioners filed a conversion of their MPSA applications to FTAAs.
The POA, in its December 14, 2007 Resolution, observed this suspect change of applications while the case was
pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission that the respondents
are not capable of conducting a large scale mining operation and that they need the financial and technical assistance
of a foreign entity in their operation that is why they sought the participation of MBMI Resources, Inc. The participation
of MBMI in the corporation only proves the fact that it is the Canadian company that will provide the finances and the
resources to operate the mining areas for the greater benefit and interest of the same and not the Filipino stockholders
who only have a less substantial financial stake in the corporation.

xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is disqualified under the laws. Corporate documents of
MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing and setting aside the
September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision, the CA upheld the findings of the POA
of the DENR that the herein petitioners are in fact foreign corporations thus a recommendation of the rejection of their
MPSA applications were recommended to the Secretary of the DENR. With respect to the FTAA applications or
conversion of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the Secretary of
the DENR and the President of the Republic of the Philippines.37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal of the petition
asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed and issued in their favor FTAA No.
05-2010-IVB, which rendered the petition moot and academic. However, the CA, in a Resolution dated February 15,
2011 denied their motion for being a mere "rehash of their claims and defenses."38 Standing firm on its Decision, the
CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case
to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA. Interestingly, the OP
rendered a Decision dated April 6, 2011, a day after this petition for review was filed, cancelling and revoking the
FTAAs, quoting the Order of the POA and stating that petitioners are foreign corporations since they needed the
financial strength of MBMI, Inc. in order to conduct large scale mining operations. The OP Decision also based the
cancellation on the misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 39 On July 6, 2011,
the OP issued a Resolution, denying the Motion for Reconsideration filed by the petitioners.

Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the fact of the OP’s Decision
and Resolution. In their Reply, petitioners chose to ignore the OP Decision and continued to reuse their old arguments
claiming that they were granted FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and Submission
dated October 19, 2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of events,
MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI Mining Corporation (DMCI), a
Filipino corporation and, in effect, making their respective corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being "moot." Their final act,
wherein MBMI was able to allegedly sell/assign all its shares and interest in the petitioner "holding companies" to
DMCI, only proves that they were in fact not Filipino corporations from the start. The recent divesting of interest by
MBMI will not change the stand of this Court with respect to the nationality of petitioners prior the suspicious change
in their corporate structures. The new documents filed by petitioners are factual evidence that this Court has no power
to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner corporations have violated
several mining laws and made misrepresentations and falsehood in their applications for FTAA which lead to the
revocation of the said FTAAs, demonstrating that petitioners are not beyond going against or around the law using
shifty actions and strategies. Thus, in this instance, we can say that their claim of mootness is moot in itself because
their defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test
The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or foreign. In their
previous petitions, they had been adamant in insisting that they were Filipino corporations, until they submitted their
Manifestation and Submission dated October 19, 2012 where they stated the alleged change of corporate ownership
to reflect their Filipino ownership. Thus, there is a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the
grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises
engaged in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60%
of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other
50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to
the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the
percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent
grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the "control test" under
RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using the
stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:

SECTION 3. Definitions. - As used in this Act:

a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly
owned by the citizens of the Philippines; a corporation organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and
at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That were a
corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations
must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board
of Directors, in order that the corporation shall be considered a Philippine national. (emphasis supplied)

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a
"Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule "has
been abandoned and is no longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the FIA
admits the application of a "corporate layering" scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of discretion in
applying the law. They said that the plain, literal meaning of the statute meant the application of the control test is
obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and
pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the grandfather rule has already
been abandoned must be discredited for lack of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential
energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With
the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development,
and utilization of natural resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture or production-sharing agreements with
Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens.
Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law.

xxxx

The President may enter into agreements with Foreign-owned corporations involving either technical or financial
assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on real contributions to the economic growth
and general welfare of the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the
exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60 percent
ownership of capital is pertinent to this case, since the issues are centered on the utilization of our country’s natural
resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as the
Constitution so provides, such agreements are only allowed corporations or associations "at least 60 percent of such
capital is owned by such citizens." The deliberations in the Records of the 1986 Constitutional Commission shed light
on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national economy is freedom
from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and the welfare of the
Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply freedom from foreign
control? I think that is the meaning of independence, because as phrased, it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the 60/40 possibility in the
cultivation of natural resources, 40 percent involves some control; not total control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-
40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base the equity requirement,
is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation’?
Will the Committee please enlighten me on this?

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP Law Center who
provided us with a draft. The phrase that is contained here which we adopted from the UP draft is ‘60 percent of the
voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity
invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

MR. NOLLEDO: Therefore, we need additional Filipino capital?

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where
corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution
will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National
Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the honorable framers of
our Constitution, the grandfather rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes,
among others, of determining compliance with nationality requirements (the ‘Investee Corporation’). Such manner of
computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders
(‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for
the determination of nationality depending on the ownership of the Investee Corporation and, in certain instances, the
Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation.
The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains
to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as
Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of
the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality."
Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee
Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation
and added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC
Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other
joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the
60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners
Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI, funded them.
However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to convince this
Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where
"doubt" as to the ownership of the corporation exists. It would be ludicrous to limit the application of the said word only
to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in
a corporation. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino
Ownership" at face value. It would be senseless for these applying corporations to state in their respective articles of
incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus,
various corporate schemes and layerings are utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the
law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or indirect,
of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, they
have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from
SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one
thousand pesos (PhP 1,000) per share, subscribed to by the following:44

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Corporation
MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Inc.
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition
as McArthur. In fact, it would seem that MBMI is also a major investor and "controls"45 MBMI and also, similar nominal
shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason
(Mason) and Kenneth Cawkell (Cawkell):

Madridejos Mining Corporation

 Name Nationality Number of Amount Amount Paid
Shares Subscribed
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.
MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Resources,

Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the number
of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder in MMC.
MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the number of shares
it subscribed to. It states that Olympic entered into joint venture agreements with several Philippine companies,
wherein it holds directly and indirectly a 60% effective equity interest in the Olympic Properties. 46 Quoting the said
Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation ("Olympic") entered into a
series of agreements including a Property Purchase and Development Agreement (the Transaction Documents) with
respect to three nickel laterite properties in Palawan, Philippines (the "Olympic Properties"). The Transaction
Documents effectively establish a joint venture between the Company and Olympic for purposes of developing the
Olympic Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture. Under certain
circumstances and upon achieving certain milestones, the Company may earn up to a 100% interest, subject to a
2.5% net revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized
by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in
McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000)
divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]
 Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining, Inc.

MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

Resources, Inc.

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,708,174.60

10,000,000.00
(emphasis supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures as the corporate
structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar,
Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed,"
and "Amount Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0

Development

Corp.

MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

 Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,809,900.00

10,000,000.00
(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity between
SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti
Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality,"
"Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by
MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000).
Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP
2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate
structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes
petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and
development of our natural resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose
corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock of Narra is
ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000) at one thousand
pesos (PhP 1,000) per share, shown as follows:

[[reference = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

Mining &

Development

Corp.

MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

 Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,800,000.00

10,000,000.00 (emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate
structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed
Palawan Alpha South Filipino 6,596 PhP PhP 0
Resources Development 6,596,000.00
Corporation
MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00
Inc.
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
 Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
(emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money paid by
the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC),
is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind the
intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the acquisition,
exploration and development of mineral properties in the Philippines is described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity interest
in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint control over
the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha
Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies
in the Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding
to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha"
group wherein MBMI has joint venture agreements with, practically exercising majority control over the corporations
mentioned. In effect, whether looking at the capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of their capital
stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by co-partner or agent"
rule and "admission by privies" under the Rules of Court in the instant case, by pointing out that statements made by
MBMI should not be admitted in this case since it is not a party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the party within the scope
of his authority and during the existence of the partnership or agency, may be given in evidence against such party
after the partnership or agency is shown by evidence other than such act or declaration itself. The same rule applies
to the act or declaration of a joint owner, joint debtor, or other person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act, declaration, or omission of
the latter, while holding the title, in relation to the property, is evidence against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the partnership relation must be
shown, and that proof of the fact must be made by evidence other than the admission itself."49 Thus, petitioners assert
that the CA erred in finding that a partnership relationship exists between them and MBMI because, in fact, no such
partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint
venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They challenged the conclusion of the CA
which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular partnership can be
formed, it should have been formally reduced into writing since the capital involved is more than three thousand pesos
(PhP 3,000). Being that there is no evidence of written agreement to form a partnership between petitioners and
MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money, property, or industry to a
common fund with the intention of dividing the profits among themselves.50 On the other hand, joint ventures have
been deemed to be "akin" to partnerships since it is difficult to distinguish between joint ventures and partnerships.
Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a
partnership that it is ordinarily held that their rights, duties, and liabilities are to be tested by rules which are closely
analogous to and substantially the same, if not exactly the same, as those which govern partnership. In fact, it has
been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very
little law being found applicable to one that does not apply to the other.51

Though some claim that partnerships and joint ventures are totally different animals, there are very few rules that
differentiate one from the other; thus, joint ventures are deemed "akin" or similar to a partnership. In fact, in joint
venture agreements, rules and legal incidents governing partnerships are applied.52

Accordingly, culled from the incidents and records of this case, it can be assumed that the relationships entered
between and among petitioners and MBMI are no simple "joint venture agreements." As a rule, corporations are
prohibited from entering into partnership agreements; consequently, corporations enter into joint venture agreements
with other corporations or partnerships for certain transactions in order to form "pseudo partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI was executed to
circumvent the legal prohibition against corporations entering into partnerships, then the relationship created should
be deemed as "partnerships," and the laws on partnership should be applied. Thus, a joint venture agreement between
and among corporations may be seen as similar to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are considered to be partnerships, then the
CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint venture, MBMI have
a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The POA has jurisdiction
to settle disputes over rights to mining areas which definitely involve the petitions filed by Redmont against petitioners
Narra, McArthur and Tesoro. Redmont, by filing its petition against petitioners, is asserting the right of Filipinos over
mining areas in the Philippines against alleged foreign-owned mining corporations. Such claim constitutes a "dispute"
found in Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive
and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or opposition to an
application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest, or
opposition to a pending application for a mineral agreement filed with the concerned Regional Office of the MGB. This
is clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:

Sec. 38.

xxxx

Within thirty (30) calendar days from the last date of publication/posting/radio announcements, the authorized
officer(s) of the concerned office(s) shall issue a certification(s) that the publication/posting/radio announcement have
been complied with. Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar days from
the last date of publication/posting/radio announcement, with the concerned Regional Office or through any concerned
PENRO or CENRO for filing in the concerned Regional Office for purposes of its resolution by the Panel of Arbitrators
pursuant to the provisions of this Act and these implementing rules and regulations. Upon final resolution of any
adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a certification to that effect within five
(5) working days from the date of finality of resolution thereof. Where there is no adverse claim, protest or opposition,
the Panel of Arbitrators shall likewise issue a Certification to that effect within five working days therefrom.

xxxx

No Mineral Agreement shall be approved unless the requirements under this Section are fully complied with and any
adverse claim/protest/opposition is finally resolved by the Panel of Arbitrators.

Sec. 41.

xxxx

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of Arbitrators as provided in
Section 38 hereof, the concerned Regional Director shall initially evaluate the Mineral Agreement applications in areas
outside Mineral reservations. He/She shall thereafter endorse his/her findings to the Bureau for further evaluation by
the Director within fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall
endorse the same to the secretary for consideration/approval within fifteen working days from receipt of such
endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15) working days from
receipt of the Certification issued by the Panel of Arbitrators as provided for in Section 38 hereof, the same shall be
evaluated and endorsed by the Director to the Secretary for consideration/approval within fifteen days from receipt of
such endorsement. (emphasis supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of
mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy
furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or
opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional Offices
concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of
mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in the concerned province(s) and municipality(ies), copy
furnished the barangays where the proposed contract area is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has been made and that no adverse claim, protest or
opposition of whatever nature has been filed. On the other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last date of publication/posting, with the Regional offices
concerned, or through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However, previously published valid and subsisting mining claims are exempted from
posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully complied with and any
opposition/adverse claim is dealt with in writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim, opposition, or protest
relative to mining rights under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts and oppositions
relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions and it has no
authority to approve or reject said applications. Such power is vested in the DENR Secretary upon recommendation
of the MGB Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining areas" has nothing to do with
the cancellation of existing mineral agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve disputes over MPSA
applications subject of Redmont’s petitions. However, said jurisdiction does not include either the approval or rejection
of the MPSA applications, which is vested only upon the Secretary of the DENR. Thus, the finding of the POA, with
respect to the rejection of petitioners’ MPSA applications being that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the POA, that has
jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the commencement of
the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.

On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall
have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights to mining areas.
One such dispute is an MPSA application to which an adverse claim, protest or opposition is filed by another interested
applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA applications where petitioners are
asserting their rights to mining areas subject of their respective MPSA applications. Since respondent filed 3 separate
petitions for the denial of said applications, then a controversy has developed between the parties and it is POA’s
jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the DENR Regional Office
or any concerned DENRE or CENRO are MPSA applications. Thus POA has jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary jurisdiction. Euro-
med Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise, specialized
training and knowledge of an administrative body, relief must first be obtained in an administrative proceeding before
resort to the courts is had even if the matter may well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to the CA and to this
Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want us to declare the
instant petition moot and academic due to the transfer and conveyance of all the shareholdings and interests of MBMI
to DMCI, a corporation duly organized and existing under Philippine laws and is at least 60% Philippine-
owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the transfer of their shares
supposedly cured the "defect" of their previous nationality. They claimed that their current FTAA contract with the
State should stand since "even wholly-owned foreign corporations can enter into an FTAA with the State."57Petitioners
stress that there should no longer be any issue left as regards their qualification to enter into FTAA contracts since
they are qualified to engage in mining activities in the Philippines. Thus, whether the "grandfather rule" or the "control
test" is used, the nationalities of petitioners cannot be doubted since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and said fact should be
disregarded. The manifestation can no longer be considered by us since it is being tackled in G.R. No. 202877 pending
before this Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-owned corporation due to
the sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation,
then it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals Decision dated
October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED SO ORDERED.

6. Strategic Alliance Dev Corp vs. Radstock Securities Limited

G.R. No. 178158 December 4, 2009

STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, Petitioner,

vs.
RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL CONSTRUCTION
CORPORATION,Respondents.
ASIAVEST MERCHANT BANKERS BERHAD, Intervenor.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 180428

 LUIS SISON, Petitioner,
vs.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and RADSTOCK SECURITIES
LIMITED,Respondents.

CARPIO, J.:

Prologue

This case is an anatomy of a ₱6.185 billion1 pillage of the public coffers that ranks among one of the most brazen and
hideous in the history of this country. This case answers the questions why our Government perennially runs out of
funds to provide basic services to our people, why the great masses of the Filipino people wallow in poverty, and why
a very select few amass unimaginable wealth at the expense of the Filipino people.

On 1 May 2007, the 30-year old franchise of Philippine National Construction Corporation (PNCC) under Presidential
Decree No. 1113 (PD 1113), as amended by Presidential Decree No. 1894 (PD 1894), expired. During the 13th
Congress, PNCC sought to extend its franchise. PNCC won approval from the House of Representatives, which
passed House Bill No. 57492 renewing PNCC’s franchise for another 25 years. However, PNCC failed to secure
approval from the Senate, dooming the extension of PNCC’s franchise. Led by Senator Franklin M. Drilon, the Senate
opposed PNCC’s plea for extension of its franchise.3 Senator Drilon’s privilege speech4 explains why the Senate
chose not to renew PNCC’s franchise:

I repeat, Mr. President. PNCC has agreed in a compromise agreement dated 17 August 2006 to transfer to Radstock
Securities Limited ₱17,676,063,922, no small money, Mr. President, my dear colleagues, ₱17.6 billion.

What does it consist of? It consists of the following: 19 pieces of real estate properties with an appraised value of
₱5,993,689,000. Do we know what is the bulk of this? An almost 13-hectare property right here in the Financial Center.
As we leave the Senate, as we go out of this Hall, as we drive thru past the GSIS, we will see on the right a vacant
lot, that is PNCC property. As we turn right on Diosdado Macapagal, we see on our right new buildings, these are all
PNCC properties. That is 12.9 hectares of valuable asset right in this Financial Center that is worth ₱5,993,689.000.

What else, Mr. President? The 20% of the outstanding capital stock of PNCC with a par value of ₱2,300,000,000-- I
repeat, 20% of the outstanding capital stock of PNCC worth ₱2,300 billion-- was assigned to Radstock.

In addition, Mr. President and my dear colleagues, please hold on to your seats because part of the agreement is
50% of PNCC’s 6% share in the gross toll revenue of the Manila North Tollways Corporation for 27 years, from 2008
to 2035, is being assigned to Radstock. How much is this worth? It is worth ₱9,382,374,922. I repeat, ₱9,382,374,922.

xxxx

Mr. President, ₱17,676,000,000, however, was made to appear in the agreement to be only worth ₱6,196,156,488.
How was this achieved? How was an aggregate amount of ₱17,676,000,000 made to appear to be only
₱6,196,156,488? First, the 19 pieces of real estate worth ₱5,993,689,000 were only assigned a value of
₱4,195,000,000 or only 70% of their appraised value.

Second, the PNCC shares of stock with a par value of ₱2.3 billion were marked to market and therefore were valued
only at ₱713 million.

Third, the share of the toll revenue assigned was given a net present value of only ₱1,287,000,000 because of a 15%
discounted rate that was applied.

In other words, Mr. President, the toll collection of ₱9,382,374,922 for 27 years was given a net present value of only
₱1,287,000,000 so that it is made to appear that the compromise agreement is only worth ₱6,196,000,000.

Mr. President, my dear colleagues, this agreement will substantially wipe out all the assets of PNCC. It will be left with
nothing else except, probably, the collection for the next 25 years or so from the North Luzon Expressway. This
agreement brought PNCC to the cleaners and literally cleaned the PNCC of all its assets. They brought PNCC to the
cleaners and cleaned it to the tune of ₱17,676,000,000.

xxxx

Mr. President, are we not entitled, as members of the Committee, to know who is Radstock Securities Limited?

Radstock Securities Limited was allegedly incorporated under the laws of the British Virgin Islands. It has no known
board of directors, except for its recently appointed attorney-in-fact, Mr. Carlos Dominguez.

Mr. President, are the members of the Committee not entitled to know why 20 years after the account to Marubeni
Corporation, which gave rise to the compromise agreement 20 years after the obligation was allegedly incurred, PNCC
suddenly recognized this obligation in its books when in fact this obligation was not found in its books for 20 years?

In other words, Mr. President, for 20 years, the financial statements of PNCC did not show any obligation to Marubeni,
much less, to Radstock. Why suddenly on October 20, 2000, ₱10 billion in obligation was recognized? Why was it
recognized?

During the hearing on December 18, Mr. President, we asked this question to the Asset Privatization Trust (APT)
trustee, Atty. Raymundo Francisco, and he was asked: "What is the basis of your recommendation to recognize this?"
He said: "I based my recommendation on a legal opinion of Feria and Feria." I asked him: "Who knew of this opinion?"
He said: "Only me and the chairman of PNCC, Atty. Renato Valdecantos." I asked him: "Did you share this opinion
with the members of the board who recognized the obligation of ₱10 billion?" He said: "No." "Can you produce this
opinion now?" He said: "I have no copy."

Mysteriously, Mr. President, an obligation of ₱10 billion based on a legal opinion which, even Mr. Arthur Aguilar, the
chairman of PNCC, is not aware of, none of the members of the PNCC board on October 20, 2000 who recognized
this obligation had seen this opinion. It is mysterious.

Mr. President, are the members of our Committee not entitled to know why Radstock Securities Limited is given
preference over all other creditors notwithstanding the fact that this is an unsecured obligation? There is no mortgage
to secure this obligation.

More importantly, Mr. President, equally recognized is the obligation of PNCC to the Philippine government to the
tune of ₱36 billion. PNCC owes the Philippine government ₱36 billion recognized in its books, apart from ₱3 billion in
taxes. Why in the face of all of these is Radstock given preference? Why is it that Radstock is given preference to
claim ₱17.676 billion of the assets of PNCC and give it superior status over the claim of the Philippine government,
of the Filipino people to the extent of ₱36 billion and taxes in the amount of P3 billion? Why, Mr. President? Why is
Radstock given preference not only over the Philippine government claims of ₱39 billion but also over other creditors
including a certain best merchant banker in Asia, which has already a final and executory judgment against PNCC for
about ₱300 million? Why, Mr. President? Are we not entitled to know why the compromise agreement assigned
₱17.676 billion to Radstock? Why was it executed?5 (Emphasis supplied)

Aside from Senator Drilon, Senator Sergio S. Osmeña III also saw irregularities in the transactions involving the
Marubeni loans, thus:

SEN. OSMEÑA. Ah okay. Good.

Now, I'd like to point out to the Committee that – it seems that this was a politically driven deal like IMPSA. Because
the acceptance of the 10 billion or 13 billion debt came in October 2000 and the Radstock assignment was January
10, 2001. Now, why would Marubeni sell for $2 million three months after there was a recognition that it was owed
₱10 billion. Can you explain that, Mr. Dominguez?

MR. DOMINGUEZ. Your Honor, I am not aware of the decision making process of Marubeni. But my understanding
was, the Japanese culture is not a litigious one and they didn't want to get into a, you know, a court situation here in
the Philippines having a lot of other interest, et cetera.
SEN. OSMEÑA. Well, but that is beside the point, Mr. Dominguez. All I am asking is does it stand to reason that after
you get an acceptance by a debtor that he owes you 10 billion, you sell your note for 100 million.

Now, if that had happened a year before, maybe I would have understood why he sold for such a low amount. But
right after, it seems that this was part of an orchestrated deal wherein with certain powerful interest would be able to
say, "Yes, we will push through. We'll fix the courts. We'll fix the board. We'll fix the APT. And we will be able to do it,
just give us 55 percent of whatever is recovered," am I correct?

MR. DOMINGUEZ. As I said, Your Honor, I am not familiar with the decision making process of Marubeni. But my
understanding was, as I said, they didn't want to get into a …

SEN. OSMEÑA. All right.

MR. DOMINGUEZ. ...litigious situation.6

xxxx

SEN. OSMEÑA. All of these financial things can be arranged. They can hire a local bank, Filipino, to be trustee for
the real estate. So ...

SEN. DRILON. Well, then, that’s a dummy relationship.

SEN. OSMEÑA. In any case, to me the main point here is that a third party, Radstock, whoever owns it, bought
Marubeni’s right for $2 million or ₱100 million. Then, they are able to go through all these legal machinations and get
awarded with the consent of PNCC of 6 billion. That’s a 100 million to 6 billion. Now, Mr. Aguilar, you have been in
the business for such a long time. I mean, this hedge funds whether it’s Radstock or New Bridge or Texas Pacific
Group or Carlyle or Avenue Capital, they look at their returns. So if Avenue Capital buys something for $2 million and
you give him $4 million in one year, it’s a 100 percent return. They’ll walk away and dance to their stockholders. So
here in this particular case, if you know that Radstock only bought it for $2 million, I would have gotten board approval
and say, "Okay, let’s settle this for $4 million." And Radstock would have jumped up and down. So what looks to me
is that this was already a scheme. Marubeni wrote it off already. Marubeni wrote everything off. They just got a $2
million and they probably have no more residual rights or maybe there’s a clause there, a secret clause, that says, "I
want 20 percent of whatever you’re able to eventually collect." So $2 million. But whatever it is, Marubeni practically
wrote it off. Radstock’s liability now or exposure is only $2 million plus all the lawyer fees, under-the-table, etcetera.
All right. Okay. So it’s pretty obvious to me that if anybody were using his brain, I would have gone up to Radstock
and say, "Here’s $4 million. Here’s P200 million. Okay." They would have walked away. But evidently, the "ninongs"
of Radstock – See, I don’t care who owns Radstock. I want to know who is the ninong here who stands to make a lot
of money by being able to get to courts, the government agencies, OGCC, or whoever else has been involved in this,
to agree to 6 billion or whatever it was. That’s a lot of money. And believe me, Radstock will probably get one or two
billion and four billion will go into somebody else’s pocket. Or Radstock will turn around, sell that claim for ₱4 billion
and let the new guy just collect the payments over the years.

x x x x7

SEN. OSMEÑA. x x x I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly and severally? I just want to plug the
loopholes.
MR. AGUILAR. I think it was – if I may just speculate. It was just common ownership at that time.
SEN. OSMEÑA. Al right. Now – Also, the ...
MR. AGUILAR. Ah, 13 percent daw, Your Honor.
SEN. OSMEÑA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEÑA. What’s 13 percent?
MR. AGUILAR. We owned ...
xxxx
SEN. OSMEÑA. x x x CDCP Mining, how many percent of the equity of CDCP Mining was owned by PNCC, formerly
CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?
MS. PASETES. Yes.
SEN. OSMEÑA. One-three? So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent
and they only own 13 percent.

x x x x8 (Emphasis supplied)

I.
The Case

Before this Court are the consolidated petitions for review9 filed by Strategic Alliance Development Corporation
(STRADEC) and Luis Sison (Sison), with a motion for intervention filed by Asiavest Merchant Bankers Berhad
(Asiavest), challenging the validity of the Compromise Agreement between PNCC and Radstock. The Court of
Appeals approved the Compromise Agreement in its Decision of 25 January 200710 in CA-G.R. CV No. 87971.

II.
The Antecedents

PNCC was incorporated in 1966 for a term of fifty years under the Corporation Code with the name Construction
Development Corporation of the Philippines (CDCP).11 PD 1113, issued on 31 March 1977, granted CDCP a 30-year
franchise to construct, operate and maintain toll facilities in the North and South Luzon Tollways. PD 1894, issued on
22 December 1983, amended PD 1113 to include in CDCP’s franchise the Metro Manila Expressway, which would
"serve as an additional artery in the transportation of trade and commerce in the Metro Manila area."

Sometime between 1978 and 1981, Basay Mining Corporation (Basay Mining), an affiliate of CDCP, obtained loans
from Marubeni Corporation of Japan (Marubeni) amounting to 5,460,000,000 yen and US$5 million. A CDCP official
issued letters of guarantee for the loans, committing CDCP to pay solidarily for the full amount of the 5,460,000,000
yen loan and to the extent of ₱20 million for the US$5 million loan. However, there was no CDCP Board Resolution
authorizing the issuance of the letters of guarantee. Later, Basay Mining changed its name to CDCP Mining
Corporation (CDCP Mining). CDCP Mining secured the Marubeni loans when CDCP and CDCP Mining were still
privately owned and managed.

Subsequently in 1983, CDCP changed its corporate name to PNCC to reflect the extent of the Government's equity
investment in the company, which arose when government financial institutions converted their loans to PNCC into
equity following PNCC’s inability to pay the loans.12 Various government financial institutions held a total of seventy-
seven point forty-eight percent (77.48%) of PNCC’s voting equity, most of which were later transferred to the Asset
Privatization Trust (APT) under Administrative Orders No. 14 and 64, series of 1987 and 1988, respectively.13 Also,
the Presidential Commission on Good Government holds some 13.82% of PNCC’s voting equity under a writ of
sequestration and through the voluntary surrender of certain PNCC shares. In fine, the Government owns 90.3% of
the equity of PNCC and only 9.70% of PNCC’s voting equity is under private ownership.14

Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000, during the short-lived Estrada
Administration, the PNCC Board of Directors15 (PNCC Board) passed Board Resolution No. BD-092-2000 admitting
PNCC’s liability to Marubeni for ₱10,743,103,388 as of 30 September 1999. PNCC Board Resolution No. BD-092-
2000 reads as follows:

RESOLUTION NO. BD-092-2000

RESOLVED, That the Board recognizes, acknowledges and confirms PNCC’s obligations as of September 30, 1999
with the following entities, exclusive of the interests and other charges that may subsequently accrue and still become
due therein, to wit:

a). the Government of the Republic of the Philippines in the amount of ₱36,023,784,751.00; and

b). Marubeni Corporation in the amount of ₱10,743,103,388.00. (Emphasis supplied)

This was the first PNCC Board Resolution admitting PNCC’s liability for the Marubeni loans. Previously, for two
decades the PNCC Board consistently refused to admit any liability for the Marubeni loans.

Less than two months later, or on 22 November 2000, the PNCC Board passed Board Resolution No. BD-099-2000
amending Board Resolution No. BD-092-2000. PNCC Board Resolution No. BD-099-2000 reads as follows:

RESOLUTION NO. BD-099-2000

RESOLVED, That the Board hereby amends its Resolution No. BD-092-2000 dated October 20, 2000 so as to read
as follows:

RESOLVED, That the Board recognizes, acknowledges and confirms its obligations as of September 30, 1999 with
the following entities, exclusive of the interests and other charges that may subsequently accrue and still due thereon,
subject to the final determination by the Commission on Audit (COA) of the amount of obligation involved, and subject
further to the declaration of the legality of said obligations by the Office of the Government Corporate Counsel (OGCC),
to wit:

a). the Government of the Republic of the Philippines in the amount of ₱36,023,784,751.00; and

b). Marubeni Corporation in the amount of ₱10,743,103,388.00. (Emphasis supplied)

In January 2001, barely three months after the PNCC Board first admitted liability for the Marubeni loans, Marubeni
assigned its entire credit to Radstock for US$2 million or less than ₱100 million. In short, Radstock paid Marubeni less
than 10% of the ₱10.743 billion admitted amount. Radstock immediately sent a notice and demand letter to PNCC.

On 15 January 2001, Radstock filed an action for collection and damages against PNCC before the Regional Trial
Court of Mandaluyong City, Branch 213 (trial court). In its order of 23 January 2001, the trial court issued a writ of
preliminary attachment against PNCC. The trial court ordered PNCC’s bank accounts garnished and several of its
real properties attached. On 14 February 2001, PNCC moved to set aside the 23 January 2001 Order and to discharge
the writ of attachment. PNCC also filed a motion to dismiss the case. The trial court denied both motions. PNCC filed
motions for reconsideration, which the trial court also denied. PNCC filed a petition for certiorari before the Court of
Appeals, docketed as CA-G.R. SP No. 66654, assailing the denial of the motion to dismiss. On 30 August 2002, the
Court of Appeals denied PNCC’s petition. PNCC filed a motion for reconsideration, which the Court of Appeals also
denied in its 22 January 2003 Resolution. PNCC filed a petition for review before this Court, docketed as G.R. No.
156887.

Meanwhile, on 19 June 2001, at the start of the Arroyo Administration, the PNCC Board, under a new President and
Chairman, revoked Board Resolution No. BD-099-2000.

The trial court continued to hear the main case. On 10 December 2002, the trial court ruled in favor of Radstock, as
follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and the defendant is directed
to pay the total amount of Thirteen Billion One Hundred Fifty One Million Nine Hundred Fifty Six thousand Five
Hundred Twenty Eight Pesos (₱13,151,956,528.00) with interest from October 15, 2001 plus Ten Million Pesos
(₱10,000,000.00) as attorney’s fees.

SO ORDERED.16

PNCC appealed the trial court’s decision to the Court of Appeals, docketed as CA-G.R. CV No. 87971.

On 19 March 2003, this Court issued a temporary restraining order in G.R. No. 156887 forbidding the trial court from
implementing the writ of preliminary attachment and ordering the suspension of the proceedings before the trial court
and the Court of Appeals. In its 3 October 2005 Decision, this Court ruled as follows:

WHEREFORE, the petition is partly GRANTED and insofar as the Motion to Set Aside the Order and/or Discharge
the Writ of Attachment is concerned, the Decision of the Court of Appeals on August 30, 2002 and its Resolution of
January 22, 2003 in CA-G.R. SP No. 66654 are REVERSED and SET ASIDE. The attachments over the properties
by the writ of preliminary attachment are hereby ordered LIFTED effective upon the finality of this Decision. The
Decision and Resolution of the Court of Appeals are AFFIRMED in all other respects. The Temporary Restraining
Order is DISSOLVED immediately and the Court of Appeals is directed to PROCEED forthwith with the appeal filed
by PNCC.

No costs.

SO ORDERED.17

On 17 August 2006, PNCC and Radstock entered into the Compromise Agreement where they agreed to reduce
PNCC’s liability to Radstock, supposedly from ₱17,040,843,968, to ₱6,185,000,000. PNCC and Radstock submitted
the Compromise Agreement to this Court for approval. In a Resolution dated 4 December 2006 in G.R. No. 156887,
this Court referred the Compromise Agreement to the Commission on Audit (COA) for comment. The COA
recommended approval of the Compromise Agreement. In a Resolution dated 22 November 2006, this Court noted
the Compromise Agreement and referred it to the Court of Appeals in CA-G.R. CV No. 87971. In its 25 January 2007
Decision, the Court of Appeals approved the Compromise Agreement.

STRADEC moved for reconsideration of the 25 January 2007 Decision. STRADEC alleged that it has a claim against
PNCC as a bidder of the National Government’s shares, receivables, securities and interests in PNCC. The matter is
subject of a complaint filed by STRADEC against PNCC and the Privatization and Management Office (PMO) for the
issuance of a Notice of Award of Sale to Dong-A Consortium of which STRADEC is a partner. The case, docketed as
Civil Case No. 05-882, is pending before the Regional Trial Court of Makati, Branch 146 (RTC Branch 146).

The Court of Appeals treated STRADEC’s motion for reconsideration as a motion for intervention and denied it in its
31 May 2007 Resolution. STRADEC filed a petition for review before this Court, docketed as G.R. No. 178158.

Rodolfo Cuenca (Cuenca), a stockholder and former PNCC President and Board Chairman, filed an intervention
before the Court of Appeals. Cuenca alleged that PNCC had no obligation to pay Radstock. The Court of Appeals
also denied Cuenca’s motion for intervention in its Resolution of 31 May 2007. Cuenca did not appeal the denial of
his motion.

On 2 July 2007, this Court issued an order directing PNCC and Radstock, their officers, agents, representatives, and
other persons under their control, to maintain the status quo ante.

Meanwhile, on 20 February 2007, Sison, also a stockholder and former PNCC President and Board Chairman, filed
a Petition for Annulment of Judgment Approving Compromise Agreement before the Court of Appeals. The case was
docketed as CA-G.R. SP No. 97982.

Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for Leave to Intervene and to File the Attached
Opposition and Motion-in-Intervention before the Court of Appeals in CA-G.R. SP No. 97982.

In a Resolution dated 12 June 2007, the Court of Appeals dismissed Sison’s petition on the ground that it had no
jurisdiction to annul a final and executory judgment also rendered by the Court of Appeals. In the same resolution, the
Court of Appeals also denied Asiavest’s urgent motion.

Asiavest filed its Urgent Motion for Leave to Intervene and to File the Attached Opposition and Motion-in-Intervention
in G.R. No. 178158.18

Sison filed a motion for reconsideration. In its 5 November 2007 Resolution, the Court of Appeals denied Sison’s
motion.

On 26 November 2007, Sison filed a petition for review before this Court, docketed as G.R. No. 180428.

In a Resolution dated 18 February 2008, this Court consolidated G.R. Nos. 178158 and 180428.

On 13 January 2009, the Court held oral arguments on the following issues:
 1. Does the Compromise Agreement violate public policy?

2. Does the subject matter involve an assumption by the government of a private entity’s obligation in violation
of the law and/or the Constitution? Is the PNCC Board Resolution of 20 October 2000 defective or illegal?

3. Is the Compromise Agreement viable in the light of the non-renewal of PNCC’s franchise by Congress and
its inclusion of all or substantially all of PNCC’s assets?

4. Is the Decision of the Court of Appeals annullable even if final and executory on grounds of fraud and
violation of public policy and the Constitution?

III.
Propriety of Actions

The Court of Appeals denied STRADEC’s motion for intervention on the ground that the motion was filed only after
the Court of Appeals and the trial court had promulgated their respective decisions.

Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:

SECTION 2. Time to intervene.– The motion to intervene may be filed at any time before rendition of judgment by the
trial court. A copy of the pleading-in-intervention shall be attached to the motion and served on the original parties.

The rule is not absolute. The rule on intervention, like all other rules of procedure, is intended to make the powers of
the Court completely available for justice.19 It is aimed to facilitate a comprehensive adjudication of rival claims,
overriding technicalities on the timeliness of the filing of the claims.20 This Court has ruled:

[A]llowance or disallowance of a motion for intervention rests on the sound discretion of the court after consideration
of the appropriate circumstances. Rule 19 of the Rules of Court is a rule of procedure whose object is to make the
powers of the court fully and completely available for justice. Its purpose is not to hinder or delay but to facilitate and
promote the administration of justice. Thus, interventions have been allowed even beyond the prescribed period in
the Rule in the higher interest of justice. Interventions have been granted to afford indispensable parties, who have
not been impleaded, the right to be heard even after a decision has been rendered by the trial court, when the petition
for review of the judgment was already submitted for decision before the Supreme Court, and even where the assailed
order has already become final and executory. In Lim v. Pacquing (310 Phil. 722 (1995)], the motion for intervention
filed by the Republic of the Philippines was allowed by this Court to avoid grave injustice and injury and to settle once
and for all the substantive issues raised by the parties.21

In Collado v. Court of Appeals,22 this Court reiterated that exceptions to Section 2, Rule 12 could be made in the
interest of substantial justice. Citing Mago v. Court of Appeals,23 the Court stated:

It is quite clear and patent that the motions for intervention filed by the movants at this stage of the proceedings where
trial had already been concluded x x x and on appeal x x x the same affirmed by the Court of Appeals and the instant
petition for certiorari to review said judgments is already submitted for decision by the Supreme Court, are obviously
and, manifestly late, beyond the period prescribed under x x x Section 2, Rule 12 of the Rules of Court.

But Rule 12 of the Rules of Court, like all other Rules therein promulgated, is simply a rule of procedure, the whole
purpose and object of which is to make the powers of the Court fully and completely available for justice. The purpose
of procedure is not to thwart justice. Its proper aim is to facilitate the application of justice to the rival claims of
contending parties. It was created not to hinder and delay but to facilitate and promote the administration of justice. It
does not constitute the thing itself which courts are always striving to secure to litigants. It is designed as the means
best adopted to obtain that thing. In other words, it is a means to an end.

Concededly, STRADEC has no legal interest in the subject matter of the Compromise Agreement. Section 1, Rule 19
of the 1997 Rules of Civil Procedure states:

SECTION 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in the success of
either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The Court shall consider whether or not the intervention will unduly delay or prejudice the
adjudication of the rights of the original parties, and whether or not the intervenor’s rights may be fully protected in a
separate proceeding.

STRADEC’s interest is dependent on the outcome of Civil Case No. 05-882. Unless STRADEC can show that RTC
Branch 146 had already decided in its favor, its legal interest is simply contingent and expectant.

However, Asiavest has a direct and material interest in the approval or disapproval of the Compromise Agreement.
Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its
favor. Asiavest’s interest is actual and material, direct and immediate characterized by either gain or loss from the
judgment that this Court may render.24 Considering that the Compromise Agreement involves the disposition of all or
substantially all of the assets of PNCC, Asiavest, as PNCC’s judgment creditor, will be greatly prejudiced if the
Compromise Agreement is eventually upheld.

Sison has legal standing to challenge the Compromise Agreement. Although there was no allegation that Sison filed
the case as a derivative suit in the name of PNCC, it could be fairly deduced that Sison was assailing the Compromise
Agreement as a stockholder of PNCC. In such a situation, a stockholder of PNCC can sue on behalf of PNCC to annul
the Compromise Agreement.

A derivative action is a suit by a stockholder to enforce a corporate cause of action.25 Under the Corporation Code,
where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees.26 However,
an individual stockholder may file a derivative suit on behalf of the corporation to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation.27 In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the
corporation, is only a nominal party.28

In this case, the PNCC Board cannot conceivably be expected to attack the validity of the Compromise Agreement
since the PNCC Board itself approved the Compromise Agreement. In fact, the PNCC Board steadfastly defends the
Compromise Agreement for allegedly being advantageous to PNCC.

Besides, the circumstances in this case are peculiar. Sison, as former PNCC President and Chairman of the PNCC
Board, was responsible for the approval of the Board Resolution issued on 19 June 2001 revoking the previous Board
Resolution admitting PNCC’s liability for the Marubeni loans.29 Such revocation, however, came after Radstock had
filed an action for collection and damages against PNCC on 15 January 2001. Then, when the trial court rendered its
decision on 10 December 2002 in favor of Radstock, Sison was no longer the PNCC President and Chairman,
although he remains a stockholder of PNCC.

When the case was on appeal before the Court of Appeals, there was no need for Sison to avail of any remedy, until
PNCC and Radstock entered into the Compromise Agreement, which disposed of all or substantially all of PNCC’s
assets. Sison came to know of the Compromise Agreement only in December 2006. PNCC and Radstock submitted
the Compromise Agreement to the Court of Appeals for approval on 10 January 2007. The Court of Appeals approved
the Compromise Agreement on 25 January 2007. To require Sison at this stage to exhaust all the remedies within the
corporation will render such remedies useless as the Compromise Agreement had already been approved by the
Court of Appeals. PNCC’s assets are in danger of being dissipated in favor of a private foreign corporation. Thus,
Sison had no recourse but to avail of an extraordinary remedy to protect PNCC’s assets.

Besides, in the interest of substantial justice and for compelling reasons, such as the nature and importance of the
issues raised in this case,30 this Court must take cognizance of Sison’s action. This Court should exercise its
prerogative to set aside technicalities in the Rules, because after all, the power of this Court to suspend its own rules
whenever the interest of justice requires is well recognized.31 In Solicitor General v. The Metropolitan Manila
Authority,32 this Court held:

Unquestionably, the Court has the power to suspend procedural rules in the exercise of its inherent power, as
expressly recognized in the Constitution, to promulgate rules concerning ‘pleading, practice and procedure in all
courts.’ In proper cases, procedural rules may be relaxed or suspended in the interest of substantial justice, which
otherwise may be miscarried because of a rigid and formalistic adherence to such rules. x x x
We have made similar rulings in other cases, thus:

Be it remembered that rules of procedure are but mere tools designed to facilitate the attainment of justice. Their strict
and rigid application, which would result in technicalities that tend to frustrate rather than promote substantial justice,
must always be avoided. x x x Time and again, this Court has suspended its own rules and excepted a particular case
from their operation whenever the higher interests of justice so require.

IV.
The PNCC Board Acted in Bad Faith and with Gross Negligence

in Directing the Affairs of PNCC

In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience, duty of diligence,
and duty of loyalty.33 Accordingly, the members of the board of directors (1) shall direct the affairs of the corporation
only in accordance with the purposes for which it was organized;34 (2) shall not willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing
the affairs of the corporation;35 and (3) shall not acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees.36

In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably failed to act in good faith
in handling the affairs of PNCC.

First. For almost two decades, the PNCC Board had consistently refused to admit liability for the Marubeni loans
because of the absence of a PNCC Board resolution authorizing the issuance of the letters of guarantee.

There is no dispute that between 1978 and 1980, Marubeni Corporation extended two loans to Basay Mining (later
renamed CDCP Mining): (1) US$5 million to finance the purchase of copper concentrates by Basay Mining; and
(2) Y5.46 billion to finance the completion of the expansion project of Basay Mining including working capital.

There is also no dispute that it was only on 20 October 2000 when the PNCC Board approved a resolution expressly
admitting PNCC’s liability for the Marubeni loans. This was the first Board Resolution admitting liability for the Marubeni
loans, for PNCC never admitted liability for these debts in the past. Even Radstock admitted that PNCC’s 1994
Financial Statements did not reflect the Marubeni loans.37 Also, former PNCC Chairman Arthur Aguilar stated during
the Senate hearings that "the Marubeni claim was never in the balance sheet x x x nor was it in a contingent
account."38 Miriam M. Pasetes, SVP Finance of PNCC, and Atty. Herman R. Cimafranca of the Office of the
Government Corporate Counsel, confirmed this fact, thus:

SEN. DRILON. x x x And so, PNCC itself did not recognize this as an obligation but the board suddenly recognized it
as an obligation. It was on that basis that the case was filed, is that correct? In fact, the case hinges on – they knew
that this claim has prescribed but because of that board resolution which recognized the obligation they filed their
complaint, is that correct?

MR. CIMAFRANCA. Apparently, it's like that, Senator, because the filing of the case came after the acknowledgement.

SEN. DRILON. Yes. In fact, the filing of the case came three months after the acknowledgement.

MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.

SEN. DRILON. That is correct. So, that it was an obligation which was not recognized in the financial
statements of PNCC but revived – in the financial statements because it has prescribed but revived by the
board effectively. That's the theory, at least, of the plaintiff. Is that correct? Who can answer that?

Ms. Pasetes, yes.

MS. PASETES. It is not an obligation of PNCC that is why it is not reflected in the financial statements. 39 (Emphasis
supplied)
In short, after two decades of consistently refuting its liability for the Marubeni loans, the PNCC Board suddenly and
inexplicably reversed itself by admitting in October 2000 liability for the Marubeni loans. Just three months after the
PNCC Board recognized the Marubeni loans, Radstock acquired Marubeni's receivable and filed the present collection
case.

Second. The PNCC Board admitted liability for the Marubeni loans despite PNCC’s total liabilities far exceeding its
assets. There is no dispute that the Marubeni loans, once recognized, would wipe out the assets of PNCC, "virtually
emptying the coffers of the PNCC."40 While PNCC insists that it remains financially viable, the figures in the COA Audit
Reports tell otherwise.41 For 2006 and 2005, "the Corporation has incurred negative gross margin of ₱84.531
Million and ₱80.180 Million, respectively, and net losses that had accumulated in a deficit of ₱14.823 Billion
as of 31 December 2006."42 The COA even opined that "unless [PNCC] Management addresses the issue on
net losses in its financial rehabilitation plan, x x x the Corporation may not be able to continue its operations
as a going concern."

Notably, during the oral arguments before this Court, the Government Corporate Counsel admitted the PNCC’s huge
negative net worth, thus:

JUSTICE CARPIO

x x x what is the net worth now of PNCC? Negative what? Negative 6 Billion at least[?]

ATTY. AGRA

Yes, your Honor.43 (Emphasis supplied)

Clearly, the PNCC Board’s admission of liability for the Marubeni loans, given PNCC’s huge negative net worth of at
least ₱6 billion as admitted by PNCC’s counsel, or ₱14.823 billion based on the 2006 COA Audit Report, would leave
PNCC an empty shell, without any assets to pay its biggest creditor, the National Government with an admitted
receivable of ₱36 billion from PNCC.

Third. In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have been a dead claim by
abandoning one of PNCC’s strong defenses, which is the prescription of the action to collect the Marubeni loans.

Settled is the rule that actions prescribe by the mere lapse of time fixed by law.44 Under Article 1144 of the Civil Code,
an action upon a written contract, such as a loan contract, must be brought within ten years from the time the right of
action accrues. The prescription of such an action is interrupted when the action is filed before the court, when there
is a written extrajudicial demand by the creditor, or when there is any written acknowledgment of the debt by the
debtor.45

In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981. While Radstock claims
that numerous demand letters were sent to PNCC, based on the records, the extrajudicial demands to pay the loans
appear to have been made only in 1984 and 1986. Meanwhile, the written acknowledgment of the debt, in the form of
Board Resolution No. BD-092-2000, was issued only on 20 October 2000.

Thus, more than ten years would have already lapsed between Marubeni’s extrajudicial demands in 1984 and 1986
and the acknowledgment by the PNCC Board of the Marubeni loans in 2000. However, the PNCC Board suddenly
passed Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni loans. In short, the PNCC
Board admitted liability for the Marubeni loans despite the fact that the same might no longer be judicially collectible.
Although the legal advantage was obviously on its side, the PNCC Board threw in the towel even before the fight
could begin. During the Senate hearings, the matter of prescription was discussed, thus:

SEN. DRILON. ... the prescription period is 10 years and there were no payments – the last demands were made,
when? The last demands for payment?

MS. OGAN. It was made January 2001 prior to the filing of the case.
SEN. DRILON. Yes, all right. Before that, when was the last demand made? By the time they filed the complaint more
than 10 years already lapsed.

MS. OGAN. On record, Mr. Chairman, we have demands starting from - - a series of demands which started from
May 23, 1984, letter from Marubeni to PNCC, demand payment. And we also have the letter of September 3, 1986,
letter of Marubeni to then PNCC Chair Mr. Jaime. We have the June 24, 1986 letter from Marubeni to the PNCC
Chairman. Also the March 4, 1988 letter...

SEN. DRILON. The March 4, 1988 letter is not a demand letter.

MS. OGAN. It is exactly addressed to the Asset Privatization Trust.

SEN. DRILON. It is not a demand letter? Okay.

MS. OGAN. And we have also...

SEN. DRILON. Anyway...

THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We want to put it on the record whether it is "yes"
or "no".

MS. OGAN. Yes, sir.

SEN. DRILON. So, even assuming that all of those were demand letters, the 10 years prescription set in and it should
have prescribed in 1998, whatever is the date, or before the case was filed in 2001.

MR. CIMAFRANCA. The 10-year period for – if the contract is written, it's 10 years and it should have prescribed in
10 years and we did raise that in our answer, in our motion to dismiss.

SEN. DRILON. I know. You raised this in your motion to dismiss and you raised this in your answer. Now, we are not
saying that you were negligent in not raising that. What we are just putting on the record that indeed there is basis to
argue that these claims have prescribed.

Now, the reason why there was a colorable basis on the complaint filed in 2001 was that somehow the board of PNCC
recognized the obligation in a special board meeting on October 20, 2000. Hindi ba ganoon 'yon?

MS. OGAN. Yes, that is correct.

SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when it was very clear that at that point more
than 10 years have lapsed since the last demand letter?

MR. AGUILAR. May I volunteer an answer?

SEN. DRILON. Please.

MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a result of and I go to the folder letter "N." In
our own demand research it was not period, Your Honor, that Punongbayan in the big folder, sir, letter "N" it was the
period where PMO was selling PNCC and Punongbayan and Araullo Law Office came out with an investment brochure
that indicated liabilities both to national government and to Marubeni/Radstock. So, PMO said, "For good order, can
you PNCC board confirm that by board resolution?" That's the tone of the letter.

SEN. DRILON. Confirm what? Confirm the liabilities that are contained in the Punongbayan investment prospectus
both to the national government and to PNCC. That is the reason at least from the record, Your Honor, how the PNCC
board got to deliberate on the Marubeni.

THE CHAIRMAN. What paragraph? Second to the last paragraph?

MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong – that"s to our recollection, in the records, that was the reason.

SEN. DRILON. Is that the only reason why ...

MR. AGUILAR. From just the records, Mr. Chairman, and then interviews with people who are still around.

SEN. DRILON. You mean, you acknowledged a prescribed obligation because of this paragraph?

MR. AGUILAR. I don’t know what legal advice we were following at that time, Mr. Chairman.46 (Emphasis supplied)

Besides prescription, the Office of the Government Corporate Counsel (OGCC) originally believed that PNCC had
another formidable legal weapon against Radstock, that is, the lack of authority of Alfredo Asuncion, then Executive
Vice-President of PNCC, to sign the letter of guarantee on behalf of CDCP. During the Senate hearings, the following
exchange reveals the OGCC’s original opinion:

THE CHAIRMAN. What was the opinion of the Office of the Government Corporate Counsel?

MS. OGAN. The opinion of the Office of the Government Corporate Counsel is that PNCC should exhaust all means
to resist the case using all defenses available to a guarantee and a surety that there is a valid ground for PNCC's
refusal to honor or make good the alleged guarantee obligation. It appearing that from the documents submitted to
the OGCC that there is no board authority in favor or authorizing Mr. Asuncion, then EVP, to sign or execute the letter
of guarantee in behalf of CDCP and that said letter of guarantee is not legally binding upon or enforceable against
CDCP as principals, your Honors.47

xxxx

SEN. DRILON. Now that we have read this, what was the opinion of the Government Corporate Counsel, Mr.
Cimafranca?

MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the request of PNCC and our opinion was that there
was no valid obligation, no valid guarantee. And we incorporated that in our pleadings in court.48 (Emphasis supplied)

Clearly, PNCC had strong defenses against the collection suit filed by Radstock, as originally opined by the OGCC. It
is quite puzzling, therefore, that the PNCC Board, which had solid grounds to refute the legitimacy of the Marubeni
loans, admitted its liability and entered into a Compromise Agreement that is manifestly and grossly prejudicial to
PNCC.

Fourth. The basis for the admission of liability for the Marubeni loans, which was an opinion of the Feria Law Office,
was not even shown to the PNCC Board.

Atty. Raymundo Francisco, the APT trustee overseeing the proposed privatization of PNCC at the time, was
responsible for recommending to the PNCC Board the admission of PNCC’s liability for the Marubeni loans. Atty.
Francisco based his recommendation solely on a mere alleged opinion of the Feria Law Office. Atty. Francisco did
not bother to show this "Feria opinion" to the members of the PNCC Board, except to Atty. Renato Valdecantos, who
as the then PNCC Chairman did not also show the "Feria opinion" to the other PNCC Board members. During the
Senate hearings, Atty. Francisco could not produce a copy of the "Feria opinion." The Senators grilled Atty. Francisco
on his recommendation to recognize PNCC’s liability for the Marubeni loans, thus:

THE CHAIRMAN. x x x You were the one who wrote this letter or rather this memorandum dated 17 October 2000 to
Atty. Valdecantos. Can you tell us the background why you wrote the letter acknowledging a debt which is non-
existent?

MR. FRANCISCO. I was appointed as the trustee in charge of the privatization of the PNCC at that time, sir. And I
was tasked to do a study and engage the services of financial advisors as well as legal advisors to do a legal audit
and financial study on the position of PNCC. I bidded out these engagements, the financial advisership went to
Punongbayan and Araullo. The legal audit went to the Feria Law Offices.
THE CHAIRMAN. Spell it. Boy Feria?
MR. FRANCISCO. Feria-- Feria.
THE CHAIRMAN. Lugto?
MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the Feria Law Office – that the Marubeni
account was a legal obligation.
So, I presented this to our board. Based on the findings of the legal audit conducted by the Ferial Law Offices, sir.
THE CHAIRMAN. Why did you not ask the government corporate counsel? Why did you have to ask for the opinion
of an outside counsel?
MR. FRANCISCO. That was the – that was the mandate given to us, sir, that we have to engage the ...
THE CHAIRMAN. Mandate given by whom?
MR. FRANCISCO. That is what we usually do, sir, in the APT.
THE CHAIRMAN. Ah, you get outside counsel?
MR. FRANCISCO. Yes, we...
THE CHAIRMAN. Not necessarily the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. So, on the basis of the opinion of outside counsel, private, you proceeded to, in effect, recognize
an obligation which is not even entered in the books of the PNCC? You probably resuscitated a non-existing obligation
anymore?
MR. FRANCISCO. Sir, I just based my recommendation on the professional findings of the law office that we engaged,
sir.
THE CHAIRMAN. Did you not ask for the opinion of the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. Why?
MR. FRANCISCO. I felt that the engagements of the law office was sufficient, anyway we were going to raise it to the
Committee on Privatization for their approval or disapproval, sir.
THE CHAIRMAN. The COP?
MR. FRANCISCO. Yes, sir.
THE CHAIRMAN. That’s a cabinet level?
MR. FRANCISCO. Yes, sir. And we did that, sir.
THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B. Valdecantos, who unfortunately is not here but I
think we have to get his response to this. And as part of the minutes of special meeting with the board of directors on
October 20, 2000, the board resolved in its Board Resolution No. 092-2000, the board resolved to recognize,
acknowledge and confirm PNCC’s obligations as of September 30, 1999, etcetera, etcetera. (A), or rather (B),
Marubeni Corporation in the amount of ₱10,740,000.
Now, we asked to be here because the franchise of PNCC is hanging in a balance because of the – on the questions
on this acknowledgement. So we want to be educated.
Now, the paper trail starts with your letter. So, that’s it – that’s my kuwan, Frank.
Yes, Senator Drilon.
SEN. DRILON. Thank you, Mr. Chairman.
Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?
MR. FRANCISCO. I’m sorry, sir, we don’t have a copy.
SEN. DRILON. May we ask the corporate secretary of PNCC to provide us with a copy?
Okay naman andiyan siya.
(Ms. Ogan handing the document to Mr. Francisco.)
You have familiarized yourselves with the minutes, Atty. Francisco?
MR. FRANCISCO. Yes, sir.
SEN. DRILON. Now, mention is made of a memorandum here on line 8, page 3 of this board’s minutes. It says,
"Director Francisco has prepared a memorandum requesting confirmation, acknowledgement, and ratification of this
indebtedness of PNCC to the national government which was determined by Bureau of Treasury as of September 30,
1999 is 36,023,784,751. And with respect to PNCC’s obligation to Marubeni, this has been determined to be in the
total amount of 10,743,103,388, also as of September 30, 1999; that there is need to ratify this because there has
already been a representation made with respect to the review of the financial records of PNCC by Punongbayan and
Araullo, which have been included as part of the package of APT’s disposition to the national government’s interest
in PNCC."
You recall having made this representation as found in the minutes, I assume, Atty. Francisco?
MR. FRANCISCO. Yes, sir. But I’d like to be refreshed on the memorandum, sir, because I don’t have a copy.
SEN. DRILON. Yes, this memorandum was cited earlier by Senator Arroyo, and maybe the secretary can give him a
copy? Give him a copy?
MS. OGAN. (Handing the document to Mr. Francisco.)
MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC board through Atty. Valdecantos, which
says that – in the last paragraph, if I may read? "May we request therefore, that a board resolution be adopted,
acknowledging and confirming the aforementioned PNCC obligations with the national government and Marubeni as
borne out by the due diligence audit."
SEN. DRILON. This is the memorandum referred to in these minutes. This memorandum dated 17 October 2000 is
the memorandum referred to in the minutes.
MR. FRANCISCO. I would assume, Mr. Chairman.
SEN. DRILON. Right.
Now, the Punongbayan representative who was here yesterday, Mr...
THE CHAIRMAN. Navarro.
SEN. DRILON. ... Navarro denied that he made this recommendation.
THE CHAIRMAN. He asked for opinion, legal opinion.
SEN. DRILON. He said that they never made this representation and the transcript will bear us out. They said that
they never made this representation that the account of Marubeni should be recognized.
MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned here the acknowledgement and confirmation
of the PNCC obligations. I was not asking for a ratification. I never mentioned ratification in the memorandum. I just
based my memo based on the due diligence audit of the Feria Law Offices.
SEN. DRILON. Can you say that again? You never asked for a ratification...
MR. FRANCISCO. No. I never mentioned in my memorandum that I was asking for a ratification. I was just – in my
memo it says, "acknowledging and confirming the PNCC obligation." This was what ...
SEN. DRILON. Isn’t it the same as ratification? I mean, what’s the difference?
MR. FRANCISCO. I – well, my memorandum was meant really just to confirm the findings of the legal audit as ...
SEN. DRILON. In your mind as a lawyer, Atty. Francisco, there’s a difference between ratification and – what’s your
term? -- acknowledgment and confirmation?
MR. FRANCISCO. Well, I guess there’s no difference, Mr. Chairman.
SEN. DRILON. Right.
Anyway, just of record, the Punongbayan representatives here yesterday said that they never made such
representation.
In any case, now you’re saying it’s the Feria Law Office who rendered that opinion? Can we – you know, yesterday
we were asking for a copy of this opinion but we were never furnished one. The ... no less than the Chairman of this
Committee was asking for a copy.
THE CHAIRMAN. Well, copy of the opinion...
MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this opinion because it’s opinion rendered for the
Asset Privatization Trust which is its client, not the PNCC, Mr. Chairman.
THE CHAIRMAN. All right. The question is whether – but you see, this is a memorandum of Atty. Francisco to the
Chairman of the Asset Privatization Trust. You say now that you were never furnished a copy because that’s supposed
to be with the Asset ...
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. ... but yet the action of – or rather the opinion of the Feria Law Offices was in effect adopted by the
board of directors of PNCC in its minutes of October 20, 2000 where you are the corporate secretary, Ms. Ogan.
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. So, what I am saying is that this opinion or rather the opinion of the Feria Law Offices of which you
don’t have a copy?
MS. OGAN. Yes, sir.
THE CHAIRMAN. And the reason being that, it does not concern the PNCC because that’s an opinion rendered for
APT and not for the PNCC.
MS. OGAN. Yes, Mr. Chairman, that was what we were told although we made several requests to the APT, sir.
THE CHAIRMAN. All right. Now, since it was for the APT and not for the PNCC, I ask the question why did PNCC
adopt it? That was not for the consumption of PNCC. It was for the consumption of the Asset Privatization Trust. And
that is what Atty. Francisco says and it’s confirmed by you saying that this was a memo – you don’t have a copy
because this was sought for by APT and the Feria Law Offices just provided an opinion – provided the APT with an
opinion. So, as corporate secretary, the board of directors of PNCC adopted it, recognized the Marubeni Corporation.
You read the minutes of the October 20, 2000 meeting of the board of directors on Item V. The resolution speaks of
.. so, go ahead.
MS. OGAN. I gave my copies. Yes, sir.
THE CHAIRMAN. In effect the Feria Law Offices’ opinion was for the consumption of the APT.
MS. OGAN. That was what we were told, Mr. Chairman.
THE CHAIRMAN. And you were not even provided with a copy.
THE CHAIRMAN. Yet you adopted it.
MS. OGAN. Yes, sir.
SEN DRILON. Considering you were the corporate secretary.
THE CHAIRMAN. She was the corporate secretary.
SEN. DRILON. She was just recording the minutes.
THE CHAIRMAN. Yes, she was recording.
Now, we are asking you now why it was taken up?
MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the memorandum of Atty. Francisco, memorandum to the
board.
SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board of PNCC. And is that correct, Mr.
Francisco?
THE CHAIRMAN. You’re an ex-officio member.
SEN. DRILON. Yes.
MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the privatization of PNCC.
SEN. DRILON. With the permission of Mr. Chair, may I ask a question...
THE CHAIRMAN. Oh, yes, Senator Drilon.
SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT representative, you are a lawyer, there was a legal
opinion of Feria, Feria, Lugto, Lao Law Offices which you cited in your memorandum. Did you discuss – first, did you
give a copy of this opinion to PNCC?
MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who was also a member of the board of PNCC,
Mr. Valdecantos, sir.
SEN. DRILON. And because he was...
MR. FRANCISCO. Because he was my immediate boss in the APT.
SEN. DRILON. Apparently, [it] just ended up in the personal possession of Mr. Valdecantos because the corporate
secretary, Glenda Ogan, who is supposed to be the custodian of the records of the board never saw a copy of this.
MR. FRANCISCO. Well, sir, my – the copy that I gave was to Mr. Valdecantos because he was the one sitting in the
PNCC board, sir.
SEN. DRILON. No, you sit in the board.
MR. FRANCISCO. I was just an ex-officio member. And all my reports were coursed through our Chairman, Mr.
Valdecantos, sir.
SEN. DRILON. Now, did you ever tell the board that there is a legal position taken or at least from the documents it is
possible that the claim has prescribed?
MR. FRANCISCO. I took this up in the board meeting of the PNCC at that time and I told them about this matter, sir.
SEN. DRILON. No, you told them that the claim could have, under the law, could have prescribed?
MR. FRANCISCO. No, sir.
SEN. DRILON. Why? You mean, you didn’t tell the board that it is possible that this liability is no longer a valid liability
because it has prescribed?
MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I found the professional opinion of the Feria
Law Office to be sufficient.49 (Emphasis supplied)
Atty. Francisco’s act of recommending to the PNCC Board the acknowledgment of the Marubeni loans based only on
an opinion of a private law firm, without consulting the OGCC and without showing this opinion to the members of the
PNCC Board except to Atty. Valdecantos, reflects how shockingly little his concern was for PNCC, contrary to his
claim that "he only had the interest of PNCC at heart." In fact, if what was involved was his own money, Atty. Francisco
would have preferred not just two, but at least three different opinions on how to deal with the matter, and he would
have maintained his non-liability.
SEN. OSMEÑA. x x x
All right. And lastly, just to clear our minds, there has always been this finger-pointing, of course, whenever – this is
typical Filipino. When they're caught in a bind, they always point a finger, they pretend they don't know. And it just
amazes me that you have been appointed trustees, meaning, representatives of the Filipino people, that's what you
were at APT, right? You were not Erap's representatives, you were representative of the Filipino people and you were
tasked to conserve the assets that that had been confiscated from various cronies of the previous administration. And
here, you are asked to recognize the P10 billion debt and you point only to one law firm. If you have cancer, don't you
to a second opinion, a second doctor or a third doctor? This is just a question. I am just asking you for your opinion if
you would take the advice of the first doctor who tells you that he's got to open you up.
MR. FRANCISCO. I would go to three or more doctors, sir.
SEN. OSMEÑA. Three or more. Yeah, that's right. And in this case the APT did not do so.
MR. FRANCISCO. We relied on the findings of the …
SEN. OSMEÑA. If these were your money, would you have gone also to obtain a second, third opinion from other law
firms. Kung pera mo itong 10 billion na ito. Siguro you're not gonna give it up that easily ano, 'di ba?
MR. FRANCISCO. Yes, sir.
SEN. OSMEÑA. You'll probably keep it in court for the next 20 years.

x x x x50 (Emphasis supplied)

This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCC - that he would not have
recognized the Marubeni loans if his own funds were involved or if he were the owner of PNCC.

The PNCC Board admitted liability for the ₱10.743 billion Marubeni loans without seeing, reading or discussing the
"Feria opinion" which was the sole basis for its admission of liability. Such act surely goes against ordinary human
nature, and amounts to gross negligence and utter bad faith, even bordering on fraud, on the part of the PNCC Board
in directing the affairs of the corporation. Owing loyalty to PNCC and its stockholders, the PNCC Board should have
exercised utmost care and diligence in admitting a gargantuan debt of ₱10.743 billion that would certainly force PNCC
into insolvency, a debt that previous PNCC Boards in the last two decades consistently refused to admit.

Instead, the PNCC Board admitted PNCC’s liability for the Marubeni loans relying solely on a mere opinion of a private
law office, which opinion the PNCC Board members never saw, except for Atty. Valdecantos and Atty. Francisco. The
PNCC Board knew that PNCC, as a government owned and controlled corporation (GOCC), must rely "exclusively"
on the opinion of the OGCC. Section 1 of Memorandum Circular No. 9 dated 27 August 1998 issued by the President
states:

SECTION 1. All legal matters pertaining to government-owned or controlled corporations, their subsidiaries, other
corporate off-springs and government acquired asset corporations (GOCCs) shall be exclusively referred to and
handled by the Office of the Government Corporate Counsel (OGCC). (Emphasis supplied)

The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that PNCC is required to rely
"exclusively" on the OGCC’s opinion. Worse, the PNCC Board, in admitting liability for ₱10.743 billion, relied on the
recommendation of a private lawyer whose opinion the PNCC Board members have not even seen.

During the oral arguments, Atty. Sison explained to the Court that the intention of APT was for the PNCC Board merely
to disclose the claim of Marubeni as part of APT's full disclosure policy to prospective buyers of PNCC. Atty. Sison
stated that it was not the intention of APT for the PNCC Board to admit liability for the Marubeni loans, thus:

x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the company. The A-P-T, for purposes of
disclosure statements, tasked the Feria Law Office to handle the documentation and the study of all legal issues that
had to be resolved or clarified for the information of prospective bidders and or buyers. In the performance of its
assigned task the Feria Law Office came upon the Marubeni claim and mentioned that the APTC and/or PNCC must
disclose that there is a claim by Marubeni against PNCC for purposes of satisfying the requirements of full disclosure.
This seemingly innocent statement or requirement made by the Feria Law Office was then taken by two officials of
the Asset Privatization Trust and with malice aforethought turned it into the basis for a multi-billion peso debt by the
now government owned and/or controlled PNCC. x x x.51 (Emphasis supplied)

While the PNCC Board passed Board Resolution No. BD-099-2000 amending Board Resolution No. BD-092-2000,
such amendment merely added conditions for the recognition of the Marubeni loans, namely, subjecting the
recognition to a final determination by COA of the amount involved and to the declaration by OGCC of the legality of
PNCC’s liability. However, the PNCC Board reiterated and stood firm that it "recognizes, acknowledges and confirms
its obligations" for the Marubeni loans. Apparently, Board Resolution No. BD-099-2000 was a futile attempt to "revoke"
Board Resolution No. BD-092-2000. Atty. Alfredo Laya, Jr., a former PNCC Director, spoke on his protests against
Board Resolution No. BD-092-2000 at the Senate hearings, thus:

MR. LAYA. Mr. Chairman, if I can …

THE CHAIRMAN. Were you also at the board?
MR. LAYA. At that time, yes, sir.
THE CHAIRMAN. Okay, go ahead.
MR. LAYA. That's why if – maybe this can help clarify the sequence. There was this meeting on October 20. This
matter of the Marubeni liability or account was also discussed. Mr. Macasaet, if I may try to refresh. And there was
some discussion, sir, and in fact, they were saying even at that stage that there should be a COA or an OGCC audit.
Now, that was during the discussion of October 20. Later on, the minutes came out. The practice, then, sir, was for
the minutes to come out at the start of the meeting of the subsequent. So the minutes of October 20 came out on
November 22 and then we were going over it. And that is in the subsequent minutes of the meeting …
THE CHAIRMAN. May I interrupt. You were taking up in your November 22 meeting the October 20 minutes?
MR. LAYA. Yes, sir.
THE CHAIRMAN. This minutes that we have?
MR. LAYA. Yes, sir.
THE CHAIRMAN. All right, go ahead.

MR. LAYA. Now, in the November 22 meeting, we noticed this resolution already for confirmation of the board –
proceedings of October 20. So immediately we made – actually, protest would be a better term for that – we protested
the wording of the resolution and that's why we came up with this resolution amending the October 20 resolution.

SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October 20 did not accurately reflect the decisions
that you made on October 20 because you were saying that this recognition should be subject to OGCC and COA?
You seem to imply and we want to make it – and I want to get that for the record. You seem to imply that there was
no decision to recognize the obligation during that meeting because you wanted it to subject it to COA and OGCC, is
that correct?

MR. LAYA. Yes, your Honor.

SEN. DRILON. So how did...
MR. LAYA. That's my understanding of the proceedings at that time, that's why in the subsequent November 22
meeting, we raised this point about obtaining a COA and OGCC opinion.
SEN. DRILON. Yes. But you know, the November 22 meeting repeated the wording of the resolution previously
adopted only now you are saying subject to final determination which is completely of different import from what you
are saying was your understanding of the decision arrived at on October 20.
MR. LAYA. Yes, sir. Because our thinking then...
SEN. DRILON. What do you mean, yes, sir?
MR. LAYA. It's just a claim under discussion but then the way it is translated, as the minutes of October 20 were not
really verbatim.
SEN. DRILON. So, you never intended to recognize the obligation.
MR. LAYA. I think so, sir. That was our – personally, that was my position.
SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the minutes did not reflect what the board …
THE CHAIRMAN. Ms. Pasetes …
MS. PASETES. Yes, Mr. Chairman.
THE CHAIRMAN. … you are the chief financial officer of PNCC.

MS. PASETES. Your Honor, before that November 22 board meeting, management headed by Mr. Rolando
Macasaet, myself and Atty. Ogan had a discussion about the recognition of the obligations of 10 billion of Marubeni
and 36 billion of the national government on whether to recognize this as an obligation in our books or recognize it as
an obligation in the pro forma financial statement to be used for the privatization of PNCC because recognizing both
obligations in the books of PNCC would defeat our going concern status and that is where the position of the president
then, Mr. Macasaet, stemmed from and he went back to the board and moved to reconsider the position of October
20, 2000, Mr. Chair.52 (Emphasis supplied)

In other words, despite Atty. Laya’s objections to PNCC’s admitting liability for the Marubeni loans, the PNCC Board
still admitted the same and merely imposed additional conditions to temper somehow the devastating effects of Board
Resolution No. BD-092-2000.

The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni
loans demonstrates the PNCC Board’s gross and willful disregard of the requisite care and diligence in managing the
affairs of PNCC, amounting to bad faith and resulting in grave and irreparable injury to PNCC and its stockholders.
This reckless and treacherous move on the part of the PNCC Board clearly constitutes a serious breach of its fiduciary
duty to PNCC and its stockholders, rendering the members of the PNCC Board liable under Section 31 of the
Corporation Code, which provides:

SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees who willfully and knowingly vote for or assent
to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.

Soon after the short-lived Estrada Administration, the PNCC Board revoked its previous admission of liability for the
Marubeni loans. During the oral arguments, Atty. Sison narrated to the Court:

x x x After President Estrada was ousted, I was appointed as President and Chairman of PNCC in April of 2001, this
particular board resolution was brought to my attention and I immediately put the matter before the board. I had no
problem in convincing them to reverse the recognition as it was illegal and had no basis in fact. The vote to overturn
that resolution was unanimous. Strange to say that some who voted to overturn the recognition were part of the old
board that approved it. Stranger still, Renato Valdecantos who was still a member of the Board voted in favor of
reversing the resolution he himself instigated and pushed. Some of the board members who voted to recognize the
obligation of Marubeni even came to me privately and said "pinilit lang kami." x x x.53 (Emphasis supplied)

In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board caused undue injury to
the Government and gave unwarranted benefits to Radstock, through manifest partiality, evident bad faith or gross
inexcusable negligence of the PNCC Board. Such acts are declared under Section 3(e) of RA 3019 or the Anti-Graft
and Corrupt Practices Act, as "corrupt practices xxx and xxx unlawful." Being unlawful and criminal acts, these PNCC
Board Resolutions are void ab initio and cannot be implemented or in any way given effect by the Executive or Judicial
branch of the Government.

Not content with forcing PNCC to commit corporate suicide with the admission of liability for the Marubeni loans under
Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board drove the last nail on PNCC’s coffin when
the PNCC Board entered into the manifestly and grossly disadvantageous Compromise Agreement with Radstock.
This time, the OGCC, headed by Agnes DST Devanadera, reversed itself and recommended approval of the
Compromise Agreement to the PNCC Board. As Atty. Sison explained to the Court during the oral arguments:

x x x While the case was pending in the Court of Appeals, Radstock in a rare display of extreme generosity,
conveniently convinced the Board of PNCC to enter into a compromise agreement for ½ the amount of the judgment
rendered by the RTC or ₱6.5 Billion Pesos. This time the OGCC, under the leadership of now Solicitor General Agnes
Devanadera, approved the compromise agreement abandoning the previous OGCC position that PNCC had a
meritorious case and would be hard press to lose the case. What is strange is that although the compromise
agreement we seek to stop ostensibly is for ₱6.5 Billion only, truth and in fact, the agreement agrees to convey to
Radstock all or substantially all of the assets of PNCC worth ₱18 Billion Pesos. There are three items that are
undervalued here, the real estate that was turned over as a result of the controversial agreement, the toll revenues
that were being assigned and the value of the new shares of PNCC the difference is about ₱12 Billion Pesos. x x x
(Emphasis supplied)

V.
The Compromise Agreement is Void for Being Contrary to the Constitution, Existing Laws, and Public Policy

For a better understanding of the present case, the pertinent terms and conditions of the Compromise Agreement
between PNCC and Radstock are quoted below:

COMPROMISE AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement made and entered into this 17th day of August 2006, in Mandaluyong City, Metro Manila, Philippines,
by and between:
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, a government acquired asset corporation, created and
existing under the laws of the Republic of the Philippines, with principal office address at EDSA corner Reliance Street,
Mandaluyong City, Philippines, duly represented herein by its Chairman ARTHUR N. AGUILAR, pursuant to a Board
Resolution attached herewith as Annex "A" and made an integral part hereof, hereinafter referred to as PNCC;

- and -

RADSTOCK SECURITIES LIMITED, a private corporation incorporated in the British Virgin Islands, with office
address at Suite 1402 1 Duddell Street, Central Hongkong duly-represented herein by its Director, CARLOS G.
DOMINGUEZ, pursuant to a Board Resolution attached herewith as Annex "B" and made an integral part hereof,
hereinafter referred to as RADSTOCK.

WITNESSETH:

WHEREAS, on January 15, 2001, RADSTOCK, as assignee of Marubeni Corporation, filed a complaint for sum of
money and damages with application for a writ of preliminary attachment with the Regional Trial Court (RTC),
Mandaluyong City, docketed as Civil Case No. MC-01-1398, to collect on PNCC’s guarantees on the unpaid loan
obligations of CDCP Mining Corporation as provided under an Advance Payment Agreement and Loan Agreement;

WHEREAS, on December 10, 2002, the RTC of Mandaluyong rendered a decision in favor of plaintiff RADSTOCK
directing PNCC to pay the total amount of Thirteen Billion One Hundred Fifty One Million Nine Hundred Fifty-Six
Thousand Five Hundred Twenty-Eight Pesos (₱13,151,956,528.00) with interest from October 15, 2001 plus Ten
Million Pesos (₱10,000,000.00) as attorney's fees.

WHEREAS, PNCC had elevated the case to the Court of Appeals (CA-G.R. SP No. 66654) on Certiorari and
thereafter, to the Supreme Court (G.R. No. 156887) which Courts have consistently ruled that the RTC did not commit
grave abuse of discretion when it denied PNCC’s Motion to Dismiss which sets forth similar or substantially the same
grounds or defenses as those raised in PNCC's Answer;

WHEREAS, the case has remained pending for almost six (6) years even after the main action was appealed to the
Court of Appeals;

WHEREAS, on the basis of the RTC Decision dated December 10, 2002, the current value of the judgment debt
against PNCC stands at ₱17,040,843,968.00 as of July 31, 2006 (the "Judgment Debt");

WHEREAS, RADSTOCK is willing to settle the case at the reduced Compromise Amount of Six Billion One Hundred
Ninety-Six Million Pesos (₱6,196,000,000.00) which may be paid by PNCC, either in cash or in kind to avoid the
trouble and inconvenience of further litigation as a gesture of goodwill and cooperation;

WHEREAS, it is an established legal policy or principle that litigants in civil cases should be encouraged to
compromise or amicably settle their claims not only to avoid litigation but also to put an end to one already commenced
(Articles 2028 and 2029, Civil Code);

WHEREAS, this Compromise Agreement has been approved by the respective Board of Directors of both PNCC and
RADSTOCK, subject to the approval of the Honorable Court;

NOW, THEREFORE, for and in consideration of the foregoing premises, and the mutual covenants, stipulations and
agreements herein contained, PNCC and RADSTOCK have agreed to amicably settle the above captioned Radstock
case under the following terms and conditions:

1. RADSTOCK agrees to receive and accept from PNCC in full and complete settlement of the
Judgment Debt, the reduced amount of Six Billion, One Hundred Ninety-Six Million Pesos
(₱6,196,000,000.00) (the "Compromise Amount").

2. This Compromise Amount shall be paid by PNCC to RADSTOCK in the following manner:
a. PNCC shall assign to a third party assignee to be designated by RADSTOCK all its rights and interests to the
following real properties provided the assignee shall be duly qualified to own real properties in the Philippines;

(1) PNCC’s rights over that parcel of land located in Pasay City with a total area of One Hundred
Twenty-Nine Thousand Five Hundred Forty-Eight (129,548) square meters, more or less, and which
is covered by and more particularly described in Transfer Certificate of Title No. T-34997 of the
Registry of Deeds for Pasay City. The transfer value is ₱3,817,779,000.00.

PNCC’s rights and interests in Transfer Certificate of Title No. T-34997 of the Registry of Deeds for
Pasay City is defined and delineated by Administrative Order No. 397, Series of 1998, and
RADSTOCK is fully aware and recognizes that PNCC has an undertaking to cede at least 2 hectares
of this property to its creditor, the Philippine National Bank; and that furthermore, the Government
Service Insurance System has also a current and existing claim in the nature of boundary conflicts,
which undertaking and claim will not result in the diminution of area or value of the property. Radstock
recognizes and acknowledges the rights and interests of GSIS over the said property.

(2) T-452587 (T-23646) - Parañaque (5,123 sq. m.) subject to the clarification of the Privatization and
Management Office (PMO) claims thereon. The transfer value is ₱45,000,900.00.
(3) T-49499 (529715 including T-68146-G (S-29716) (1,9747-A)-Parañaque (107 sq. m.) (54 sq. m.)
subject to the clarification of the Privatization and Management Office (PMO) claims thereon. The
transfer value is ₱1,409,100.00.
(4) 5-29716-Parañaque (27,762 sq. m.) subject to the clarification of the Privatization and Management
Office (PMO) claims thereon. The transfer value is ₱242,917,500.00.
(5) P-169 - Tagaytay (49,107 sq. m.). The transfer value is ₱13,749,400.00.
(6) P-170 - Tagaytay (49,100 sq. m.). The transfer value is ₱13,749,400.00.
(7) N-3320 - Town and Country Estate, Antipolo (10,000 sq. m.). The transfer value is ₱16,800,000.00.
(8) N-7424 - Antipolo (840 sq. m.). The transfer value is ₱940,800.00.
(9) N-7425 - Antipolo (850 sq. m.). The transfer value is ₱952,000.00.
(10) N-7426 - Antipolo (958 sq. m.). The transfer value is ₱1,073,100.00.
(11) T-485276 - Antipolo (741 sq. m.). The transfer value is ₱830,200.00.
(12) T-485277 - Antipolo (680 sq. m.). The transfer value is ₱761,600.00.
(13) T-485278 - Antipolo (701 sq. m.). The transfer value is ₱785,400.00.
(14) T-131500 - Bulacan (CDCP Farms Corp.) (4,945 sq, m.). The transfer value is ₱6,475,000.00.
(15) T-131501 - Bulacan (678 sq. m.). The transfer value is ₱887,600.00.
(16) T-26,154 (M) - Bocaue, Bulacan (2,841 sq. m.). The transfer value is ₱3,779,300.00.
(17) T-29,308 (M) - Bocaue, Bulacan (733 sq. m.). The transfer value is ₱974,400.00.
(18) T-29,309 (M) Bocaue, Bulacan (1,141 sq. m.). The transfer value is ₱1,517,600.00.
(19) T-260578 (R. Bengzon) Sta. Rita, Guiguinto, Bulacan (20,000 sq. m.). The transfer value is
₱25,200,000.00.

The transfer values of the foregoing properties are based on 70% of the appraised value of the respective properties.

b. PNCC shall issue to RADSTOCK or its assignee common shares of the capital stock of PNCC issued at par value
which shall comprise 20% of the outstanding capital stock of PNCC after the conversion to equity of the debt exposure
of the Privatization Management Office (PMO) and the National Development Company (NDC) and other government
agencies and creditors such that the total government holdings shall not fall below 70% voting equity subject to the
approval of the Securities and Exchange Commission (SEC) and ratification of PNCC’s stockholders, if necessary.
The assigned value of the shares issued to RADSTOCK is ₱713 Million based on the approximate last trading price
of PNCC shares in the Philippine Stock Exchange as the date of this agreement, based further on current generally
accepted accounting standards which stipulates the valuation of shares to be based on the lower of cost or market
value.

Subject to the procurement of any and all necessary approvals from the relevant governmental authorities, PNCC
shall deliver to RADSTOCK an instrument evidencing an undertaking of the Privatization and Management Office
(PMO) to give RADSTOCK or its assignee the right to match any offer to buy the shares of the capital stock and debts
of PNCC held by PMO, in the event the same shares and debt are offered for privatization.
c. PNCC shall assign to RADSTOCK or its assignee 50% of the PNCC's 6% share in the gross toll revenue of the
Manila North Tollways Corporation (MNTC), with a Net Present Value of ₱1.287 Billion computed in the manner
outlined in Annex "C" herein attached as an integral part hereof, that shall be due and owing to PNCC pursuant to the
Joint Venture Agreement between PNCC and First Philippine Infrastructure Development Corp. dated August 29,
1995 and other related existing agreements, commencing in 2008. It shall be understood that as a result of this
assignment, PNCC shall charge and withhold the amounts, if any, pertaining to taxes due on the amounts assigned.

Under the Compromise Agreement, PNCC shall pay Radstock the reduced amount of ₱6,185,000,000.00 in full
settlement of PNCC’s guarantee of CDCP Mining’s debt allegedly totaling ₱17,040,843,968.00 as of 31 July 2006. To
satisfy its reduced obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated by Radstock
all its rights and interests" to the listed real properties therein; (2) issue to Radstock or its assignee common shares
of the capital stock of PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC;
and (3) assign to Radstock or its assignee 50% of PNCC’s 6% share, for the next 27 years (2008-2035), in the gross
toll revenues of the Manila North Tollways Corporation.

A. The PNCC Board has no power to compromise the ₱6.185 billion amount.

Does the PNCC Board have the power to compromise the ₱6.185 billion "reduced" amount? The answer is in the
negative.1avvphi1

The Dissenting Opinion asserts that PNCC has the power, citing Section 36(2) of Presidential Decree No. 1445 (PD
1445), otherwise known as the Government Auditing Code of the Philippines, enacted in 1978. Section 36 states:

SECTION 36. Power to Compromise Claims. — (1) When the interest of the government so requires, the Commission
may compromise or release in whole or in part, any claim or settled liability to any government agency not exceeding
ten thousand pesos and with the written approval of the Prime Minister, it may likewise compromise or release any
similar claim or liability not exceeding one hundred thousand pesos, the application for relief therefrom shall be
submitted, through the Commission and the Prime Minister, with their recommendations, to the National Assembly.

(2) The respective governing bodies of government-owned or controlled corporations, and self-governing boards,
commissions or agencies of the government shall have the exclusive power to compromise or release any similar
claim or liability when expressly authorized by their charters and if in their judgment, the interest of their respective
corporations or agencies so requires. When the charters do not so provide, the power to compromise shall be
exercised by the Commission in accordance with the preceding paragraph. (Emphasis supplied)

The Dissenting Opinion asserts that since PNCC is incorporated under the Corporation Code, the PNCC Board has
all the powers granted to the governing boards of corporations incorporated under the Corporation Code, which
includes the power to compromise claims or liabilities.

Section 36 of PD 1445, enacted on 11 June 1978, has been superseded by a later law -- Section 20(1), Chapter IV,
Subtitle B, Title I, Book V of Executive Order No. 292 or the Administrative Code of 1987, which provides:

Section 20. Power to Compromise Claims. - (1) When the interest of the Government so requires, the Commission
may compromise or release in whole or in part, any settled claim or liability to any government agency not exceeding
ten thousand pesos arising out of any matter or case before it or within its jurisdiction, and with the written approval
of the President, it may likewise compromise or release any similar claim or liability not exceeding one hundred
thousand pesos. In case the claim or liability exceeds one hundred thousand pesos, the application for relief therefrom
shall be submitted, through the Commission and the President, with their recommendations, to the Congress[.] x x x
(Emphasis supplied)

Under this provision,54 the authority to compromise a settled claim or liability exceeding ₱100,000.00 involving a
government agency, as in this case where the liability amounts to ₱6.185 billion, is vested not in COA but exclusively
in Congress. Congress alone has the power to compromise the ₱6.185 billion purported liability of PNCC. Without
congressional approval, the Compromise Agreement between PNCC and Radstock involving ₱6.185 billion is void for
being contrary to Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987.
PNCC is a "government agency" because Section 2 on Introductory Provisions of the Revised Administrative Code of
1987 provides that –

Agency of the Government refers to any of the various units of the Government, including a department, bureau,
office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein.
(Boldfacing supplied)

Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987 applies to PNCC, which
indisputably is a government owned or controlled corporation.

In the same vein, the COA’s stamp of approval on the Compromise Agreement is void for violating Section 20(1),
Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987. Clearly, the Dissenting Opinion’s reliance
on the COA’s finding that the terms and conditions of the Compromise Agreement are "fair and above board" is
patently erroneous.

Citing Benedicto v. Board of Administrators of Television Stations RPN, BBC and IBC,55 the Dissenting Opinion views
that congressional approval is not required for the validity of the Compromise Agreement because the liability of PNCC
is not yet "settled."

In Benedicto, the PCGG filed in the Sandiganbayan a civil case to recover from the defendants (including Roberto S.
Benedicto) their ill-gotten wealth consisting of funds and other properties. The PCGG executed a compromise
agreement with Roberto S. Benedicto ceding to the latter a substantial part of his ill-gotten assets and the State
granting him immunity from further prosecution. The Court held that prior congressional approval is not required for
the PCGG to enter into a compromise agreement with persons against whom it has filed actions for recovery of ill-
gotten wealth.

In Benedicto, the Court found that the government’s claim against Benedicto was not yet settled unlike here where
the PNCC Board expressly admitted the liability of PNCC for the Marubeni loans. In Benedicto, the ownership of the
alleged ill-gotten assets was still being litigated in the Sandiganbayan and no party ever admitted any liability, unlike
here where the PNCC Board had already admitted through a formal Board Resolution PNCC’s liability for the Marubeni
loans. PNCC’s express admission of liability for the Marubeni loans is essentially the premise of the execution of the
Compromise Agreement. In short, Radstock’s claim against PNCC is settled by virtue of PNCC’s express admission
of liability for the Marubeni loans. The Compromise Agreement merely reduced this settled liability from ₱17 billion to
₱6.185 billion.

The provision of the Revised Administrative Code on the power to settle claims or liabilities was precisely enacted to
prevent government agencies from admitting liabilities against the government, then compromising such "settled"
liabilities. The present case is exactly what the law seeks to prevent, a compromise agreement on a creditor’s claim
settled through admission by a government agency without the approval of Congress for amounts exceeding
₱100,000.00. What makes the application of the law even more necessary is that the PNCC Board’s twin moves are
manifestly and grossly disadvantageous to the Government. First, the PNCC admitted solidary liability for a staggering
₱10.743 billion private debt incurred by a private corporation which PNCC does not even control. Second, the PNCC
Board agreed to pay Radstock ₱6.185 billion as a compromise settlement ahead of all other creditors, including the
Government which is the biggest creditor.

The Dissenting Opinion further argues that since the PNCC is incorporated under the Corporation Code, it has the
power, through its Board of Directors, to compromise just like any other private corporation organized under the
Corporation Code. Thus, the Dissenting Opinion states:

Not being a government corporation created by special law, PNCC does not owe its creation to some charter or special
law, but to the Corporation Code. Its powers are enumerated in the Corporation Code and its articles of
incorporation. As an autonomous entity, it undoubtedly has the power to compromise, and to enter into a settlement
through its Board of Directors, just like any other private corporation organized under the Corporation Code. To
maintain otherwise is to ignore the character of PNCC as a corporate entity organized under the Corporation Code,
by which it was vested with a personality and identity distinct and separate from those of its stockholders or members.
(Boldfacing and underlining supplied)
The Dissenting Opinion is woefully wide off the mark. The PNCC is not "just like any other private corporation"
precisely because it is not a private corporation but indisputably a government owned corporation. Neither is PNCC
"an autonomous entity" considering that PNCC is under the Department of Trade and Industry, over which the
President exercises control. To claim that PNCC is an "autonomous entity" is to say that it is a lost command in the
Executive branch, a concept that violates the President's constitutional power of control over the entire Executive
branch of government.56

The government nominees in the PNCC Board, who practically compose the entire PNCC Board, are public officers
subject to the Anti-Graft and Corrupt Practices Act, accountable to the Government and the Filipino people. To hold
that a corporation incorporated under the Corporation Code, despite its being 90.3% owned by the Government, is
"an autonomous entity" that could solely through its Board of Directors compromise, and transfer ownership of,
substantially all its assets to a private third party without the approval required under the Administrative Code of
1987,57 is to invite the plunder of all such government owned corporations.

The Dissenting Opinion’s claim that PNCC is an autonomous entity just like any other private corporation is
inconsistent with its assertion that Section 36(2) of the Government Auditing Code is the governing law in determining
PNCC's power to compromise. Section 36(2) of the Government Auditing Code expressly states that it applies to the
governing bodies of "government-owned or controlled corporations." The phrase "government-owned or
controlled corporations" refers to both those created by special charter as well as those incorporated under the
Corporation Code. Section 2, Article IX-D of the Constitution provides:

SECTION 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including
government-owned or controlled corporations with original charters, and on a post-audit basis: (a) constitutional
bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous
state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d)
such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the Government,
which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity.
However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It
shall keep the general accounts of the Government and, for such period as may be provided by law, preserve the
vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its
audit and examination, establish the techniques and methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. (Emphasis
supplied)

In explaining the extent of the jurisdiction of COA over government owned or controlled corporations, this Court
declared in Feliciano v. Commission on Audit:58

The COA's audit jurisdiction extends not only to government "agencies or instrumentalities," but also to "government-
owned and controlled corporations with original charters" as well as "other government-owned or controlled
corporations" without original charters.

xxxx

Petitioner forgets that the constitutional criterion on the exercise of COA's audit jurisdiction depends on the
government's ownership or control of a corporation. The nature of the corporation, whether it is private, quasi-public,
or public is immaterial.

The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with original
charters," as well as "government-owned or controlled corporations" without original charters. GOCCs with original
charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA post-audit. GOCCs
without original charters refer to corporations created under the Corporation Code but are owned or controlled by the
government. The nature or purpose of the corporation is not material in determining COA's audit jurisdiction. Neither
is the manner of creation of a corporation, whether under a general or special law.

Clearly, the COA’s audit jurisdiction extends to government owned or controlled corporations incorporated under the
Corporation Code. Thus, the COA must apply the Government Auditing Code in the audit and examination of the
accounts of such government owned or controlled corporations even though incorporated under the Corporation
Code. This means that Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987 on the
power to compromise, which superseded Section 36 of the Government Auditing Code, applies to the present case
in determining PNCC’s power to compromise. In fact, the COA has been regularly auditing PNCC on a post-audit
basis in accordance with Section 2, Article IX-D of the Constitution, the Government Auditing Code, and COA rules
and regulations.

B. PNCC’s toll fees are public funds.

PD 1113 granted PNCC a 30-year franchise to construct, operate and maintain toll facilities in the North and South
Luzon Expressways. Section 1 of PD 111359 provides:

Section 1. Any provision of law to the contrary notwithstanding, there is hereby granted to the Construction and
Development Corporation of the Philippines (CDCP), a corporation duly organized and registered under the laws of
the Philippines, hereinafter called the GRANTEE, for a period of thirty (30) years from May 1, 1977 the right, privilege
and authority to construct, operate and maintain toll facilities covering the expressways from Balintawak (Station 9 +
563) to Carmen, Rosales, Pangasinan and from Nichols, Pasay City (Station 10 + 540) to Lucena, Quezon, hereinafter
referred to collectively as North Luzon Expressway, respectively.

The franchise herein granted shall include the right to collect toll fees at such rates as may be fixed and/or authorized
by the Toll Regulatory Board hereinafter referred to as the Board created under Presidential Decree No. 1112 for the
use of the expressways above-mentioned. (Emphasis supplied)

Section 2 of PD 1894,60 which amended PD 1113 to include in PNCC’s franchise the Metro Manila expressway, also
provides:

Section 2. The term of the franchise provided under Presidential Decree No. 1113 for the North Luzon Expressway
and the South Luzon Expressway which is thirty (30) years from 1 May 1977 shall remain the same; provided that,
the franchise granted for the Metro Manila Expressway and all extensions linkages, stretches and diversions that may
be constructed after the date of approval of this decree shall likewise have a term of thirty (30) years commencing
from the date of completion of the project. (Emphasis supplied)

Based on these provisions, the franchise of the PNCC expired on 1 May 2007 or thirty years from 1 May 1977.

PNCC, however, claims that under PD 1894, the North Luzon Expressway (NLEX) shall have a term of 30 years from
the date of its completion in 2005. PNCC argues that the proviso in Section 2 of PD 1894 gave "toll road projects
completed within the franchise period and after the approval of PD No. 1894 on 12 December 1983 their own thirty-
year term commencing from the date of the completion of the said project, notwithstanding the expiry of the said
franchise."

This contention is untenable.

The proviso in Section 2 of PD 1894 refers to the franchise granted for the Metro Manila Expressway and all extensions
linkages, stretches and diversions constructed after the approval of PD 1894. It does not pertain to the NLEX because
the term of the NLEX franchise, "which is 30 years from 1 May 1977, shall remain the same," as expressly provided
in the first sentence of the same Section 2 of PD 1894. To construe that the NLEX franchise had a new term of 30
years starting from 2005 glaringly conflicts with the plain, clear and unequivocal language of the first sentence of
Section 2 of PD 1894. That would be clearly absurd.

There is no dispute that Congress did not renew PNCC’s franchise after its expiry on 1 May 2007. However, PNCC
asserts that it "remains a viable corporate entity even after the expiration of its franchise under Presidential Decree
No. 1113." PNCC points out that the Toll Regulatory Board (TRB) granted PNCC a "Tollway Operation Certificate"
(TOC) which conferred on PNCC the authority to operate and maintain toll facilities, which includes the power to
collect toll fees. PNCC further posits that the toll fees are private funds because they represent "the consideration
given to tollway operators in exchange for costs they incurred or will incur in constructing, operating and maintaining
the tollways."

This contention is devoid of merit.

With the expiration of PNCC’s franchise, the assets and facilities of PNCC were automatically turned over, by
operation of law, to the government at no cost. Sections 2(e) and 9 of PD 1113 and Section 5 of PD 1894 provide:

Section 2 [of PD 1113]. In consideration of this franchise, the GRANTEE shall:

(e) Turn over the toll facilities and all equipment directly related thereto to the government upon expiration of the
franchise period without cost.

Section 9 [of PD 1113]. For the purposes of this franchise, the Government, shall turn over to the GRANTEE (PNCC)
not later than April 30, 1977 all physical assets and facilities including all equipment and appurtenances directly related
to the operations of the North and South Toll Expressways: Provided, That, the extensions of such Expressways shall
also be turned over to GRANTEE upon completion of their construction or of functional sections thereof: Provided,
However, That upon termination of the franchise period, said physical assets and facilities including improvements
thereon, together with equipment and appurtenances directly related to their operations, shall be turned over to the
Government without any cost or obligation on the part of the latter. (Emphasis supplied)

Section 5 [of PD No. 1894]. In consideration of this franchise, the GRANTEE shall:

(a) Construct, operate and maintain at its own expense the Expressways; and

(b) Turn over, without cost, the toll facilities and all equipment, directly related thereto to the Government upon
expiration of the franchise period. (Emphasis supplied)

The TRB does not have the power to give back to PNCC the toll assets and facilities which were automatically turned
over to the Government, by operation of law, upon the expiration of the franchise of the PNCC on 1 May 2007.
Whatever power the TRB may have to grant authority to operate a toll facility or to issue a "Tollway Operation
Certificate," such power does not obviously include the authority to transfer back to PNCC ownership of National
Government assets, like the toll assets and facilities, which have become National Government property upon the
expiry of PNCC’s franchise. Such act by the TRB would repeal Section 5 of PD 1894 which automatically vested in
the National Government ownership of PNCC’s toll assets and facilities upon the expiry of PNCC’s franchise. The
TRB obviously has no power to repeal a law. Further, PD 1113, as amended by PD 1894, granting the franchise to
PNCC, is a later law that must necessarily prevail over PD 1112 creating the TRB. Hence, the provisions of PD 1113,
as amended by PD 1894, are controlling.

The government’s ownership of PNCC's toll assets and facilities inevitably results in the government’s ownership of
the toll fees and the net income derived from these toll assets and facilities. Thus, the toll fees form part of the National
Government’s General Fund, which includes public moneys of every sort and other resources pertaining to any agency
of the government.61 Even Radstock’s counsel admits that the toll fees are public funds, to wit:

ASSOCIATE JUSTICE CARPIO:

Okay. Now, when the franchise of PNCC expired on May 7, 2007, under the terms of the franchise under PD 1896,
all the assets, toll way assets, equipment, etcetera of PNCC became owned by government at no cost, correct, under
the franchise?

DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Okay. So this is now owned by the national government. [A]ny income from these assets of the national government
is national government income, correct?
DEAN AGABIN:
Yes, Your Honor.62
xxxx
ASSOCIATE JUSTICE CARPIO:
x x x My question is very simple x x x Is the income from these assets of the national government (interrupted)
DEAN AGABIN:
Yes, Your Honor.63
xxxx
ASSOCIATE JUSTICE CARPIO:
So, it’s the government [that] decides whether it goes to the general fund or another fund. [W]hat is that other fund?
Is there another fund where revenues of the government go?
DEAN AGABIN:
It’s the same fund, Your Honor, except that (interrupted)
ASSOCIATE JUSTICE CARPIO:
So it goes to the general fund?
DEAN AGABIN:
Except that it can be categorized as a private fund in a commercial sense, and it can be categorized as a public fund
in a Public Law sense.
ASSOCIATE JUSTICE CARPIO:
Okay. So we agree that, okay, it goes to the general fund. I agree with you, but you are saying it is categorized still as
a private funds?
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But it’s part of the general fund. Now, if it is part of the general fund, who has the authority to spend that money?
DEAN AGABIN:
Well, the National Government itself.
ASSOCIATE JUSTICE CARPIO:
Who in the National Government, the Executive, Judiciary or Legislative?
DEAN AGABIN:
Well, the funds are usually appropriated by the Congress.
ASSOCIATE JUSTICE CARPIO:
x x x you mean to say there are exceptions that money from the general fund can be spent by the Executive without
going t[hrough] Congress, or xxx is [that] the absolute rule?
DEAN AGABIN:
Well, in so far as the general fund is concerned, that is the absolute rule set aside by the National Government.
ASSOCIATE JUSTICE CARPIO:
x x x you are saying this is general fund money - the collection from the assets[?]
DEAN AGABIN:
Yes.64 (Emphasis supplied)

Forming part of the General Fund, the toll fees can only be disposed of in accordance with the fundamental principles
governing financial transactions and operations of any government agency, to wit: (1) no money shall be paid out of
the Treasury except in pursuance of an appropriation made by law, as expressly mandated by Section 29(1), Article
VI of the Constitution; and (2) government funds or property shall be spent or used solely for public purposes, as
expressly mandated by Section 4(2) of PD 1445 or the Government Auditing Code.65

Section 29(1), Article VI of the Constitution provides:

Section 29(1). No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.

The power to appropriate money from the General Funds of the Government belongs exclusively to the Legislature.
Any act in violation of this iron-clad rule is unconstitutional.

Reinforcing this Constitutional mandate, Sections 84 and 85 of PD 1445 require that before a government agency can
enter into a contract involving the expenditure of government funds, there must be an appropriation law for such
expenditure, thus:
Section 84. Disbursement of government funds.

1. Revenue funds shall not be paid out of any public treasury or depository except in pursuance of an appropriation
law or other specific statutory authority.

xxxx

Section 85. Appropriation before entering into contract.

1. No contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor,
the unexpended balance of which, free of other obligations, is sufficient to cover the proposed expenditure.

xxxx

Section 86 of PD 1445, on the other hand, requires that the proper accounting official must certify that funds have
been appropriated for the purpose.66 Section 87 of PD 1445 provides that any contract entered into contrary to
the requirements of Sections 85 and 86 shall be void, thus:

Section 87. Void contract and liability of officer. Any contract entered into contrary to the requirements of the two
immediately preceding sections shall be void, and the officer or officers entering into the contract shall be liable to the
government or other contracting party for any consequent damage to the same extent as if the transaction had been
wholly between private parties. (Emphasis supplied)

Applying Section 29(1), Article VI of the Constitution, as implanted in Sections 84 and 85 of the Government Auditing
Code, a law must first be enacted by Congress appropriating ₱6.185 billion as compromise money before payment to
Radstock can be made.67 Otherwise, such payment violates a prohibitory law and thus void under Article 5 of the Civil
Code which states that "[a]cts executed against the provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity."

Indisputably, without an appropriation law, PNCC cannot lawfully pay ₱6.185 billion to Radstock. Any contract allowing
such payment, like the Compromise Agreement, "shall be void" as provided in Section 87 of the Government Auditing
Code. In Comelec v. Quijano-Padilla,68 this Court ruled:

Petitioners are justified in refusing to formalize the contract with PHOTOKINA. Prudence dictated them not to enter
into a contract not backed up by sufficient appropriation and available funds. Definitely, to act otherwise would be a
futile exercise for the contract would inevitably suffer the vice of nullity. In Osmeña vs. Commission on Audit, this
Court held:

The Auditing Code of the Philippines (P.D. 1445) further provides that no contract involving the expenditure of public
funds shall be entered into unless there is an appropriation therefor and the proper accounting official of the agency
concerned shall have certified to the officer entering into the obligation that funds have been duly appropriated for the
purpose and the amount necessary to cover the proposed contract for the current fiscal year is available for
expenditure on account thereof. Any contract entered into contrary to the foregoing requirements shall be VOID.

Clearly then, the contract entered into by the former Mayor Duterte was void from the very beginning since the agreed
cost for the project (₱,368,920.00) was way beyond the appropriated amount (₱,419,180.00) as certified by the City
Treasurer. Hence, the contract was properly declared void and unenforceable in COA's 2nd Indorsement, dated
September 4, 1986. The COA declared and we agree, that:

The prohibition contained in Sec. 85 of PD 1445 (Government Auditing Code) is explicit and mandatory. Fund
availability is, as it has always been, an indispensable prerequisite to the execution of any government contract
involving the expenditure of public funds by all government agencies at all levels. Such contracts are not to be
considered as final or binding unless such a certification as to funds availability is issued (Letter of Instruction No. 767,
s. 1978). Antecedent of advance appropriation is thus essential to government liability on contracts (Zobel vs. City of
Manila, 47 Phil. 169). This contract being violative of the legal requirements aforequoted, the same contravenes Sec.
85 of PD 1445 and is null and void by virtue of Sec. 87.
Verily, the contract, as expressly declared by law, is inexistent and void ab initio. This is to say that the proposed
contract is without force and effect from the very beginning or from its incipiency, as if it had never been entered into,
and hence, cannot be validated either by lapse of time or ratification. (Emphasis supplied)

Significantly, Radstock’s counsel admits that an appropriation law is needed before PNCC can use toll fees to pay
Radstock, thus:

ASSOCIATE JUSTICE CARPIO:

Okay, I agree with you. Now, you are saying that money can be paid out of the general fund only through an
appropriation by Congress, correct? That’s what you are saying.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
I agree with you also. Okay, now, can PNCC xxx use this money to pay Radstock without Congressional approval?
DEAN AGABIN:
Well, I believe that that may not be necessary. Your Honor, because earlier, the government had already decreed that
PNCC should be properly paid for the reclamation works which it had done. And so (interrupted)
ASSOCIATE JUSTICE CARPIO:
No. I am talking of the funds.
DEAN AGABIN:
And so it is like a foreign obligation.
ASSOCIATE JUSTICE CARPIO:
Counsel, I'm talking of the general funds, collection from the toll fees. Okay. You said, they go to the general fund.
You also said, money from the general fund can be spent only if there is an appropriation law by Congress.
DEAN AGABIN:
Yes, Your Honor.
There is no law.
DEAN AGABIN:
Yes, except that, Your Honor, this fund has not yet gone to the general fund.
ASSOCIATE JUSTICE CARPIO:
No. It’s being collected everyday. As of May 7, 2007, national government owned those assets already. All those x x
x collections that would have gone to PNCC are now national government owned. It goes to the general fund. And
any body who uses that without appropriation from Congress commits malversation, I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the general fund.
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that it’s still being held now by the agent, PNCC. It has not been remitted to the National
Government?
DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private entity (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that – You just agreed that all those collections now will go to the National Government forming
part of the general fund. If, somehow, PNCC is holding this money in the meantime, it holds xxx it in trust, correct?
Because you said, it goes to the general fund, National Government. So it must be holding this in trust for the National
Government.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Okay. Can the person holding in trust use it to pay his private debt?
DEAN AGABIN:
No, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Cannot be.
DEAN AGABIN:
But I assume that there must be some portion of the collections which properly pertain to PNCC.
ASSOCIATE JUSTICE CARPIO:
If there is some portion that xxx may be [for] operating expenses of PNCC. But that is not
DEAN AGABIN:
Even profit, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Yeah, but that is not the six percent. Out of the six percent, that goes now to PNCC, that’s entirely national government.
But the National Government and the PNCC can agree on service fees for collecting, to pay toll collectors.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But those are expenses. We are talking of the net income. It goes to the general fund. And it’s only Congress that can
authorize that expenditure. Not even the Court of Appeals can give its stamp of approval that it goes to Radstock,
correct?
DEAN AGABIN:
Yes, Your Honor.69 (Emphasis supplied)
Without an appropriation law, the use of the toll fees to pay Radstock would constitute malversation of public funds.
Even counsel for Radstock expressly admits that the use of the toll fees to pay Radstock constitutes malversation of
public funds, thus:
ASSOCIATE JUSTICE CARPIO:
x x x As of May 7, 2007, [the] national government owned those assets already. All those x x x collections that would
have gone to PNCC are now national government owned. It goes to the general fund. And any body who uses that
without appropriation from Congress commits malversation, I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the general fund.
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that it’s still being held now by the agent, PNCC. It has not been remitted to the National
Government?
DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private entity (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that – You just agreed that all those collections now will go to the National Government forming
part of the general fund. If, somehow, PNCC is holding this money in the meantime, it holds x x x it in trust, correct?
Because you said, it goes to the general fund, National Government. So it must be holding this in trust for the National
Government.
DEAN AGABIN:
Yes, Your Honor.70 (Emphasis supplied)
Indisputably, funds held in trust by PNCC for the National Government cannot be used by PNCC to pay a
private debt of CDCP Mining to Radstock, otherwise the PNCC Board will be liable for malversation of public
funds.
In addition, to pay Radstock ₱6.185 billion violates the fundamental public policy, expressly articulated in Section 4(2)
of the Government Auditing Code,71 that government funds or property shall be spent or used solely for pubic
purposes, thus:
Section 4. Fundamental Principles. x x x (2) Government funds or property shall be spent or used solely for public
purposes. (Emphasis supplied)
There is no question that the subject of the Compromise Agreement is CDCP Mining’s private debt to Marubeni, which
Marubeni subsequently assigned to Radstock. Counsel for Radstock admits that Radstock holds a private debt of
CDCP Mining, thus:
ASSOCIATE JUSTICE CARPIO:
So your client is holding a private debt of CDCP Mining, correct?
DEAN AGABIN:
Correct, Your Honor.72 (Emphasis supplied)
CDCP Mining obtained the Marubeni loans when CDCP Mining and PNCC (then CDCP) were still privately owned
and managed corporations. The Government became the majority stockholder of PNCC only because government
financial institutions converted their loans to PNCC into equity when PNCC failed to pay the loans. However, CDCP
Mining have always remained a majority privately owned corporation with PNCC owning only 13% of its equity as
admitted by former PNCC Chairman Arthur N. Aguilar and PNCC SVP Finance Miriam M. Pasetes during the Senate
hearings, thus:
SEN. OSMEÑA. x x x – I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly and severally? I just want to plug the
loopholes.
MR. AGUILAR. I think it was – if I may just speculate. It was just common ownership at that time.
SEN. OSMEÑA. Al right. Now – Also, the ...
MR. AGUILAR. Ah, 13 percent daw, your Honor.
SEN. OSMEÑA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEÑA. What’s 13 percent?
MR. AGUILAR. We owned ...
MS. PASETES. Thirteen percent of ...
SEN. OSMEÑA. PNCC owned ...
MS. PASETES. (Mike off) CDCP ...
SEN. DRILON. Use the microphone, please.
MS. PASETES. Sorry. Your Honor, the ownership of CDCP of CDCP Basay Mining ...
SEN. OSMEÑA. No, no, the ownership of CDCP. CDCP Mining, how many percent of the equity of CDCP Mining was
owned by PNCC, formerly CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?
MS. PASETES. Yes.
SEN. OSMEÑA. One-three?
So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent and they only own 13 percent.
x x x x73 (Emphasis supplied)

PNCC cannot use public funds, like toll fees that indisputably form part of the General Fund, to pay a private debt of
CDCP Mining to Radstock. Such payment cannot qualify as expenditure for a public purpose. The toll fees are merely
held in trust by PNCC for the National Government, which is the owner of the toll fees.

Considering that there is no appropriation law passed by Congress for the ₱6.185 billion compromise amount, the
Compromise Agreement is void for being contrary to law, specifically Section 29(1), Article VI of the Constitution and
Section 87 of PD 1445. And since the payment of the ₱6.185 billion pertains to CDCP Mining’s private debt to
Radstock, the Compromise Agreement is also void for being contrary to the fundamental public policy that government
funds or property shall be spent or used solely for public purposes, as provided in Section 4(2) of the Government
Auditing Code.

C. Radstock is not qualified to own land in the Philippines.

Radstock is a private corporation incorporated in the British Virgin Islands. Its office address is at Suite 14021 Duddell
Street, Central Hongkong. As a foreign corporation, with unknown owners whose nationalities are also unknown,
Radstock is not qualified to own land in the Philippines pursuant to Section 7, in relation to Section 3, Article XII of the
Constitution. These provisions state:

Section. 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national
parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they
may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or
associations may not hold such lands of the public domain except by lease, for a period not exceeding twenty-five
years, renewable for not more than twenty-five years, and not to exceed one hundred thousand hectares in area.
Citizens of the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares
thereof by purchase, homestead, or grant.

Taking into account the requirements of conservation, ecology, and development, and subject to the requirements of
agrarian reform, the Congress shall determine, by law, the size of lands of the public domain which may be acquired,
developed, held, or leased and the conditions therefor.

xxxx
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

The OGCC admits that Radstock cannot own lands in the Philippines. However, the OGCC claims that Radstock can
own the rights to ownership of lands in the Philippines, thus:

ASSOCIATE JUSTICE CARPIO:

Under the law, a foreigner cannot own land, correct?
ATTY. AGRA:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Can a foreigner who xxx cannot own land assign the right of ownership to the land?
ATTY. AGRA:
Again, Your Honor, at that particular time, it will be PNCC, not through Radstock, that chain of events should be,
there’s a qualified nominee (interrupted)
ASSOCIATE JUSTICE CARPIO:
Yes, xxx you said, Radstock will assign the right of ownership to the qualified assignee[.] So my question is, can a
foreigner own the right to ownership of a land when it cannot own the land itself?
ATTY. AGRA:
The foreigner cannot own the land, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But you are saying it can own the right of ownership to the land, because you are saying, the right of ownership will
be assigned by Radstock.
ATTY. AGRA:
The rights over the properties, Your Honors, if there’s a valid assignment made to a qualified party, then the
assignment will be made.
ASSOCIATE JUSTICE CARPIO:
Who makes the assignment?
ATTY. AGRA:
It will be Radstock, Your Honor.
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it, correct?
ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership of the land?
ATTY. AGRA:
Yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. Whether there is such a compromise agreement - - It’s an academic question I am asking you, can a foreigner
assign rights to ownership of a land in the Philippines?
ATTY. AGRA:
Under the Compromise Agreement, Your Honors, these rights should be respected.
ASSOCIATE JUSTICE CARPIO:
So, it can?
ATTY. AGRA:
It can. Your Honor. But again, this right must, cannot be perfected or cannot be, could not take effect.
ASSOCIATE JUSTICE CARPIO:
But if it cannot - - It’s not perfected, how can it assign?
ATTY. AGRA:
Not directly, Your Honors. Again, there must be a qualified nominee assigned by Radstock.
ASSOCIATE JUSTICE CARPIO:
It’s very clear, it’s an indirect way of selling property that is prohibited by law, is it not?
ATTY. AGRA:
Again, Your Honor, know, believe this is a Compromise Agreement. This is a dacion en pago.
ASSOCIATE JUSTICE CARPIO:
So, dacion en pago is an exception to the constitutional prohibition.
ATTY. AGRA:
No, Your Honor. PNCC, will still hold on to the property, absent a valid assignment of properties.
ASSOCIATE JUSTICE CARPIO:
But what rights will PNCC have over that land when it has already signed the compromise? It is just waiting for
instruction xxx from Radstock what to do with it? So, it’s a trustee of somebody, because it does not, it cannot, [it] has
no dominion over it anymore? It’s just holding it for Radstock. So, PNCC becomes a dummy, at that point, of Radstock,
correct?
ATTY. AGRA:
No, Your Honor, I believe it (interrupted)
ASSOCIATE JUSTICE CARPIO:
Yeah, but it does not own the land, but it still holding the land in favor of the other party to the Compromise Agreement
ATTY. AGRA:
Pursuant to the compromise agreement, that will happen.
ASSOCIATE JUSTICE CARPIO:
Okay. May I (interrupted)
ATTY. AGRA:
Again, Your Honor, if the compromise agreement ended with a statement that Radstock will be the owner of the
property (interrupted)
ASSOCIATE JUSTICE CARPIO:
Yeah. Unfortunately, it says, to a qualified assignee.
ATTY. AGRA:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
And at this point, when it is signed and execut[ed] and approved, PNCC has no dominion over that land anymore.
Who has dominion over it?
ATTY. AGRA:
Pending the assignment to a qualified party, Your Honor, PNCC will hold on to the property.
ASSOCIATE JUSTICE CARPIO:
Hold on, but who x x x can exercise acts of dominion, to sell it, to lease it?
ATTY. AGRA:

Again, Your Honor, without the valid assignment to a qualified nominee, the compromise agreement in so far as the
transfer of these properties will not become effective. It is subject to such condition. Your Honor.74 (Emphasis supplied)

There is no dispute that Radstock is disqualified to own lands in the Philippines. Consequently, Radstock is also
disqualified to own the rights to ownership of lands in the Philippines. Contrary to the OGCC’s claim, Radstock cannot
own the rights to ownership of any land in the Philippines because Radstock cannot lawfully own the land itself.
Otherwise, there will be a blatant circumvention of the Constitution, which prohibits a foreign private corporation from
owning land in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land in the Philippines
if it cannot own the land itself. It is basic that an assignor or seller cannot assign or sell something he does not own at
the time the ownership, or the rights to the ownership, are to be transferred to the assignee or buyer.75

The third party assignee under the Compromise Agreement who will be designated by Radstock can only acquire
rights duplicating those which its assignor (Radstock) is entitled by law to exercise.76 Thus, the assignee can acquire
ownership of the land only if its assignor, Radstock, owns the land. Clearly, the assignment by PNCC of the real
properties to a nominee to be designated by Radstock is a circumvention of the Constitutional prohibition against a
private foreign corporation owning lands in the Philippines. Such circumvention renders the Compromise Agreement
void.

D. Public bidding is required for the disposal of government properties.

Under Section 79 of the Government Auditing Code,77 the disposition

of government lands to private parties requires public bidding.78 COA Circular No. 89-926, issued on 27 January 1989,
sets forth the guidelines on the disposal of property and other assets of the government. Part V of the COA Circular
provides:
V. MODE OF DISPOSAL/DIVESTMENT: -

This Commission recognizes the following modes of disposal/divestment of assets and property of national
government agencies, local government units and government-owned or controlled corporations and their
subsidiaries, aside from other such modes as may be provided for by law.

1. Public Auction

Conformably to existing state policy, the divestment or disposal of government property as contemplated herein shall
be undertaken primarily thru public auction. Such mode of divestment or disposal shall observe and adhere to
established mechanics and procedures in public bidding, viz:

a. adequate publicity and notification so as to attract the greatest number of interested parties; (vide, Sec. 79,
P.D. 1445)
b. sufficient time frame between publication and date of auction;
c. opportunity afforded to interested parties to inspect the property or assets to be disposed of;
d. confidentiality of sealed proposals;
e. bond and other prequalification requirements to guarantee performance; and
f. fair evaluation of tenders and proper notification of award.

It is understood that the Government reserves the right to reject any or all of the tenders. (Emphasis supplied)

Under the Compromise Agreement, PNCC shall dispose of substantial parcels of land, by way of dacion en pago, in
favor of Radstock. Citing Uy v. Sandiganbayan,79 PNCC argues that a dacion en pago is an exception to the
requirement of a public bidding.

PNCC’s reliance on Uy is misplaced. There is nothing in Uy declaring that public bidding is dispensed with in a dacion
en pago transaction. The Court explained the transaction in Uy as follows:

We do not see any infirmity in either the MOA or the SSA executed between PIEDRAS and respondent banks. By
virtue of its shareholdings in OPMC, PIEDRAS was entitled to subscribe to 3,749,906,250 class "A" and 2,499,937,500
class "B" OPMC shares. Admittedly, it was financially sound for PIEDRAS to exercise its pre-emptive rights as an
existing shareholder of OPMC lest its proportionate shareholdings be diluted to its detriment. However, PIEDRAS
lacked the necessary funds to pay for the additional subscription. Thus, it resorted to contract loans from respondent
banks to finance the payment of its additional subscription. The mode of payment agreed upon by the parties was that
the payment would be made in the form of part of the shares subscribed to by PIEDRAS. The OPMC shares therefore
were agreed upon by the parties to be equivalent payment for the amount advanced by respondent banks. We see
the wisdom in the conditions of the loan transaction. In order to save PIEDRAS and/or the government from the trouble
of selling the shares in order to raise funds to pay off the loans, an easier and more direct way was devised in the
form of the dacion en pago agreements.

Moreover, we agree with the Sandiganbayan that neither PIEDRAS nor the government sustained any loss in these
transactions. In fact, after deducting the shares to be given to respondent banks as payment for the shares, PIEDRAS
stood to gain about 1,540,781,554 class "A" and 710,550,000 class "B" OPMC shares virtually for free. Indeed, the
question that must be asked is whether or not PIEDRAS, in the exercise of its pre-emptive rights, would have been
able to acquire any of these shares at all if it did not enter into the financing agreements with the respondent banks.80

Suffice it to state that in Uy, neither PIEDRAS81 nor the government suffered any loss in the dacion en
pagotransactions, unlike here where the government stands to lose at least ₱6.185 billion worth of assets.

Besides, a dacion en pago is in essence a form of sale, which basically involves a disposition of a property. In Filinvest
Credit Corp. v. Philippine Acetylene, Co., Inc.,82 the Court defined dacion en pago in this wise:

Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor as
an accepted equivalent of the performance of obligation. In dacion en pago, as a special mode of payment, the debtor
offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking
really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the
debtor, payment for which is to be charged against the debtor's debt.As such, the essential elements of a contract of
sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what
actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is
considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or innovation
to have the effect of totally extinguishing the debt or obligation.83 (Emphasis supplied)

E. PNCC must follow rules on preference of credit.

Radstock is only one of the creditors of PNCC. Asiavest is PNCC’s judgment creditor. In its Board Resolution No. BD-
092-2000, PNCC admitted not only its debt to Marubeni but also its debt to the National Government84 in the amount
of ₱36 billion.85 During the Senate hearings, PNCC admitted that it owed the Government ₱36 billion, thus:

SEN. OSMEÑA. All right. Now, second question is, the management of PNCC also recognize the obligation to the
national government of 36 billion. It is part of the board resolution.

MS. OGAN. Yes, sir, it is part of the October 20 board resolution.

SEN. OSMEÑA. All right. So if you owe the national government 36 billion and you owe Marubeni 10 billion, you know,
I would just declare bankruptcy and let an orderly disposition of assets be done. What happened in this case to the
claim, the 36 billion claim of the national government? How was that disposed of by the PNCC? Mas malaki ang utang
ninyo sa national government, 36 billion. Ang gagawin ninyo, babayaran lahat ang utang ninyo sa Marubeni without
any assets left to satisfy your obligations to the national government. There should have been, at least, a pari passu
payment of all your obligations, 'di ba?

MS. PASETES. Mr. Chairman...

SEN. OSMEÑA. Yes.

MS. PASETES. PNCC still carries in its books an equity account called equity adjustments arising from transfer of
obligations to national government - - 5.4 billion - - in addition to shares held by government amounting to 1.2 billion.

SEN. OSMEÑA. What is the 36 billion?

THE CHAIRMAN. Ms. Pasetes...

SEN. OSMEÑA. Wait, wait, wait.

THE CHAIRMAN. Baka ampaw yun eh.

SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the resolution of the board in September 2000 (sic)?
This is the same resolution that recognizes, acknowledges and confirms PNCC's obligations to Marubeni. And
subparagraph (a) says "Government of the Philippines, in the amount of 36,023,784,000 and change. And then (b)
Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in the same resolution, you acknowledged that
had something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not protect the national
government's 36 billion? And then, number two, why is it now in your books, the 36 billion is now down to five? If you
use that ratio, then Marubeni should be down to one.

MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

SEN. OSMEÑA. And what about Marubeni? Is that just principal only?

MS. PASETES. Principal and interest.

SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal plus penalties plus
interest, hindi ba?
MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEÑA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion and change and the
national government is only recognizing 5 billion. I don't think that's protecting the interest of the national government
at all.86

In giving priority and preference to Radstock, the Compromise Agreement is certainly in fraud of PNCC’s other
creditors, including the National Government, and violates the provisions of the Civil Code on concurrence and
preference of credits.

This Court has held that while the Corporation Code allows the transfer of all or substantially all of the assets of a
corporation, the transfer should not prejudice the creditors of the assignor corporation.87 Assuming that PNCC may
transfer all or substantially all its assets, to allow PNCC to do so without the consent of its creditors or without requiring
Radstock to assume PNCC’s debts will defraud the other PNCC creditors88 since the assignment will place PNCC’s
assets beyond the reach of its other creditors.89 As this Court held in Caltex (Phil.), Inc. v. PNOC Shipping and
Transport Corporation:90

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation,
the transfer should not prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice
to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all
or substantially all of the assets of the assignor necessarily includes the assumption of the assignor's liabilities, unless
the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an
assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring
the assignee to assume the assignor's obligations will defraud the creditors. The assignment will place the assignor's
assets beyond the reach of its creditors. (Emphasis supplied)

Also, the law, specifically Article 138791 of the Civil Code, presumes that there is fraud of creditors when property is
alienated by the debtor after judgment has been rendered against him, thus:

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has
been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer
to the property alienated, and need not have been obtained by the party seeking rescission. (Emphasis supplied)

As stated earlier, Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ
of execution in its favor. Thus, when PNCC entered into the Compromise Agreement conveying several prime lots in
favor of Radstock, by way of dacion en pago, there is a legal presumption that such conveyance is fraudulent under
Article 1387 of the Civil Code.92 This presumption is strengthened by the fact that the conveyance has virtually left
PNCC’s other creditors, including the biggest creditor – the National Government - with no other asset to garnish or
levy.

Notably, the presumption of fraud or intention to defraud creditors is not just limited to the two instances set forth in
the first and second paragraphs of Article 1387 of the Civil Code. Under the third paragraph of the same article, "the
design to defraud creditors may be proved in any other manner recognized by the law of evidence." In Oria v.
Mcmicking,93 this Court considered the following instances as badges of fraud:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other of the above
circumstances.
7. The failure of the vendee to take exclusive possession of all the property. (Emphasis supplied)

Among the circumstances indicating fraud is a transfer of all or nearly all of the debtor’s assets, especially when the
debtor is greatly embarrassed financially. Accordingly, neither a declaration of insolvency nor the institution of
insolvency proceedings is a condition sine qua non for a transfer of all or nearly all of a debtor’s assets to be regarded
in fraud of creditors. It is sufficient that a debtor is greatly embarrassed financially.

In this case, PNCC’s huge negative net worth - at least ₱6 billion as expressly admitted by PNCC’s counsel during
the oral arguments, or ₱14 billion based on the 2006 COA Audit Report - necessarily translates to an extremely
embarrassing financial situation. With its huge negative net worth arising from unpaid billions of pesos in debt, PNCC
cannot claim that it is financially stable. As a consequence, the Compromise Agreement stipulating a transfer in favor
of Radstock of substantially all of PNCC’s assets constitutes fraud. To legitimize the Compromise Agreement just
because there is still no judicial declaration of PNCC’s insolvency will work fraud on PNCC’s other creditors, the
biggest creditor of which is the National Government. To insist that PNCC is very much liquid, given its admitted huge
negative net worth, is nothing but denial of the truth. The toll fees that PNCC collects belong to the National
Government. Obviously, PNCC cannot claim it is liquid based on its collection of such toll fees, because PNCC merely
holds such toll fees in trust for the National Government. PNCC does not own the toll fees, and such toll fees do not
form part of PNCC’s assets.

PNCC owes the National Government ₱36 billion, a substantial part of which constitutes taxes and fees, thus:

SEN. ROXAS. Thank you, Mr. Chairman.

Mr. PNCC Chairman, could you describe for us the composition of your debt of about five billion – there are in
thousands, so this looks like five and half billion. Current portion of long-term debt, about five billion. What is this made
of?

MS. PASETES. The five billion is composed of what is owed the Bureau of Treasury and the Toll Regulatory
Board for concession fees that’s almost three billion and another 2.4 billion owed Philippine National Bank.

SEN. ROXAS. So, how much is the Bureau of Treasury?

MS. PASETES. Three billion.
SEN. ROXAS. Three – Why do you owe the Bureau of Treasury three billion?
MS. PASETES. That represents the concession fees due Toll Regulatory Board principal plus interest, Your Honor.
x x x x94 (Emphasis supplied)
In addition, PNCC’s 2006 Audit Report by COA states as follows:
TAX MATTERS
The Company was assessed by the Bureau of Internal Revenue (BIR) of its deficiencies in various taxes. However,
no provision for any liability has been made yet in the Company’s financial statements.
• 1980 deficiency income tax, deficiency contractor’s tax and deficiency documentary stamp tax assessments by the
BIR totaling ₱212.523 Million.
xxxx
• Deficiency business tax of ₱64 Million due the Belgian Consortium, PNCC’s partner in its LRT Project.
• 1992 deficiency income tax, deficiency value-added tax and deficiency expanded withholding tax of ₱1.04 Billion
which was reduced to ₱709 Million after the Company’s written protest.
xxxx
• 2002 deficiency internal revenue taxes totaling ₱72.916 Million.
x x x x.95 (Emphasis supplied)

Clearly, PNCC owes the National Government substantial taxes and fees amounting to billions of pesos.

The ₱36 billion debt to the National Government was acknowledged by the PNCC Board in the same board resolution
that recognized the Marubeni loans. Since PNCC is clearly insolvent with a huge negative net worth, the government
enjoys preference over Radstock in the satisfaction of PNCC’s liability arising from taxes and duties, pursuant to the
provisions of the Civil Code on concurrence and preference of credits. Articles 2241,96 224297 and 224398 of the Civil
Code expressly mandate that taxes and fees due the National Government "shall be preferred" and "shall first be
satisfied" over claims like those arising from the Marubeni loans which "shall enjoy no preference" under Article 2244.99

However, in flagrant violation of the Civil Code, the PNCC Board favored Radstock over the National Government in
the order of credits. This would strip PNCC of its assets leaving virtually nothing for the National Government. This
action of the PNCC Board is manifestly and grossly disadvantageous to the National Government and amounts to
fraud.
During the Senate hearings, Senator Osmeña pointed out that in the Board Resolution of 20 October 2000, PNCC
acknowledged its obligations to the National Government amounting to ₱36,023,784,000 and to Marubeni amounting
to ₱10,743,000,000. Yet, Senator Osmeña noted that in the PNCC books at the time of the hearing, the ₱36 billion
obligation to the National Government was reduced to ₱5 billion. PNCC’s Miriam M. Pasetes could not properly explain
this discrepancy, except by stating that the ₱36 billion includes the principal plus interest and penalties, thus:

SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the resolution of the board in September 2000 (sic)?
This is the same resolution that recognizes, acknowledges and confirms PNCC's obligations to Marubeni. And
subparagraph (a) says "Government of the Philippines, in the amount of 36,023,784,000 and change. And then (b)
Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in the same resolution, you acknowledged that
had something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did not protect the national
government's 36 billion? And then, number two, why is it now in your books, the 36 billion is now down to five? If you
use that ratio, then Marubeni should be down to one.

MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.

SEN. OSMEÑA. And what about Marubeni? Is that just principal only?

MS. PASETES. Principal and interest.

SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal plus penalties plus
interest, hindi ba?

MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEÑA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion and change and the
national government is only recognizing 5 billion. I don't think that's protecting the interest of the national government
at all.100

PNCC failed to explain satisfactorily why in its books the obligation to the National Government was reduced when
no payment to the National Government appeared to have been made. PNCC failed to justify why it made it appear
that the obligation to the National Government was less than the obligation to Marubeni. It is another obvious ploy to
justify the preferential treatment given to Radstock to the great prejudice of the National Government.

VI.
Supreme Court is Not Legitimizer of Violations of Laws

During the oral arguments, counsels for Radstock and PNCC admitted that the Compromise Agreement violates the
Constitution and existing laws. However, they rely on this Court to approve the Compromise Agreement to shield their
clients from possible criminal acts arising from violation of the Constitution and existing laws. In their view, once this
Court approves the Compromise Agreement, their clients are home free from prosecution, and can enjoy the ₱6.185
billion loot. The following exchanges during the oral arguments reveal this view:

ASSOCIATE JUSTICE CARPIO:

If there is no agreement, they better remit all of that to the National Government. They cannot just hold that. They are
holding that [in] trust, as you said, x x x you agree, for the National Government.
DEAN AGABIN:
Yes, that’s why, they are asking the Honorable Court to approve the compromise agreement.
ASSOCIATE JUSTICE CARPIO:
We cannot approve that if the power to authorize the expenditure [belongs] to Congress. How can we usurp
x x x the power of Congress to authorize that expenditure[?] It’s only Congress that can authorize the
expenditure of funds from the general funds.
DEAN AGABIN:
But, Your Honor, if the Honorable Court would approve of this compromise agreement, I believe that this
would be binding on Congress.
ASSOCIATE JUSTICE CARPIO:
Ignore the Constitutional provision that money shall be paid out of the National Treasury only pursuant to an
appropriation by law. You want us to ignore that[?]
DEAN AGABIN:
Not really, Your Honor, but I suppose that Congress would have no choice, because this is a final judgment of the
Honorable Court. 101
xxxx
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it, correct?
ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership of the land?
ATTY. AGRA:
Yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise
(interrupted).102(Emphasis supplied)

This Court is not, and should never be, a rubber stamp for litigants hankering to pocket public funds for their selfish
private gain. This Court is the ultimate guardian of the public interest, the last bulwark against those who seek to
plunder the public coffers. This Court cannot, and must never, bring itself down to the level of legitimizer of violations
of the Constitution, existing laws or public policy.

Conclusion

In sum, the acts of the PNCC Board in (1) issuing Board Resolution Nos. BD-092-2000 and BD-099-2000 expressly
admitting liability for the Marubeni loans, and (2) entering into the Compromise Agreement, constitute evident bad
faith and gross inexcusable negligence, amounting to fraud, in the management of PNCC’s affairs. Being public
officers, the government nominees in the PNCC Board must answer not only to PNCC and its stockholders, but also
to the Filipino people for grossly mishandling PNCC’s finances.

Under Article 1409 of the Civil Code, the Compromise Agreement is "inexistent and void from the beginning," and
"cannot be ratified," thus:

Art. 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;

xxx

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. x x x. (Emphasis supplied)

The Compromise Agreement is indisputably contrary to the Constitution, existing laws and public policy. Under Article
1409, the Compromise Agreement is expressly declared void and "cannot be ratified." No court, not even this Court,
can ratify or approve the Compromise Agreement. This Court must perform its duty to defend and uphold the
Constitution, existing laws, and fundamental public policy. This Court must not shirk in declaring the Compromise
Agreement inexistent and void ab initio.

WHEREFORE, we GRANT the petition in G.R. No. 180428. We SET ASIDE the Decision dated 25 January 2007 and
the Resolutions dated 12 June 2007 and 5 November 2007 of the Court of Appeals. We DECLARE (1) PNCC Board
Resolution Nos. BD-092-2000 and BD-099-2000 admitting liability for the Marubeni loans VOID AB INITIO for causing
undue injury to the Government and giving unwarranted benefits to a private party, constituting a corrupt practice and
unlawful act under Section 3(e) of the Anti-Graft and Corrupt Practices Act, and (2) the Compromise Agreement
between the Philippine National Construction Corporation and Radstock Securities Limited INEXISTENT AND VOID
AB INITIO for being contrary to Section 29(1), Article VI and Sections 3 and 7, Article XII of the Constitution; Section
20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987; Sections 4(2), 79, 84(1), and 85 of
the Government Auditing Code; and Articles 2241, 2242, 2243 and 2244 of the Civil Code.

We GRANT the intervention of Asiavest Merchant Bankers Berhad in G.R. No. 178158 but DECLARE that Strategic
Alliance Development Corporation has no legal standing to sue. SO ORDERED.

7. Unchuan vs. Lozada

G.R. No. 172671 April 16, 2009

MARISSA R. UNCHUAN, Petitioner,

vs. ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER OF DEEDS OF CEBU CITY, Respondents.

QUISUMBING, J.:

For review are the Decision1 dated February 23, 2006 and Resolution2 dated April 12, 2006 of the Court of Appeals
in CA-G.R. CV. No. 73829. The appellate court had affirmed with modification the Order3 of the Regional Trial Court
(RTC) of Cebu City, Branch 10 reinstating its Decision4 dated June 9, 1997.

The facts of the case are as follows:

Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay were the registered co-owners of Lot Nos. 898-A-3
and 898-A-4 covered by Transfer Certificates of Title (TCT) Nos. 532585 and 532576 in Cebu City.

The sisters, who were based in the United States, sold the lots to their nephew Antonio J.P. Lozada (Antonio) under
a Deed of Sale7 dated March 11, 1994. Armed with a Special Power of Attorney8 from Anita, Peregrina went to the
house of their brother, Dr. Antonio Lozada (Dr. Lozada), located at 4356 Faculty Avenue, Long Beach California.9Dr.
Lozada agreed to advance the purchase price of US$367,000 or ₱10,000,000 for Antonio, his nephew. The Deed of
Sale was later notarized and authenticated at the Philippine Consul’s Office. Dr. Lozada then forwarded the deed,
special power of attorney, and owners’ copies of the titles to Antonio in the Philippines. Upon receipt of said
documents, the latter recorded the sale with the Register of Deeds of Cebu. Accordingly, TCT Nos. 128322 10 and
12832311 were issued in the name of Antonio Lozada.

Pending registration of the deed, petitioner Marissa R. Unchuan caused the annotation of an adverse claim on the
lots. Marissa claimed that Anita donated an undivided share in the lots to her under an unregistered Deed of
Donation12 dated February 4, 1987.

Antonio and Anita brought a case against Marissa for quieting of title with application for preliminary injunction and
restraining order. Marissa for her part, filed an action to declare the Deed of Sale void and to cancel TCT Nos. 128322
and 128323. On motion, the cases were consolidated and tried jointly.

At the trial, respondents presented a notarized and duly authenticated sworn statement, and a videotape where Anita
denied having donated land in favor of Marissa. Dr. Lozada testified that he agreed to advance payment for Antonio
in preparation for their plan to form a corporation. The lots are to be eventually infused in the capitalization of Damasa
Corporation, where he and Antonio are to have 40% and 60% stake, respectively. Meanwhile, Lourdes G. Vicencio,
a witness for respondents confirmed that she had been renting the ground floor of Anita’s house since 1983, and
tendering rentals to Antonio.

For her part, Marissa testified that she accompanied Anita to the office of Atty. Cresencio Tomakin for the signing of
the Deed of Donation. She allegedly kept it in a safety deposit box but continued to funnel monthly rentals to
Peregrina’s account.
A witness for petitioner, one Dr. Cecilia Fuentes, testified on Peregrina’s medical records. According to her
interpretation of said records, it was physically impossible for Peregrina to have signed the Deed of Sale on March
11, 1994, when she was reported to be suffering from edema. Peregrina died on April 4, 1994.

In a Decision dated June 9, 1997, RTC Judge Leonardo B. Cañares disposed of the consolidated cases as follows:

WHEREFORE, judgment is hereby rendered in Civil Case No. CEB-16145, to wit:

1. Plaintiff Antonio J.P. Lozada is declared the absolute owner of the properties in question;

2. The Deed of Donation (Exh. "9") is declared null and void, and Defendant Marissa R. Unchuan is directed
to surrender the original thereof to the Court for cancellation;

3. The Register of Deeds of Cebu City is ordered to cancel the annotations of the Affidavit of Adverse Claim
of defendant Marissa R. Unchuan on TCT Nos. 53257 and 53258 and on such all other certificates of title
issued in lieu of the aforementioned certificates of title;

4. Defendant Marissa R. Unchuan is ordered to pay Antonio J.P. Lozada and Anita Lozada Slaughter the sum
of ₱100,000.00 as moral damages; exemplary damages of ₱50,000.00; ₱50,000.00 for litigation expenses
and attorney’s fees of ₱50,000.00; and

5. The counterclaims of defendant Marissa R. Unchuan [are] DISMISSED.

In Civil Case No. CEB-16159, the complaint is hereby DISMISSED.

In both cases, Marissa R. Unchuan is ordered to pay the costs of suit.

SO ORDERED.13

On motion for reconsideration by petitioner, the RTC of Cebu City, Branch 10, with Hon. Jesus S. dela Peña as Acting
Judge, issued an Order14 dated April 5, 1999. Said order declared the Deed of Sale void, ordered the cancellation of
the new TCTs in Antonio’s name, and directed Antonio to pay Marissa ₱200,000 as moral damages, ₱100,000 as
exemplary damages, ₱100,000 attorney’s fees and ₱50,000 for expenses of litigation. The trial court also declared
the Deed of Donation in favor of Marissa valid. The RTC gave credence to the medical records of Peregrina.

Respondents moved for reconsideration. On July 6, 2000, now with Hon. Soliver C. Peras, as Presiding Judge, the
RTC of Cebu City, Branch 10, reinstated the Decision dated June 9, 1997, but with the modification that the award of
damages, litigation expenses and attorney’s fees were disallowed.

Petitioner appealed to the Court of Appeals. On February 23, 2006 the appellate court affirmed with modification the
July 6, 2000 Order of the RTC. It, however, restored the award of ₱50,000 attorney’s fees and ₱50,000 litigation
expenses to respondents.

Thus, the instant petition which raises the following issues:

I.

WHETHER THE COURT OF APPEALS ERRED AND VIOLATED PETITIONER’S RIGHT TO DUE PROCESS WHEN
IT FAILED TO RESOLVE PETITIONER’S THIRD ASSIGNED ERROR.

II.

WHETHER THE HONORABLE SUPREME COURT MAY AND SHOULD REVIEW THE CONFLICTING FACTUAL
FINDINGS OF THE HONORABLE REGIONAL TRIAL COURT IN ITS OWN DECISION AND RESOLUTIONS ON
THE MOTIONS FOR RECONSIDERATION, AND THAT OF THE HONORABLE COURT OF APPEALS.
III.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER’S CASE IS
BARRED BY LACHES.

IV.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF DONATION
EXECUTED IN FAVOR OF PETITIONER IS VOID.

V.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT ANITA LOZADA’S
VIDEOTAPED STATEMENT IS HEARSAY.15

Simply stated, the issues in this appeal are: (1) Whether the Court of Appeals erred in upholding the Decision of the
RTC which declared Antonio J.P. Lozada the absolute owner of the questioned properties; (2) Whether the Court of
Appeals violated petitioner’s right to due process; and (3) Whether petitioner’s case is barred by laches.

Petitioner contends that the appellate court violated her right to due process when it did not rule on the validity of the
sale between the sisters Lozada and their nephew, Antonio. Marissa finds it anomalous that Dr. Lozada, an American
citizen, had paid the lots for Antonio. Thus, she accuses the latter of being a mere dummy of the former. Petitioner
begs the Court to review the conflicting factual findings of the trial and appellate courts on Peregrina’s medical
condition on March 11, 1994 and Dr. Lozada’s financial capacity to advance payment for Antonio. Likewise, petitioner
assails the ruling of the Court of Appeals which nullified the donation in her favor and declared her case barred by
laches. Petitioner finally challenges the admissibility of the videotaped statement of Anita who was not presented as
a witness.

On their part, respondents pray for the dismissal of the petition for petitioner’s failure to furnish the Register of Deeds
of Cebu City with a copy thereof in violation of Sections 316 and 4,17 Rule 45 of the Rules. In addition, they aver that
Peregrina’s unauthenticated medical records were merely falsified to make it appear that she was confined in the
hospital on the day of the sale. Further, respondents question the credibility of Dr. Fuentes who was neither presented
in court as an expert witness18 nor professionally involved in Peregrina’s medical care.

Further, respondents impugn the validity of the Deed of Donation in favor of Marissa. They assert that the Court of
Appeals did not violate petitioner’s right to due process inasmuch as it resolved collectively all the factual and legal
issues on the validity of the sale.

Faithful adherence to Section 14,19 Article VIII of the 1987 Constitution is indisputably a paramount component of due
process and fair play. The parties to a litigation should be informed of how it was decided, with an explanation of the
factual and legal reasons that led to the conclusions of the court.20

In the assailed Decision, the Court of Appeals reiterates the rule that a notarized and authenticated deed of sale
enjoys the presumption of regularity, and is admissible without further proof of due execution. On the basis thereof, it
declared Antonio a buyer in good faith and for value, despite petitioner’s contention that the sale violates public policy.
While it is a part of the right of appellant to urge that the decision should directly meet the issues presented for
resolution,21 mere failure by the appellate court to specify in its decision all contentious issues raised by the appellant
and the reasons for refusing to believe appellant’s contentions is not sufficient to hold the appellate court’s decision
contrary to the requirements of the law22 and the Constitution.23 So long as the decision of the Court of Appeals
contains the necessary findings of facts to warrant its conclusions, we cannot declare said court in error if it withheld
"any specific findings of fact with respect to the evidence for the defense."24 We will abide by the legal presumption
that official duty has been regularly performed,25 and all matters within an issue in a case were laid down before the
court and were passed upon by it.26

In this case, we find nothing to show that the sale between the sisters Lozada and their nephew Antonio violated the
public policy prohibiting aliens from owning lands in the Philippines. Even as Dr. Lozada advanced the money for the
payment of Antonio’s share, at no point were the lots registered in Dr. Lozada’s name. Nor was it contemplated that
the lots be under his control for they are actually to be included as capital of Damasa Corporation. According to their
agreement, Antonio and Dr. Lozada are to hold 60% and 40% of the shares in said corporation, respectively. Under
Republic Act No. 7042,27 particularly Section 3,28 a corporation organized under the laws of the Philippines of which
at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, is
considered a Philippine National. As such, the corporation may acquire disposable lands in the Philippines. Neither
did petitioner present proof to belie Antonio’s capacity to pay for the lots subjects of this case.

Petitioner, likewise, calls on the Court to ascertain Peregrina’s physical ability to execute the Deed of Sale on March
11, 1994. This essentially necessitates a calibration of facts, which is not the function of this Court. 29 Nevertheless,
we have sifted through the Decisions of the RTC and the Court of Appeals but found no reason to overturn their factual
findings. Both the trial court and appellate court noted the lack of substantial evidence to establish total impossibility
for Peregrina to execute the Deed of Sale.

In support of its contentions, petitioner submits a copy of Peregrina’s medical records to show that she was confined
at the Martin Luther Hospital from February 27, 1994 until she died on April 4, 1994. However, a Certification 30 from
Randy E. Rice, Manager for the Health Information Management of the hospital undermines the authenticity of said
medical records. In the certification, Rice denied having certified or having mailed copies of Peregrina’s medical
records to the Philippines. As a rule, a document to be admissible in evidence, should be previously authenticated,
that is, its due execution or genuineness should be first shown.31 Accordingly, the unauthenticated medical records
were excluded from the evidence. Even assuming that Peregrina was confined in the cited hospital, the Deed of Sale
was executed on March 11, 1994, a month before Peregrina reportedly succumbed to Hepato Renal Failure caused
by Septicemia due to Myflodysplastic Syndrome.32 Nothing in the records appears to show that Peregrina was so
incapacitated as to prevent her from executing the Deed of Sale. Quite the contrary, the records reveal that close to
the date of the sale, specifically on March 9, 1994, Peregrina was even able to issue checks33 to pay for her attorney’s
professional fees and her own hospital bills. At no point in the course of the trial did petitioner dispute this revelation.

Now, as to the validity of the donation, the provision of Article 749 of the Civil Code is in point:

art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying
therein the property donated and the value of the charges which the donee must satisfy.

The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take
effect unless it is done during the lifetime of the donor.

If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this
step shall be noted in both instruments.

When the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract
be proved in a certain way, that requirement is absolute and indispensable.34 Here, the Deed of Donation does not
appear to be duly notarized. In page three of the deed, the stamped name of Cresencio Tomakin appears above the
words Notary Public until December 31, 1983 but below it were the typewritten words Notary Public until December
31, 1987. A closer examination of the document further reveals that the number 7 in 1987 and Series of 1987 were
merely superimposed.35 This was confirmed by petitioner’s nephew Richard Unchuan who testified that he saw
petitioner’s husband write 7 over 1983 to make it appear that the deed was notarized in 1987. Moreover, a
Certification36 from Clerk of Court Jeoffrey S. Joaquino of the Notarial Records Division disclosed that the Deed of
Donation purportedly identified in Book No. 4, Document No. 48, and Page No. 35 Series of 1987 was not reported
and filed with said office. Pertinent to this, the Rules require a party producing a document as genuine which has been
altered and appears to have been altered after its execution, in a part material to the question in dispute, to account
for the alteration. He may show that the alteration was made by another, without his concurrence, or was made with
the consent of the parties affected by it, or was otherwise properly or innocently made, or that the alteration did not
change the meaning or language of the instrument. If he fails to do that, the document shall, as in this case, not be
admissible in evidence.371avvphi1

Remarkably, the lands described in the Deed of Donation are covered by TCT Nos. 7364538 and 73646,39 both of
which had been previously cancelled by an Order40 dated April 8, 1981 in LRC Record No. 5988. We find it equally
puzzling that on August 10, 1987, or six months after Anita supposedly donated her undivided share in the lots to
petitioner, the Unchuan Development Corporation, which was represented by petitioner’s husband, filed suit to compel
the Lozada sisters to surrender their titles by virtue of a sale. The sum of all the circumstances in this case calls for
no other conclusion than that the Deed of Donation allegedly in favor of petitioner is void. Having said that, we deem
it unnecessary to rule on the issue of laches as the execution of the deed created no right from which to reckon delay
in making any claim of rights under the instrument.

Finally, we note that petitioner faults the appellate court for not excluding the videotaped statement of Anita as hearsay
evidence. Evidence is hearsay when its probative force depends, in whole or in part, on the competency and credibility
of some persons other than the witness by whom it is sought to be produced. There are three reasons for excluding
hearsay evidence: (1) absence of cross-examination; (2) absence of demeanor evidence; and (3) absence of oath.41 It
is a hornbook doctrine that an affidavit is merely hearsay evidence where its maker did not take the witness
stand.42 Verily, the sworn statement of Anita was of this kind because she did not appear in court to affirm her
averments therein. Yet, a more circumspect examination of our rules of exclusion will show that they do not cover
admissions of a party;43 the videotaped statement of Anita appears to belong to this class. Section 26 of Rule 130
provides that "the act, declaration or omission of a party as to a relevant fact may be given in evidence against him. It
has long been settled that these admissions are admissible even if they are hearsay.44 Indeed, there is a vital
distinction between admissions against interest and declaration against interest. Admissions against interest are those
made by a party to a litigation or by one in privity with or identified in legal interest with such party, and are admissible
whether or not the declarant is available as a witness. Declaration against interest are those made by a person who
is neither a party nor in privity with a party to the suit, are secondary evidence and constitute an exception to the
hearsay rule. They are admissible only when the declarant is unavailable as a witness.45 Thus, a man’s acts, conduct,
and declaration, wherever made, if voluntary, are admissible against him, for the reason that it is fair to presume that
they correspond with the truth, and it is his fault if they do not.46 However, as a further qualification, object evidence,
such as the videotape in this case, must be authenticated by a special testimony showing that it was a faithful
reproduction.47 Lacking this, we are constrained to exclude as evidence the videotaped statement of Anita. Even so,
this does not detract from our conclusion concerning petitioner’s failure to prove, by preponderant evidence, any right
to the lands subject of this case.

Anent the award of moral damages in favor of respondents, we find no factual and legal basis therefor. Moral damages
cannot be awarded in the absence of a wrongful act or omission or fraud or bad faith. When the action is filed in good
faith there should be no penalty on the right to litigate. One may have erred, but error alone is not a ground for moral
damages.48 The award of moral damages must be solidly anchored on a definite showing that respondents actually
experienced emotional and mental sufferings. Mere allegations do not suffice; they must be substantiated by clear
and convincing proof.49 As exemplary damages can be awarded only after the claimant has shown entitlement to
moral damages,50 neither can it be granted in this case.

WHEREFORE, the instant petition is DENIED. The Decision dated February 23, 2006, and Resolution dated April 12,
2006 of the Court of Appeals in CA-G.R. CV. No. 73829 are AFFIRMED with MODIFICATION. The awards of moral
damages and exemplary damages in favor of respondents are deleted. No pronouncement as to costs. SO
ORDERED.

8. Tatad vs. Garcia

G.R. No. 114222 April 6, 1995

FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners,

vs.
HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of Transportation and
Communications, and EDSA LRT CORPORATION, LTD., respondents.

QUIASON, J.:

This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents from further implementing and
enforcing the "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA"
dated April 22, 1992, and the "Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement To
Build, Lease and Transfer a Light Rail Transit System for EDSA" dated May 6, 1993.

Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members of the Philippine Senate and
are suing in their capacities as Senators and as taxpayers. Respondent Jesus B. Garcia, Jr. is the incumbent
Secretary of the Department of Transportation and Communications (DOTC), while private respondent EDSA LRT
Corporation, Ltd. is a private corporation organized under the laws of Hongkong.

In 1989, DOTC planned to construct a light railway transit line along EDSA, a major thoroughfare in Metropolitan
Manila, which shall traverse the cities of Pasay, Quezon, Mandaluyong and Makati. The plan, referred to as EDSA
Light Rail Transit III (EDSA LRT III), was intended to provide a mass transit system along EDSA and alleviate the
congestion and growing transportation problem in the metropolis.

On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc., represented by Elijahu Levin to DOTC
Secretary Oscar Orbos, proposing to construct the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.

On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss the project with DOTC.

On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing, Construction, Operation and
Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes," was signed by President
Corazon C. Aquino. Referred to as the Build-Operate-Transfer (BOT) Law, it took effect on October 9, 1990.

Republic Act No. 6957 provides for two schemes for the financing, construction and operation of government projects
through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT).

In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III project underway, DOTC, on January
22, 1991 and March 14, 1991, issued Department Orders Nos. 91-494 and 91-496, respectively creating the
Prequalification Bids and Awards Committee (PBAC) and the Technical Committee.

After its constitution, the PBAC issued guidelines for the prequalification of contractors for the financing and
implementation of the project The notice, advertising the prequalification of bidders, was published in three
newspapers of general circulation once a week for three consecutive weeks starting February 21, 1991.

The deadline set for submission of prequalification documents was March 21, 1991, later extended to April 1, 1991.
Five groups responded to the invitation namely, ABB Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel
International of Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium, composed of ten foreign
and domestic corporations: namely, Kaiser Engineers International, Inc., ACER Consultants (Far East) Ltd. and
Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal Republics, TCGI Engineering All Asia Capital
and Leasing Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial
Construction Group, Inc, and F. F. Cruz & co., Inc.

On the last day for submission of prequalification documents, the prequalification criteria proposed by the Technical
Committee were adopted by the PBAC. The criteria totalling 100 percent, are as follows: (a) Legal aspects — 10
percent; (b) Management/Organizational capability — 30 percent; and (c) Financial capability — 30 percent; and (d)
Technical capability — 30 percent (Rollo, p. 122).

On April 3, 1991, the Committee, charged under the BOT Law with the formulation of the Implementation Rules and
Regulations thereof, approved the same.

After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9, 1991 declaring that of the five
applicants, only the EDSA LRT Consortium "met the requirements of garnering at least 21 points per criteria [sic],
except for Legal Aspects, and obtaining an over-all passing mark of at least 82 points" (Rollo, p. 146). The Legal
Aspects referred to provided that the BOT/BT contractor-applicant meet the requirements specified in the Constitution
and other pertinent laws (Rollo, p. 114).

Subsequently, Secretary Orbos was appointed Executive Secretary to the President of the Philippines and was
replaced by Secretary Pete Nicomedes Prado. The latter sent to President Aquino two letters dated May 31, 1991
and June 14, 1991, respectively recommending the award of the EDSA LRT III project to the sole complying bidder,
the EDSA LRT Consortium, and requesting for authority to negotiate with the said firm for the contract pursuant to
paragraph 14(b) of the Implementing Rules and Regulations of the BOT Law (Rollo, pp. 298-302).
In July 1991, Executive Secretary Orbos, acting on instructions of the President, issued a directive to the DOTC to
proceed with the negotiations. On July 16, 1991, the EDSA LRT Consortium submitted its bid proposal to DOTC.

Finding this proposal to be in compliance with the bid requirements, DOTC and respondent EDSA LRT Corporation,
Ltd., in substitution of the EDSA LRT Consortium, entered into an "Agreement to Build, Lease and Transfer a Light
Rail Transit System for EDSA" under the terms of the BOT Law (Rollo, pp. 147-177).

Secretary Prado, thereafter, requested presidential approval of the contract.

In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced Executive Secretary Orbos,
informed Secretary Prado that the President could not grant the requested approval for the following reasons: (1) that
DOTC failed to conduct actual public bidding in compliance with Section 5 of the BOT Law; (2) that the law authorized
public bidding as the only mode to award BOT projects, and the prequalification proceedings was not the public
bidding contemplated under the law; (3) that Item 14 of the Implementing Rules and Regulations of the BOT Law
which authorized negotiated award of contract in addition to public bidding was of doubtful legality; and (4) that
congressional approval of the list of priority projects under the BOT or BT Scheme provided in the law had not yet
been granted at the time the contract was awarded (Rollo, pp. 178-179).

In view of the comments of Executive Secretary Drilon, the DOTC and private respondents re-negotiated the
agreement. On April 22, 1992, the parties entered into a "Revised and Restated Agreement to Build, Lease and
Transfer a Light Rail Transit System for EDSA" (Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant of the fact
the DOTC has full authority to sign the Agreement without need of approval by the President pursuant to the provisions
of Executive Order No. 380 and that certain events [had] supervened since November 7, 1991 which necessitate[d]
the revision of the Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by Secretary Jesus
Garcia vice Secretary Prado, and private respondent entered into a "Supplemental Agreement to the 22 April 1992
Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" so as to "clarify
their respective rights and responsibilities" and to submit [the] Supplemental Agreement to the President, of the
Philippines for his approval" (Rollo, pp. 79-80).

Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his consideration and approval. In a
Memorandum to Secretary Garcia on May 6, 1993, approved the said Agreements, (Rollo, p. 194).

According to the agreements, the EDSA LRT III will use light rail vehicles from the Czech and Slovak Federal
Republics and will have a maximum carrying capacity of 450,000 passengers a day, or 150 million a year to be
achieved-through 54 such vehicles operating simultaneously. The EDSA LRT III will run at grade, or street level, on
the mid-section of EDSA for a distance of 17.8 kilometers from F.B. Harrison, Pasay City to North Avenue, Quezon
City. The system will have its own power facility (Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will
also have thirteen (13) passenger stations and one depot in 16-hectare government property at North Avenue
(Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

Private respondents shall undertake and finance the entire project required for a complete operational light rail transit
system (Revised and Restated Agreement, Sec. 4.1; Rollo, p. 58). Target completion date is 1,080 days or
approximately three years from the implementation date of the contract inclusive of mobilization, site works, initial and
final testing of the system (Supplemental Agreement, Sec. 5; Rollo, p. 83). Upon full or partial completion and viability
thereof, private respondent shall deliver the use and possession of the completed portion to DOTC which shall operate
the same (Supplemental Agreement, Sec. 5; Revised and Restated Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC
shall pay private respondent rentals on a monthly basis through an Irrevocable Letter of Credit. The rentals shall be
determined by an independent and internationally accredited inspection firm to be appointed by the parties
(Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private respondent's capital shall be recovered
from the rentals to be paid by the DOTC which, in turn, shall come from the earnings of the EDSA LRT III (Revised
and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have completed payment of the
rentals, ownership of the project shall be transferred to the latter for a consideration of only U.S. $1.00 (Revised and
Restated Agreement, Sec. 11.1; Rollo, p. 67).

On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act No. 6957, Entitled "An Act
Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector,
and for Other Purposes" was signed into law by the President. The law was published in two newspapers of general
circulation on May 12, 1994, and took effect 15 days thereafter or on May 28, 1994. The law expressly recognizes
BLT scheme and allows direct negotiation of BLT contracts.

II

In their petition, petitioners argued that:

(1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE SUPPLEMENTAL AGREEMENT
OF MAY 6, 1993, INSOFAR AS IT GRANTS EDSA LRT CORPORATION, LTD., A FOREIGN
CORPORATION, THE OWNERSHIP OF EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE
CONSTITUTION AND, HENCE, IS UNCONSTITUTIONAL;

(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED IN THE AGREEMENTS IS NOT DEFINED

NOR RECOGNIZED IN R.A. NO. 6957 OR ITS IMPLEMENTING RULES AND REGULATIONS AND,
HENCE, IS ILLEGAL;

(3) THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS VIOLATES R; A. NO. 6957 AND,
HENCE, IS UNLAWFUL;

(4) THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT EDSA LRT CORPORATION,
LTD. VIOLATES THE REQUIREMENTS PROVIDED IN THE IMPLEMENTING RULES AND
REGULATIONS OF THE BOT LAW AND, HENCE, IS ILLEGAL;

(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR THEIR FAILURE TO BEAR
PRESIDENTIAL APPROVAL AND, HENCE, ARE ILLEGAL AND INEFFECTIVE; AND

(6) THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT (Rollo, pp.
15-16).

Secretary Garcia and private respondent filed their comments separately and claimed that:

(1) Petitioners are not the real parties-in-interest and have no legal standing to institute the present petition;
(2) The writ of prohibition is not the proper remedy and the petition requires ascertainment of facts;
(3) The scheme adopted in the Agreements is actually a build-transfer scheme allowed by the BOT Law;
(4) The nationality requirement for public utilities mandated by the Constitution does not apply to private respondent;
(5) The Agreements executed by and between respondents have been approved by President Ramos and are not
disadvantageous to the government;
(6) The award of the contract to private respondent through negotiation and not public bidding is allowed by the BOT
Law; and
(7) Granting that the BOT Law requires public bidding, this has been amended by R.A No. 7718 passed by the
Legislature On May 12, 1994, which provides for direct negotiation as a mode of award of infrastructure projects.

III

Respondents claimed that petitioners had no legal standing to initiate the instant action. Petitioners, however,
countered that the action was filed by them in their capacity as Senators and as taxpayers.

The prevailing doctrines in taxpayer's suits are to allow taxpayers to question contracts entered into by the national
government or government-owned or controlled corporations allegedly in contravention of the law (Kilosbayan, Inc. v.
Guingona, 232 SCRA 110 [1994]) and to disallow the same when only municipal contracts are involved (Bugnay
Construction and Development Corporation v. Laron, 176 SCRA. 240 [1989]).

For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no choice but to follow it and uphold
the legal standing of petitioners as taxpayers to institute the present action.

IV
In the main, petitioners asserted that the Revised and Restated Agreement of April 22, 1992 and the Supplemental
Agreement of May 6, 1993 are unconstitutional and invalid for the following reasons:

(1) the EDSA LRT III is a public utility, and the ownership and operation thereof is limited by the
Constitution to Filipino citizens and domestic corporations, not foreign corporations like private
respondent;

(2) the Build-Lease-Transfer (BLT) scheme provided in the agreements is not the BOT or BT Scheme
under the law;

(3) the contract to construct the EDSA LRT III was awarded to private respondent not through public
bidding which is the only mode of awarding infrastructure projects under the BOT law; and

(4) the agreements are grossly disadvantageous to the government.

1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to construct the EDSA LRT III was awarded
by public respondent, is admittedly a foreign corporation "duly incorporated and existing under the laws of Hongkong"
(Rollo, pp. 50, 79). There is also no dispute that once the EDSA LRT III is constructed, private respondent, as lessor,
will turn it over to DOTC, as lessee, for the latter to operate the system and pay rentals for said use.

The question posed by petitioners is:

Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA LRT III; a public utility?
(Rollo, p. 17).

The phrasing of the question is erroneous; it is loaded. What private respondent owns are the rail tracks, rolling stocks
like the coaches, rail stations, terminals and the power plant, not a public utility. While a franchise is needed to operate
these facilities to serve the public, they do not by themselves constitute a public utility. What constitutes a public utility
is not their ownership but their use to serve the public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil.
551, 557 558 [1923]).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility. However, it does not
require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate
them to serve the public.

Section 11 of Article XII of the Constitution provides:

No franchise, certificate or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall
such franchise, certificate or authorization be exclusive character or for a longer period than fifty years
. . . (Emphasis supplied).

In law, there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and
equipment used to serve the public.

Ownership is defined as a relation in law by virtue of which a thing pertaining to one person is completely subjected
to his will in everything not prohibited by law or the concurrence with the rights of another (Tolentino, II Commentaries
and Jurisprudence on the Civil Code of the Philippines 45 [1992]).

The exercise of the rights encompassed in ownership is limited by law so that a property cannot be operated and used
to serve the public as a public utility unless the operator has a franchise. The operation of a rail system as a public
utility includes the transportation of passengers from one point to another point, their loading and unloading at
designated places and the movement of the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co. v. J.A..
Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash
2d. 722, 193 P. 2d 868, 2 A.L.R. 2d 1065 [1948]).
The right to operate a public utility may exist independently and separately from the ownership of the facilities thereof.
One can own said facilities without operating them as a public utility, or conversely, one may operate a public utility
without owning the facilities used to serve the public. The devotion of property to serve the public may be done by the
owner or by the person in control thereof who may not necessarily be the owner thereof.

This dichotomy between the operation of a public utility and the ownership of the facilities used to serve the public
can be very well appreciated when we consider the transportation industry. Enfranchised airline and shipping
companies may lease their aircraft and vessels instead of owning them themselves.

While private respondent is the owner of the facilities necessary to operate the EDSA. LRT III, it admits that it is not
enfranchised to operate a public utility (Revised and Restated Agreement, Sec. 3.2; Rollo, p. 57). In view of this
incapacity, private respondent and DOTC agreed that on completion date, private respondent will immediately deliver
possession of the LRT system by way of lease for 25 years, during which period DOTC shall operate the same as a
common carrier and private respondent shall provide technical maintenance and repair services to DOTC (Revised
and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62). Technical maintenance consists of
providing (1) repair and maintenance facilities for the depot and rail lines, services for routine clearing and security;
and (2) producing and distributing maintenance manuals and drawings for the entire system (Revised and Restated
Agreement, Annex F).

Private respondent shall also train DOTC personnel for familiarization with the operation, use, maintenance and repair
of the rolling stock, power plant, substations, electrical, signaling, communications and all other equipment as supplied
in the agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-67). Training consists of theoretical and
live training of DOTC operational personnel which includes actual driving of light rail vehicles under simulated
operating conditions, control of operations, dealing with emergencies, collection, counting and securing cash from the
fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3). Personnel of DOTC will work under
the direction and control of private respondent only during training (Revised and Restated Agreement, Annex E, Sec.
3.1). The training objectives, however, shall be such that upon completion of the EDSA LRT III and upon opening of
normal revenue operation, DOTC shall have in their employ personnel capable of undertaking training of all new and
replacement personnel (Revised and Restated Agreement, Annex E Sec. 5.1). In other words, by the end of the three-
year construction period and upon commencement of normal revenue operation, DOTC shall be able to operate the
EDSA LRT III on its own and train all new personnel by itself.

Fees for private respondent' s services shall be included in the rent, which likewise includes the project cost, cost of
replacement of plant equipment and spare parts, investment and financing cost, plus a reasonable rate of return
thereon (Revised and Restated Agreement, Sec. 1; Rollo, p. 54).

Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and liabilities of a common carrier. For
this purpose, DOTC shall indemnify and hold harmless private respondent from any losses, damages, injuries or death
which may be claimed in the operation or implementation of the system, except losses, damages, injury or death due
to defects in the EDSA LRT III on account of the defective condition of equipment or facilities or the defective
maintenance of such equipment facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).

In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It will have no
dealings with the public and the public will have no right to demand any services from it.

It is well to point out that the role of private respondent as lessor during the lease period must be distinguished from
the role of the Philippine Gaming Management Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona, 232
SCRA 110 (1994). Therein, the Contract of Lease between PGMC and the Philippine Charity Sweepstakes Office
(PCSO) was actually a collaboration or joint venture agreement prescribed under the charter of the PCSO. In the
Contract of Lease; PGMC, the lessor obligated itself to build, at its own expense, all the facilities necessary to operate
and maintain a nationwide on-line lottery system from whom PCSO was to lease the facilities and operate the same.
Upon due examination of the contract, the Court found that PGMC's participation was not confined to the construction
and setting up of the on-line lottery system. It spilled over to the actual operation thereof, becoming indispensable to
the pursuit, conduct, administration and control of the highly technical and sophisticated lottery system. In effect, the
PCSO leased out its franchise to PGMC which actually operated and managed the same.

Indeed, a mere owner and lessor of the facilities used by a public utility is not a public utility (Providence and W.R.
Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad Commission of Wisconsin, 205 N.W.
900, 903, 188 Wis. 246 [1925]; Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434, 59 L.
Ed. 1036 [1914]). Neither are owners of tank, refrigerator, wine, poultry and beer cars who supply cars under contract
to railroad companies considered as public utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987
[1946]).

Even the mere formation of a public utility corporation does not ipso facto characterize the corporation as one
operating a public utility. The moment for determining the requisite Filipino nationality is when the entity applies for a
franchise, certificate or any other form of authorization for that purpose (People v. Quasha, 93 Phil. 333 [1953]).

2. Petitioners further assert that the BLT scheme under the Agreements in question is not recognized in the BOT Law
and its Implementing Rules and Regulations.

Section 2 of the BOT Law defines the BOT and BT schemes as follows:

(a) Build-operate-and-transfer scheme — A contractual arrangement whereby the contractor

undertakes the construction including financing, of a given infrastructure facility, and the operation and
maintenance thereof. The contractor operates the facility over a fixed term during which it is allowed
to charge facility users appropriate tolls, fees, rentals and charges sufficient to enable the contractor
to recover its operating and maintenance expenses and its investment in the project plus a reasonable
rate of return thereon. The contractor transfers the facility to the government agency or local
government unit concerned at the end of the fixed term which shall not exceed fifty (50) years. For the
construction stage, the contractor may obtain financing from foreign and/or domestic sources and/or
engage the services of a foreign and/or Filipino constructor [sic]: Provided, That the ownership
structure of the contractor of an infrastructure facility whose operation requires a public utility franchise
must be in accordance with the Constitution: Provided, however, That in the case of corporate
investors in the build-operate-and-transfer corporation, the citizenship of each stockholder in the
corporate investors shall be the basis for the computation of Filipino equity in the said corporation:
Provided, further, That, in the case of foreign constructors [sic], Filipino labor shall be employed or
hired in the different phases of the construction where Filipino skills are available: Provided,
furthermore, that the financing of a foreign or foreign-controlled contractor from Philippine government
financing institutions shall not exceed twenty percent (20%) of the total cost of the infrastructure facility
or project: Provided, finally, That financing from foreign sources shall not require a guarantee by the
Government or by government-owned or controlled corporations. The build-operate-and-transfer
scheme shall include a supply-and-operate situation which is a contractual agreement whereby the
supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government
so requires, operates the facility providing in the process technology transfer and training to Filipino
nationals.

(b) Build-and-transfer scheme — "A contractual arrangement whereby the contractor undertakes the
construction including financing, of a given infrastructure facility, and its turnover after completion to
the government agency or local government unit concerned which shall pay the contractor its total
investment expended on the project, plus a reasonable rate of return thereon. This arrangement may
be employed in the construction of any infrastructure project including critical facilities which for
security or strategic reasons, must be operated directly by the government (Emphasis supplied).

The BOT scheme is expressly defined as one where the contractor undertakes the construction and financing in
infrastructure facility, and operates and maintains the same. The contractor operates the facility for a fixed period
during which it may recover its expenses and investment in the project plus a reasonable rate of return thereon. After
the expiration of the agreed term, the contractor transfers the ownership and operation of the project to the
government.

In the BT scheme, the contractor undertakes the construction and financing of the facility, but after completion, the
ownership and operation thereof are turned over to the government. The government, in turn, shall pay the contractor
its total investment on the project in addition to a reasonable rate of return. If payment is to be effected through
amortization payments by the government infrastructure agency or local government unit concerned, this shall be
made in accordance with a scheme proposed in the bid and incorporated in the contract (R.A. No. 6957, Sec. 6).
Emphasis must be made that under the BOT scheme, the owner of the infrastructure facility must comply with the
citizenship requirement of the Constitution on the operation of a public utility. No such a requirement is imposed in the
BT scheme.

There is no mention in the BOT Law that the BOT and BT schemes bar any other arrangement for the payment by
the government of the project cost. The law must not be read in such a way as to rule out or unduly restrict any
variation within the context of the two schemes. Indeed, no statute can be enacted to anticipate and provide all the
fine points and details for the multifarious and complex situations that may be encountered in enforcing the law
(Director of Forestry v. Munoz, 23 SCRA 1183 [1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v.
Tupasi Molina, 29 Phil. 119 [1914]).

The BLT scheme in the challenged agreements is but a variation of the BT scheme under the law.

As a matter of fact, the burden on the government in raising funds to pay for the project is made lighter by allowing it
to amortize payments out of the income from the operation of the LRT System.

In form and substance, the challenged agreements provide that rentals are to be paid on a monthly basis according
to a schedule of rates through and under the terms of a confirmed Irrevocable Revolving Letter of Credit (Supplemental
Agreement, Sec. 6; Rollo, p. 85). At the end of 25 years and when full payment shall have been made to and received
by private respondent, it shall transfer to DOTC, free from any lien or encumbrances, all its title to, rights and interest
in, the project for only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec;
7; Rollo, pp. 67, .87).

A lease is a contract where one of the parties binds himself to give to another the enjoyment or use of a thing for a
certain price and for a period which may be definite or indefinite but not longer than 99 years (Civil Code of the
Philippines, Art. 1643). There is no transfer of ownership at the end of the lease period. But if the parties stipulate that
title to the leased premises shall be transferred to the lessee at the end of the lease period upon the payment of an
agreed sum, the lease becomes a lease-purchase agreement.

Furthermore, it is of no significance that the rents shall be paid in United States currency, not Philippine pesos. The
EDSA LRT III Project is a high priority project certified by Congress and the National Economic and Development
Authority as falling under the Investment Priorities Plan of Government (Rollo, pp. 310-311). It is, therefore, outside
the application of the Uniform Currency Act (R.A. No. 529), which reads as follows:

Sec. 1. — Every provision contained in, or made with respect to, any domestic obligation to wit, any
obligation contracted in the Philippines which provisions purports to give the obligee the right to require
payment in gold or in a particular kind of coin or currency other than Philippine currency or in an
amount of money of the Philippines measured thereby, be as it is hereby declared against public
policy, and null, void, and of no effect, and no such provision shall be contained in, or made with
respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) . . .; (b)
transactions affecting high-priority economic projects for agricultural, industrial and power
development as may be determined by
the National Economic Council which are financed by or through foreign funds; . . . .

3. The fact that the contract for the construction of the EDSA LRT III was awarded through negotiation and before
congressional approval on January 22 and 23, 1992 of the List of National Projects to be undertaken by the private
sector pursuant to the BOT Law (Rollo, pp. 309-312) does not suffice to invalidate the award.

Subsequent congressional approval of the list including "rail-based projects packaged with commercial development
opportunities" (Rollo, p. 310) under which the EDSA LRT III projects falls, amounts to a ratification of the prior award
of the EDSA LRT III contract under the BOT Law.

Petitioners insist that the prequalifications process which led to the negotiated award of the contract appears to have
been rigged from the very beginning to do away with the usual open international public bidding where qualified
internationally known applicants could fairly participate.
The records show that only one applicant passed the prequalification process. Since only one was left, to conduct a
public bidding in accordance with Section 5 of the BOT Law for that lone participant will be an absurb and pointless
exercise (cf. Deloso v. Sandiganbayan, 217 SCRA 49, 61 [1993]).

Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT Law in relation to Presidential
Decree No. 1594 allows the negotiated award of government infrastructure projects.

Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure
Contracts," allows the negotiated award of government projects in exceptional cases. Sections 4 of the said law reads
as follows:

Bidding. — Construction projects shall generally be undertaken by contract after competitive public
bidding. Projects may be undertaken by administration or force account or by negotiated contract only
in exceptional cases where time is of the essence, or where there is lack of qualified bidders or
contractors, or where there is conclusive evidence that greater economy and efficiency would be
achieved through this arrangement, and in accordance with provision of laws and acts on the matter,
subject to the approval of the Minister of Public Works and Transportation and Communications, the
Minister of Public Highways, or the Minister of Energy, as the case may be, if the project cost is less
than P1 Million, and the President of the Philippines, upon recommendation of the Minister, if the
project cost is P1 Million or more (Emphasis supplied).

xxx xxx xxx

Indeed, where there is a lack of qualified bidders or contractors, the award of government infrastructure contracts may
he made by negotiation. Presidential Decree No. 1594 is the general law on government infrastructure contracts while
the BOT Law governs particular arrangements or schemes aimed at encouraging private sector participation in
government infrastructure projects. The two laws are not inconsistent with each other but are in pari materia and
should be read together accordingly.

In the instant case, if the prequalification process was actually tainted by foul play, one wonders why none of the
competing firms ever brought the matter before the PBAC, or intervened in this case before us (cf. Malayan Integrated
Industries Corp. v. Court of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the President, 205 SCRA 705
[1992]).

The challenged agreements have been approved by President Ramos himself. Although then Executive Secretary
Drilon may have disapproved the "Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA,"
there is nothing in our laws that prohibits parties to a contract from renegotiating and modifying in good faith the terms
and conditions thereof so as to meet legal, statutory and constitutional requirements. Under the circumstances, to
require the parties to go back to step one of the prequalification process would just be an idle ceremony. Useless
bureaucratic "red tape" should be eschewed because it discourages private sector participation, the "main engine" for
national growth and development (R.A. No. 6957, Sec. 1), and renders the BOT Law nugatory.

Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as:

(e) Build-lease-and-transfer — A contractual arrangement whereby a project proponent is authorized

to finance and construct an infrastructure or development facility and upon its completion turns it over
to the government agency or local government unit concerned on a lease arrangement for a fixed
period after which ownership of the facility is automatically transferred to the government unit
concerned.

Section 5-A of the law, which expressly allows direct negotiation of contracts, provides:

Direct Negotiation of Contracts. — Direct negotiation shall be resorted to when there is only one
complying bidder left as defined hereunder.
 (a) If, after advertisement, only one contractor applies for prequalification and it meets the
prequalification requirements, after which it is required to submit a bid proposal which is subsequently
found by the agency/local government unit (LGU) to be complying.

(b) If, after advertisement, more than one contractor applied for prequalification but only one meets
the prequalification requirements, after which it submits bid/proposal which is found by the
agency/local government unit (LGU) to be complying.

(c) If, after prequalification of more than one contractor only one submits a bid which is found by the
agency/LGU to be complying.

(d) If, after prequalification, more than one contractor submit bids but only one is found by the
agency/LGU to be complying. Provided, That, any of the disqualified prospective bidder [sic] may
appeal the decision of the implementing agency, agency/LGUs prequalification bids and awards
committee within fifteen (15) working days to the head of the agency, in case of national projects or to
the Department of the Interior and Local Government, in case of local projects from the date the
disqualification was made known to the disqualified bidder: Provided, furthermore, That the
implementing agency/LGUs concerned should act on the appeal within forty-five (45) working days
from receipt thereof.

Petitioners' claim that the BLT scheme and direct negotiation of contracts are not contemplated by the BOT Law has
now been rendered moot and academic by R.A. No. 7718. Section 3 of this law authorizes all government
infrastructure agencies, government-owned and controlled corporations and local government units to enter into
contract with any duly prequalified proponent for the financing, construction, operation and maintenance of any
financially viable infrastructure or development facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO
(Contract-add-operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-operate-and-transfer), and ROO
(Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).

From the law itself, once and applicant has prequalified, it can enter into any of the schemes enumerated in Section
2 thereof, including a BLT arrangement, enumerated and defined therein (Sec. 3).

Republic Act No. 7718 is a curative statute. It is intended to provide financial incentives and "a climate of minimum
government regulations and procedures and specific government undertakings in support of the private sector" (Sec.
1). A curative statute makes valid that which before enactment of the statute was invalid. Thus, whatever doubts and
alleged procedural lapses private respondent and DOTC may have engendered and committed in entering into the
questioned contracts, these have now been cured by R.A. No. 7718 (cf. Development Bank of the Philippines v. Court
of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong V. Cheong Seng Gee, 43 Phil. 43
[1922].

4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the government because the rental
rates are excessive and private respondent's development rights over the 13 stations and the depot will rob DOTC of
the best terms during the most productive years of the project.

It must be noted that as part of the EDSA LRT III project, private respondent has been granted, for a period of 25
years, exclusive rights over the depot and the air space above the stations for development into commercial premises
for lease, sublease, transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). For and in
consideration of these development rights, private respondent shall pay DOTC in Philippine currency guaranteed
revenues generated therefrom in the amounts set forth in the Supplemental Agreement (Sec. 11; Rollo, p. 93). In the
event that DOTC shall be unable to collect the guaranteed revenues, DOTC shall be allowed to deduct any shortfalls
from the monthly rent due private respondent for the construction of the EDSA LRT III (Supplemental Agreement,
Sec. 11; Rollo, pp. 93-94). All rights, titles, interests and income over all contracts on the commercial spaces shall
revert to DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

The terms of the agreements were arrived at after a painstaking study by DOTC. The determination by the proper
administrative agencies and officials who have acquired expertise, specialized skills and knowledge in the
performance of their functions should be accorded respect absent any showing of grave abuse of discretion (Felipe
Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673 [1990]; Board of Medical Education v. Alfonso, 176
SCRA 304 [1989]).
Government officials are presumed to perform their functions with regularity and strong evidence is necessary to rebut
this presumption. Petitioners have not presented evidence on the reasonable rentals to be paid by the parties to each
other. The matter of valuation is an esoteric field which is better left to the experts and which this Court is not eager
to undertake.

That the grantee of a government contract will profit therefrom and to that extent the government is deprived of the
profits if it engages in the business itself, is not worthy of being raised as an issue. In all cases where a party enters
into a contract with the government, he does so, not out of charity and not to lose money, but to gain pecuniarily.

5. Definitely, the agreements in question have been entered into by DOTC in the exercise of its governmental function.
DOTC is the primary policy, planning, programming, regulating and administrative entity of the Executive branch of
government in the promotion, development and regulation of dependable and coordinated networks of transportation
and communications systems as well as in the fast, safe, efficient and reliable postal, transportation and
communications services (Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the Executive department,
DOTC in particular that has the power, authority and technical expertise determine whether or not a specific
transportation or communication project is necessary, viable and beneficial to the people. The discretion to award a
contract is vested in the government agencies entrusted with that function (Bureau Veritas v. Office of the President,
205 SCRA 705 [1992]).

WHEREFORE, the petition is DISMISSED. SO ORDERED

9. Hontiveros – Baraquel vs. Toll Regulatory Board

G.R. No. 181293 February 23, 2015

ANA THERESIA "RISA" HONTIVEROS-BARAQUEL, DANIEL L. EDRALIN, VICTOR M. GONZALES, SR., JOSE
APOLLO R. ADO, RENE D. SORIANO, ALLIANCE OF PROGRESSIVE LABOR, BUKLURAN NG
MANGGAGAWANG PILIPINO, LAHING PILIPINO MULTIPURPOSE TRANSPORT SERVICE COOPERATIVE,
PNCC SKYWAY CORPORATION EMPLOYEES UNION (PSCEU), and PNCC TRAFFIC MANAGEMENT &
SECURITY DEPARTMENT WORKERS ORGANIZATION (PTMSDWO), Petitioners,
vs.
TOLL REGULATORY BOARD, THE SECRETARY OF THE DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS (DOTC), PNCC SKYWAY CORPORATION, PHILIPPINE NATIONAL CONSTRUCTION
CORPORATION, SKYWAY O & M CORPORATION, and CITRA METRO MANILA TOLLWAYS
CORP.,Respondents.

SERENO, CJ:

This is an original petition for certiorari and prohibition under Rule 65 of the Rules of Court, with a prayer for the
issuance of a writ of preliminary injunction and/or temporary restraining order, seeking the annulment of the following:

1. The Amendment to the Supplemental Toll Operation Agreement executed on 18 July 2007 between the
Republic of the Philippines, the Philippine National Construction Corporation, and Citra Metro Manila Tollways
Corporation;

2. The Memorandum dated 20 July 2007 of the Secretary of Transportation and Communications, approving
the Amendment to the Supplemental Toll Operation Agreement;

3. The Memorandum of Agreement executed on 21 December 2007 between the Philippine National
Construction Corporation, PNCC Skyway Corporation, and Citra Metro Manila Tollways Corporation; and

4. The Toll Operation Certificate issued by the Toll Regulatory Board on 28 December 2007 in favor of Skyway
O & M Corporation.

The annulment of the above is sought for being unconstitutional, contrary to law, and grossly disadvantageous to the
government. Petitioners also seek to prohibit Skyway O & M Corporation from assuming operations and maintenance
responsibilities over the Skyway toll facilities. ANTECEDENT FACTS
The Toll Regulatory Board (TRB) was created on 31 March 1977 by Presidential Decree No. (P.D.) 1112 1 in order to
supervise and regulate, on behalf of the government, the collection of toll fees and the operation of toll facilities by the
private sector.

On the same date, P.D. 11132 was issued granting to the Construction and Development Corporation of the
Philippines (now Philippine National Construction Corporation or PNCC) the right, privilege, and authority to construct,
operate, and maintain toll facilities in the North and South Luzon Toll Expressways for a period of 30 years starting 1
May1977.

TRB and PNCC later entered into a Toll Operation Agreement,3 which prescribed the operating conditions of the right
granted to PNCC under P.D. 1113.

P.D. 1113 was amended by P.D. 1894,4 which granted PNCC the right, privilege, and authority to construct, maintain,
and operate the North Luzon, South Luzon and Metro Manila Expressways, together with the toll facilities appurtenant
thereto. The term of 30 years provided under P. D. 1113 starting from 1 May 1977 remained the same for the North
and the South Luzon Expressways, while the franchise granted for the Metro Manila Expressway (MME) provided a
term of 30 years commencing from the date of completion of the project.

On 22 September 1993, PNCC entered into an agreement5 with PT Citra Lamtoro Gung Persada (CITRA), a limited
liability company organized and established under the laws of the Republic of Indonesia, whereby the latter committed
to provide PNCC with a pre-feasibility study on the proposed MME project. The agreement was supplemented6 on 14
February 1994 with a related undertaking on the part of CITRA. CITRA was to provide a preliminary feasibility study
on the Metro Manila Skyways (MMS) project, a system of elevated roadway networks passing through the heart of
the Metropolitan Manila area. In order to accelerate the actual implementation of both the MME and the MMS projects,
PNCC and CITRA entered into a second agreement.7 Through that agreement, CITRA committed to finance and
undertake the preparation, updating, and revalidation of previous studies on the construction, operation, and
maintenance of the projects.

As a result of the feasibility and related studies, PNCC and CITRA submitted, through the TRB, a Joint Investment
Proposal (JIP) to the Republic of the Philippines.8 The JIP embodied the implementation schedule for the financing,
design and construction of the MMS in three stages: the South Metro Manila Skyway, the North Metro Manila Skyway,
and the Central Metro Manila Skyway.9

The TRB reviewed, evaluated and approved the JIP, particularly as it related to Stage 1, Phases 1 and 2; and Stage
2, Phase 1 of the South Metro Manila Skyway.

On 30 August 1995, PNCC and CITRA entered into a Business and Joint Venture Agreement10 and created the Citra
Metro Manila Tollways Corporation (CMMTC). CMMTC was a joint venture corporation organized under Philippine
laws to serve as a channel through which CITRA shall participate in the construction and development of the project.

On 27 November 1995, the Republic of the Philippines - through the TRB - as Grantor, CMMTC as Investor, and
PNCC as Operator executed a Supplemental Toll Operation Agreement (STOA)11 covering Stage 1, Phases 1 and 2;
and Stage 2, Phase 1 of the South Metro Manila Skyway. Under the STOA, the design and construction of the project
roads became the primary and exclusive privilege and responsibility of CMMTC. The operation and maintenance of
the project roads became the primary and exclusive privilege and responsibility of the PNCC Skyway Corporation
(PSC), a wholly owned subsidiary of PNCC, which undertook and performed the latter's obligations under the STOA.

CMMTC completed the design and construction of Stage 1 of the South Metro Manila Skyway, which was operated
and maintained by PSC.12

On 18 July 2007, the Republic of the Philippines, through the TRB, CMMTC, and PNCC executed the assailed
Amendment to the Supplemental Toll Operation Agreement (ASTOA).13 The ASTOA incorporated the amendments,
revisions, and modifications necessary to cover the design and construction of Stage 2 of the South Metro Manila
Skyway. Also under the ASTOA, Skyway 0 & M Corporation (SOMCO) replaced PSC in performing the operations
and maintenance of Stage 1 of the South Metro Manila Skyway.
Pursuant to the authority granted to him under Executive Order No. (E.O.) 49714 dated 24 January 2006, Department
of Transportation and Communications (DOTC) Secretary Leandro Mendoza approved the ASTOA through the
challenged Memorandum dated 20 July 2007.15

On 21 December 2007, PNCC, PSC, and CMMTC entered into the assailed Memorandum of Agreement
(MOA)16providing for the successful and seamless assumption by SOMCO of the operations and maintenance of
Stage 1 of the South Metro Manila Skyway. Under the MOA, PSC received the amount of ₱320 million which was
used for the settlement of its liabilities arising from the consequent retrenchment or separation of its affected
employees.

The TRB issued the challenged Toll Operation Certificate (TOC)17 to SOM CO on 28 December 2007, authorizing the
latter to operate and maintain Stage 1 of the South Metro Manila Skyway effective 10:00 p.m. on 31December2007.

Meanwhile, on 28 December 2007, petitioner PNCC Traffic Management and Security Department Workers
Organization (PTMSDWO) filed a Notice of Strike against PSC on the ground of unfair labor practice, specifically
union busting.18 The Secretary of Labor and Employment19 assumed jurisdiction over the dispute in an Order dated
31 December 2007 and set the initial hearing of the case on 2 January 2008.20

On 3 January 2008, petitioners PTMSDWO and PNCC Skyway Corporation Employees Union (PSCEU) filed before
the Regional Trial Court of Parañaque City, Branch 258 (RTC), a complaint against respondents TRB, PNCC, PSC,
CMMTC, and SOMCO. The complaint was for injunction and prohibition with a prayer for a writ of preliminary injunction
and/or a temporary restraining order, and sought to prohibit the implementation of the AS TOA and the MOA, as well
as the assumption of the toll operations by SOMCO.21 Petitioners PSCEU and PTMSDWO also sought the
subsequent nullification of the ASTOA and the MOA for being contrary to law and for being grossly disadvantageous
to the government.22 They later filed an Amended Complaint23 dated 8 January 2008, additionally praying that PSC
be allowed to continue the toll operations. With the exception of TRB, all defendants therein filed their Opposition.

On 23 January 2008, the RTC issued an Order24 denying the prayer for the issuance of a temporary restraining order
and/or writ of preliminary injunction. According to the RTC, petitioners were seeking to enjoin a national government
infrastructure project. Under Republic Act No. (R.A.) 8975,25 lower courts are prohibited from issuing a temporary
restraining order or preliminary injunction against the government - or any person or entity acting under the
government's direction - to restrain the execution, implementation, or operation of any such contract or project.
Furthermore, the RTC ruled that it could no longer issue a temporary restraining order or preliminary injunction,
considering that the act sought to be restrained had already been consummated.26 The AS TOA, the MOA, and the
assumption of the toll operations by SOMCO took effect at 10:00 p.m. on 31 December 2007, while petitioners PSCEU
and PTMSDWO sought to prohibit their implementation only on 3 January 2008.

In view of its denial of the ancillary prayer, the RTC required defendants to file their respective Answers to the
Amended Complaint.27

On 28 January 2008, petitioners PSCEU and PTMSDWO filed a Notice of Dismissal with Urgent Ex-Parte Motion for
the Issuance of Order Confirming the Dismissal,28 considering that no Answers had yet been filed. On the basis
thereof, the R TC dismissed the case without prejudice on 29 January 2008.29

On 4 February 2008, petitioners filed the instant Petition30 before this Court. On 13 February 2008, we required
respondents to comment on the same.31

Meanwhile, defendants PNCC32 and PSC33 filed their respective Motions for Partial Reconsideration of the Order of
the R TC dismissing the case without prejudice. Both argued that the RTC should have dismissed the case with
prejudice. They pointed out that petitioners PSCEU and PTMSDWO had acted in bad faith by filing the complaint
before the RTC, despite the pendency of a labor case over which the Secretary of Labor and Employment had
assumed jurisdiction. Defendant CMMTC joined PNCC and PSC in moving for a partial reconsideration of the RTC
Order.34

The RTC denied the Motions for Partial Reconsideration in an Order dated 13 June 2008.35

Before this Court, SOMCO,36 PSC,37 PNCC,38 CMMTC,39 and TRB40 filed their respective Comments on the Petition.
THE PARTIES' POSITIONS

Petitioners argue that the franchise for toll operations was exclusively vested by P.D. 1113 in PNCC, which exercised
the powers under its franchise through PSC in accordance with the STOA. By agreeing to the arrangement whereby
SOMCO would replace PSC in the toll operations and management, PNCC seriously breached the terms and
conditions of its undertaking under the franchise and effectively abdicated its rights and privileges in favor of SOMCO.

Furthermore, the TOC granted to SOMCO was highly irregular and contrary to law, because 1) it did not indicate the
conditions that shall be imposed on SOMCO as provided under P.D. 1112;41 2) none of the requirements on public
bidding, negotiations, or even publication was complied with before the issuance of the TOC to SOMCO; 3) applying
the stricter "grandfather rule," SOMCO does not qualify as a facility operator as defined under R.A. 6957, 42 as
amended by R.A. 7718;43 and 4) there were no public notices and hearings conducted wherein all legitimate issues
and concerns about the transfer of the toll operations would have been properly ventilated.

Petitioners also claim that the approval by the DOTC Secretary of the AS TOA could not take the place of the
presidential approval required under P.D. 111344 and P.D. 189445 concerning the franchise granted to PNCC.

Finally, petitioners claim that the assumption of the toll operations by SOM CO was grossly disadvantageous to the
government, because 1) for a measly capital investment of ₱2.5 million, SOMCO stands to earn ₱400 million in gross
revenues based on official and historical records; 2) with its measly capital, SOMCO would not be able to cover the
direct overhead for personal services in the amount of ₱226 million as borne out by Commission on Audit reports; 3)
the net revenue from toll operations would go to private shareholders of SOMCO, whereas all earnings of PSC when
it was still in charge of the toll operations went to PNCC - the mother company whose earnings, as an "acquired-asset
corporation," formed part of the public treasury; 4) the new arrangement would result in the poor delivery of toll services
by SOMCO, which had no proven track record; 5) PSC received only ₱320 million as settlement for the transfer of toll
operations to SOMCO.

All respondents counter that petitioners do not have the requisite legal standing to file the petition. According to
respondents, petitioner Hontiveros-Baraquel filed the instant petition as a legislator in her capacity as party-list
representative of Akbayan. As such, she was only allowed to sue to question the validity of any official action when it
infringed on her prerogative as a legislator.46 Presently, she has cited no such prerogative, power, or privilege that is
adversely affected by the assailed acts.47

While suing as citizens, the individual petitioners have not shown any personal or substantial interest in the case
indicating that they sustained or will sustain direct injury as a result of the implementation of the assailed acts.48 The
maintenance of the suit by petitioners as taxpayers has no merit either because the assailed acts do not involve the
disbursement of public funds.49 Finally, the bringing of the suit by petitioners as people's organizations does not
automatically confer legal standing, especially since petitioner-organizations do not even allege that they represent
their members,50 nor do they cite any particular constitutional provision that has been violated or disregarded by the
assailed acts.51 In fact, the suit raises only issues of contract law, and none of the petitioners is a party or is privy to
the assailed agreements and issuances.52

Respondents also argue that petitioners violate the hierarchy of courts. In particular, it is alleged that while lower
courts are prohibited from issuing temporary restraining orders or preliminary injunctions against national government
projects under R.A. 8975, the law does not preclude them from assuming jurisdiction over complaints that seek the
nullification of a national government project as ultimate relief.53

As a final procedural challenge to the petition, respondents aver that petitioners are guilty of forum shopping. When
petitioners filed the instant petition, the case before the R TC seeking similar reliefs was still pending, as respondents
PNCC, PSC and CMMTC had moved for the partial reconsideration of the RTC's Order of dismissal within the
reglementary period.54 Furthermore, the instant case and the one before the RTC were filed while petitioners' labor
grievances seeking similar reliefs were also being heard before the Department of Labor and Employment.55

On the merits of the arguments in the petition, respondents argue that nothing in the ASTOA, the approval thereof by
the DOTC Secretary, the MOA, or the TOC was violative of the Constitution. It is argued that the authority to operate
a public utility can be granted by administrative agencies when authorized by law.56 Under P.D. 1112, the TRB is
empowered to grant authority and enter into contracts for the construction, operation, and maintenance of a toll
facility,57 such as the ASTOA in this case. Also, the ASTOA was an amendment, not to the legislative franchise of
PNCC, but to the STOA previously executed between the Republic of the Philippines through the TRB, PNCC, and
CMMTC.58 In fact, PNCC's franchise was never sold, transferred, or otherwise assigned to SOMCO59 in the same
way that PSC's previous assumption of the operation and maintenance of the South Metro Manila Skyway did not
amount to a sale, transfer or assignment of PNCC's franchise.60

There can be no valid objection to the approval of the ASTOA by the DOTC Secretary, because he was authorized
by the President to do so by virtue of E.O. 497.61 Also, the phrase "subject to the approval of the President of the
Philippines" in P.D. 1112 and 1113 does not in any way mean that the presidential approval must be obtained prior to
the execution of a contract, or that the approval be made personally by the President.62 The presidential approval may
be obtained under the doctrine of qualified political agency.63

Respondents argue that there is no merit in the claim that the TOC granted to SOMCO was highly irregular and
contrary to law. First, the TOC clearly states that the toll operation and maintenance by SOMCO shall be regulated
by the Republic of the Philippines in accordance with P.D. 1112, the STOA, the toll operations and maintenance rules
and regulations, and lawful orders, instructions, and conditions that may be imposed from time to time.64Second, there
is no need to comply with the public bidding and negotiation requirements, because the South Metro Manila Skyway
is an ongoing project, not a new one.65 Furthermore, the STOA, which was the basis for the ASTOA, was concluded
way before the effectivity of R.A. 918466 in 2003.67

Third, SOMCO is a Filipino corporation with substantial 72% Filipino ownership.68 Fourth, the law requires prior notice
and hearing only in an administrative body's exercise of quasi-judicial functions.69 In this case, the transfer of the toll
operations and maintenance to SOM CO was a contractual arrangement entered into in accordance with law.70

Finally, the assumption of the toll operation and maintenance by SOMCO is not disadvantageous to the government.
Petitioners belittle the ₱2.5 million capitalization of SOMCO, considering that PSC's capitalization at the time it was
incorporated was merely ₱500,000.71

Respondents claim that under the ASTOA, PNCC shall get a direct share in the toll revenues without any corollary
obligation, unlike the arrangement in the STOA whereby PNCC's 10% share in the toll revenues was intended primarily
for the toll operation and maintenance by PSC.72

Finally, respondents assert that there is no reason to fear that the assumption by SOMCO would result in poor delivery
of toll services. CITRA and the other shareholders of SOMCO are entities with experience and proven track record in
toll operations.73 Also, SOM CO hired or absorbed more than 300 PSC employees,74 who brought with them their
work expertise and experience.

ISSUES

The instant case shall be resolved on the basis of the following issues:

Procedural:

I. Whether petitioners have standing;

II. Whether petitioners are guilty of forum-shopping;
Substantive:
III. Whether the TRB has the power to grant authority to operate a toll facility;
IV. Whether the TOC issued to SOMCO was valid;
V. Whether the approval of the ASTOA by the DOTC Secretary was valid; and
VI. Whether the assumption of toll operations by SOMCO is disadvantageous to the government.

OUR RULING

Not all petitioners have personality to sue.

Standing is a constitutional law concept allowing suits to be brought not necessarily by parties personally injured by
the operation of a law or official action, but by concerned citizens, taxpayers, or voters who sue in the public
interest.75 Determining the standing of concerned citizens, taxpayers, or voters requires a partial consideration of the
substantive merit of the constitutional question,76 or at least a preliminary estimate thereof.77

In this case, petitioners raise the power of Congress to grant franchises as a constitutional question. They allege that
the execution of the ASTOA and the MOA, the approval of the AS TOA by the DOTC Secretary and the issuance of
the TOC infringed on the constitutional power of Congress, which has the sole authority to grant franchises for the
operation of public utilities. This Court has had a few occasions to rule that a franchise from Congress is not required
before each and every public utility may operate.78 Unless there is a law that specifically requires a franchise for the
operation of a public utility, particular agencies in the executive branch may issue authorizations and licenses for the
operation of certain classes of public utilities.79 In the instant case, there is no law that states that a legislative franchise
is necessary for the operation of toll facilities.

In PAL v. Civil Aeronautics Board,80 this Court enunciated:

Congress has granted certain administrative agencies the power to grant licenses for, or to authorize the operation of
certain public utilities. With the growing complexity of modem life, the multiplication of the subjects of governmental
regulation, and the increased difficulty of administering the laws, there is a constantly growing tendency towards the
delegation of greater powers by the legislature, and towards the approval of the practice by the courts. It is generally
recognized that a franchise may be derived indirectly from the state through a duly designated agency, and to this
extent, the power to grant franchises has frequently been delegated, even to agencies other than those of a legislative
nature. In pursuance of this, it has been held that privileges conferred by grant by local authorities as agents for the
state constitute as much a legislative franchise as though the grant had been made by an act of the Legislature.81

It is thus clear that Congress does not have the sole authority to grant franchises for the operation of public utilities.
Considering the foregoing, we find that the petition raises no issue of constitutional import. More particularly, no
legislative prerogative, power, or privilege has been impaired. Hence, legislators have no standing to file the instant
petition, for they are only allowed to sue to question the validity of any official action when it infringes on their
prerogatives as members of Congress.82 Standing is accorded to them only if there is an unmistakable showing that
the challenged official act affects or impairs their rights and prerogatives as legislators.83

In line with our ruling in Kilosbayan, Inc. v. Morato,84 the rule concerning a real party in interest - which is applicable
to private litigation – rather than the liberal rule on standing, should be applied to petitioners.

A real party in interest is one who stands to be benefited or injured by the judgment in the suit, or the party entitled to
the avails of the suit.85 One's interest must be personal and not one based on a desire to vindicate the constitutional
right of some third and unrelated party.86 The purposes of the rule are to prevent the prosecution of actions by persons
without any right or title to or interest in the case; to require that the actual party entitled to legal relief be the one to
prosecute the action; to avoid a multiplicity of suits; and to discourage litigation and keep it within certain bounds,
pursuant to sound public policy.87

At bottom, what is being questioned in the petition is the relinquishment by PSC of the toll operations in favor of
SOMCO, effectively leading to the cessation of the former' s business. In this case, we find that among petitioners,
the only real parties in interest are the labor unions PSCEU and PTMSDWO.

PSCEU and PTMSDWO filed the petition not as a representative suit on behalf of their members who are rank-and-
file employees of PSC, but as people's organizations "invested with a public duty to defend the rule of law."88PSCEU
and PTMSDWO cite Kilosbayan v. Ermita89 as authority to support their standing to file the instant suit.

It is well to point out that the Court, in Ermita, accorded standing to people's organizations to file the suit, because the
matter involved therein was the qualification of a person to be appointed as a member of this Court -"an issue of
utmost and far-reaching constitutional importance."90 As discussed, the instant petition raises no genuine
constitutional issues.

Nevertheless, for a different reason, we accord standing to PSCEU and PTMSDWO to file the instant suit. With the
transfer of toll operations to SOMCO and the resulting cessation of PSC's business comes the retrenchment and
separation of all its employees. The existence of petitioner labor unions would terminate with the dissolution of its
employer and the separation of its members. This is why the petition also prays that this Court issue an order "that
would smoothly preserve the toll operations services of respondent PNCC and/or respondent PSC under its legislative
franchise."91

We have recognized that the right of self-preservation is inherent in every labor union or any organization for that
matter.92 Thus, PSCEU and PTMSDWO, as real parties in interest, have the personality to question the assumption
of the toll operations by SOMCO.

II

PSCEU and PTMSDWO are not guilty of forum-shopping.

Forum shopping refers to the act of availing of several remedies in different courts and/or administrative agencies,
either simultaneously or successively, when these remedies are substantially founded on the same material facts and
circumstances and raise basically the same issues either pending in or already resolved by some other court or
administrative agency.93 What is pivotal in determining whether forum shopping exists is the vexation caused to the
courts and litigants and the possibility of conflicting decisions being rendered by different courts and/or administrative
agencies upon the same issues.94

The elements of forum shopping are as follows: a) identity of parties or at least such parties that represent the same
interests in both actions; b) identity of rights asserted and the relief prayed for, the relief founded on the same facts;
and c) identity of the two preceding particulars, such that any judgment rendered in one action will amount to res
judicata in the other.95 Respondents argue that petitioners PSCEU and PTMSDWO committed forum shopping by
filing the complaint for injunction and prohibition before the RTC during the pendency of NCMB-NCR-NS-12-188-07
entitled In Re: Labor Dispute at PNCC Skyway Corporation. It was a case they also filed, over which the Secretary of
Labor and Employment has assumed jurisdiction.

The case involves a Notice of Strike filed against PSC on the ground of unfair labor practice. While the specific act in
question is not specified, the prohibited acts constituting unfair labor practice96 essentially relate to violations
concerning the workers' right to self-organization.97 When compared with the complaint filed with the RTC for
injunction and prohibition seeking to prohibit the implementation of the ASTOA and the MOA, as well as the
assumption of the toll operations by SOM CO for being unconstitutional, contrary to law and disadvantageous to the
government, it is easily discernible that there is no identity of rights asserted and relief prayed for. These cases are
distinct and dissimilar in their nature and character.

For the sake of argument, let us assume that, in order to hurt the unions, PSC feigned a cessation of business that
led to the retrenchment and separation of all employees. That is an unfair labor practice. In that complaint, the unions
cannot be expected to ask for, or the Secretary of Labor and Employment to grant, the annulment of the ASTOA and
the MOA and the continuation of toll operations by PSC. The Secretary would only focus on the legality of the
retrenchment and separation, and on the presence or absence of bad faith in PSC's cessation of business. On the
other hand, the complaint before the RTC would require it to focus on the legality of the ASTOA, the MOA and the
transfer of toll operations. Ultimately, even if the Secretary of Labor and Employment makes a finding of unfair labor
practice, this determination would not amount to res judicata as regards the case before the RTC.

We also reject the claim of respondents that petitioners PSCEU and PTMSDWO committed forum shopping by filing
the instant petition before this Court while the motion for partial reconsideration of the RTC's Order of dismissal without
prejudice was still pending. Section 1, Rule 17 of the Rules of Court states:

SECTION 1. Dismissal upon notice by plaintiff. - A complaint may be dismissed by the plaintiff by filing a notice of
dismissal at any time before service of the answer or of a motion for summary judgment. Upon such notice being filed,
the court shall issue an order confirming the dismissal. Unless otherwise stated in the notice, the dismissal is without
prejudice, except that a notice operates as an adjudication upon the merits when filed by a plaintiff who has once
dismissed in a competent court an action based on or including the same claim.

In this case, petitioners PSCEU and PTMSDWO had filed a notice of dismissal of the complaint before the RTC on
28 January 2008, before respondents filed their Answers. The following day, the RTC issued an order confirming the
dismissal. Under the above-cited rule, this confirmation is the only qualification imposed on the right of a party to
dismiss the action before the adverse party files an answer.98 In this case, the dismissal of the action therefore became
effective upon that confirmation by the RTC despite the subsequent filing of the motions for partial reconsideration.

Thus, when the instant petition was filed on 4 February 2008, the complaint before the RTC was no longer pending.
The complaint was dismissed without prejudice by virtue of the notice of dismissal filed by petitioners PSCEU and
PTMSDWO. Consequently, there was not even any need for petitioners to mention the prior filing and dismissal of the
complaint in the certificate of non-forum shopping in the instant petition,99 but they did so anyway.100

Parenthetically, in their motions for partial reconsideration, respondents PNCC and PSC insisted that the dismissal
should have been with prejudice, because petitioners allegedly acted in bad faith in filing the notice of dismissal, were
guilty of forum shopping, and did not notify respondents of their intention to file a notice of dismissal. With regard to
the first and the third allegation, petitioners may ask for dismissal at any time before the filing of the answer as a
matter of right, even if the notice cites "the most ridiculous of grounds for dismissal."101 As to the second, we have
already ruled that there was no forum shopping as regards the successive filings of the labor case and the complaint
before the RTC.

II

TRB has the power to grant authority to operate a toll facility.

This matter has already been settled by the Court in Francisco, Jr. v. TRB,102 which ruled thus:

It is abundantly clear that Sections 3 (a) and (e) of P.D. 1112 in relation to Section 4 of P.D. 1894 have invested the
TRB with sufficient power to grant a qualified person or entity with authority to construct, maintain, and operate a toll
facility and to issue the corresponding toll operating permit or TOC.

Sections 3 (a) and (e) of P.D. 1112 and Section 4 of P.D. 1894 amply provide the power to grant authority to operate
toll facilities:

Section 3. Powers and Duties of the Board. - The Board shall have in addition to its general powers of administration
the following powers and duties:

(a) Subject to the approval of the President of the Philippines, to enter into contracts in behalf of the Republic of the
Philippines with persons, natural or juridical, for the construction, operation and maintenance of toll facilities such as
but not limited to national highways, roads, bridges, and public thoroughfares. Said contract shall be open to citizens
of the Philippines and/or to corporations or associations qualified under the Constitution and authorized by law to
engage in toll operations;

xxxx

(e) To grant authority to operate a toll facility and to issue therefore the necessary "Toll Operation Certificate" subject
to such conditions as shall be imposed by the Board including inter alia the following:

(1) That the Operator shall desist from collecting toll upon the expiration of the Toll Operation Certificate.

(2) That the entire facility operated as a toll system including all operation and maintenance equipment directly
related thereto shall be turned over to the government immediately upon the expiration of the Toll Operation
Certificate.

(3) That the toll operator shall not lease, transfer, grant the usufruct of, sell or assign the rights or privileges
acquired under the Toll Operation Certificate to any person, firm, company, corporation or other commercial
or legal entity, nor merge with any other company or corporation organized for the same purpose, without the
prior approval of the President of the Philippines. In the event of any valid transfer of the Toll Operation
Certificate, the Transferee shall be subject to all the conditions, terms, restrictions and limitations of this
Decree as fully and completely and to the same extent as if the Toll Operation Certificate has been granted to
the same person, firm, company, corporation or other commercial or legal entity.
 (4) That in time of war, rebellion, public peril, emergency, calamity, disaster or disturbance of peace and order,
the President of the Philippines may cause the total or partial closing of the toll facility or order to take over
thereof by the Government without prejudice to the payment of just compensation.

(5) That no guarantee, Certificate of Indebtedness, collateral, securities, or bonds shall be issued by any
government agency or government-owned or controlled corporation on any financing program of the toll
operator in connection with his undertaking under the Toll Operation Certificate.

(6) The Toll Operation Certificate may be amended, modified or revoked whenever the public interest so
requires.

(a) The Board shall promulgate rules and regulations governing the procedures for the grant of Toll
Certificates. The rights and privileges of a grantee under a Toll Operation Certificate shall be defined
by the Board.

(b) To issue rules and regulations to carry out the purposes of this Decree.

SECTION 4. The Toll Regulatory Board is hereby given jurisdiction and supervision over the GRANTEE with respect
to the Expressways, the toll facilities necessarily appurtenant thereto and, subject to the provisions of Section 8 and
9 hereof, the toll that the GRANTEE will charge the users thereof.

By explicit provision of law, the TRB was given the power to grant administrative franchise for toll facility
projects.103(Emphases supplied)

We cannot abide by the contention of petitioners that the franchise for toll operations was exclusively vested in PNCC,
which effectively breached its franchise when it transferred the toll operations to SOMCO. First, there is nothing in
P.D. 1113 or P.D. 1894 that states that the franchise granted to PNCC is to the exclusion of all others.

Second, if we were to go by the theory of petitioners, it is only the operation and maintenance of the toll facilities that
is vested with PNCC. This interpretation is contrary to the wording of P.D. 1113 and P.D. 1894 g ranting PNCC the
right, privilege and authority to construct, operate and maintain the North Luzon, South Luzon and Metro Manila
Expressways and their toll facilities.

It appears that petitioners have confused the franchise granted under P.D. 1113 and P.D. 1894 with particular
provisions in the STOA. To clarify, the operation and maintenance of the project roads were the primary and exclusive
privilege and responsibility of PNCC through PSC under the STOA. On the other hand, the design and construction
of the project roads were the primary and exclusive privilege and responsibility of CMMTC. However, with the
execution of the AS TOA, the parties agreed that SOM CO shall replace PSC in undertaking the operations and
maintenance of the project roads. Thus, the "exclusivity clause" was a matter of agreement between the parties, which
amended it in a later contract; it was not a matter provided under the law.

Third, aside from having been granted the power to grant administrative franchises for toll facility projects, TRB is also
empowered to modify, amend, and impose additional conditions on the franchise of PNCC in an appropriate contract,
particularly when public interest calls for it. This is provided under Section 3 of P.D. 1113 and Section 6 of P.D. 1894,
to wit:

SECTION 3. This franchise is granted subject to such conditions as may be imposed by the [Toll Regulatory] Board
in an appropriate contract to be executed for this purpose, and with the understanding and upon the condition that it
shall be subject to amendment, alteration or repeal when public interest so requires.

xxx

SECTION 6. This franchise is granted subject to such conditions, consistent with the provisions of this Decree, as
may be imposed by the Toll Regulatory Board in the Toll Operation Agreement and such other modifications or
amendments that may be made thereto, and with the understanding and upon the condition that it shall be subject to
amendment or alteration when public interest so dictates.
Section 6 of P.D. 1894 specifically mentions the Toll Operation Agreement. The STOA was one such modification or
amendment of the franchise of PNCC. So was the ASTOA, which further modified the franchise. PNCC cannot be
said to have breached its franchise when it transferred the toll operations to SOMCO. PNCC remained the franchise
holder for the construction, operation, and maintenance of the project roads; it only opted to partner with investors in
the exercise of its franchise leading to the organization of companies such as PSC and SOMCO.

Again, considering that PNCC was granted the right, privilege, and authority to construct, operate, and maintain the
North Luzon, South Luzon, and Metro Manila Expressways and their toll facilities, we have not heard petitioners
decrying the "breach" by PNCC of its franchise when it agreed to make CMMTC responsible for the design and
construction of the project roads under the STOA.

IV

The TOC issued to SOMCO was not irregular.

Petitioners argue that the conditions provided under Section 3(e) of P.D. 1112104 were not imposed on SOMCO,
because these do not appear on the face of the TOC. Petitioners are mistaken.

The TOC, as a grant of authority from the government, is subject to the latter's control insofar as the grant affects or
concerns the public.105 Like all other franchises or licenses issued by the government, the TOC is issued subject to
terms, conditions, and limitations under existing laws and agreements. This rule especially holds true in this instance
since the TRB has the power to issue "the necessary 'Toll Operation Certificate' subject to such conditions as shall
be imposed by the Board including inter alia" those specified under Section 3(e) of P.D. 1112. Thus, impliedly written
into every TOC are the conditions prescribed therein.

In any case, part of the TOC issued to SOMCO reads:

Pursuant to Section 3(e) of Presidential Decree No. 1112 or the Toll Operation Decree, Skyway O & M Corporation is
hereby given authority to operate and maintain Stage 1 of the South Metro Manila Skyway effective as of 10:00 p.m.
of 31 December 2007.

This authorization is issued upon the clear understanding that the operation and maintenance of Stage 1 of the South
Metro Manila Skyway as a toll facility and the collection of toll fees shall be closely supervised and regulated by the
Grantor, by and through the Board of Directors, in accordance with the terms and conditions set forth in the STOA, as
amended, the rules and regulations duly promulgated by the Grantor for toll road operations and maintenance, as well
as the lawful orders, instructions and conditions which the Grantor, through the TRB, may impose from time to time
in view of the public nature of the facility.

As regards the allegation that none of the requirements for public bidding was observed before the TOC was issued
to SOMCO, this matter was also squarely answered by the Court in Francisco, Jr. v. TRB,106 to wit:

Where, in the instant case, a franchisee undertakes the tollway projects of construction, rehabilitation and expansion
of the tollways under its franchise, there is no need for a public bidding. In pursuing the projects with the vast resource
requirements, the franchisee can partner with other investors, which it may choose in the exercise of its management
prerogatives. In this case, no public bidding is required upon the franchisee in choosing its partners as such process
was done in the exercise of management prerogatives and in pursuit of its right of delectus personae. Thus, the
subject tollway projects were undertaken by companies, which are the product of the joint ventures between PNCC
and its chosen partners.107

Under the STOA in this case, PNCC partnered with CMMTC in Stages 1 and 2 of the South Metro Manila Skyway.
The STOA gave birth to PSC, which was put in charge of the operation and maintenance of the project roads. The
ASTOA had to be executed for Stage 2 to accommodate changes and modifications in the original design. The ASTOA
then brought forth the incorporation of SOMCO to replace PSC in the operations and maintenance of Stage 1 of the
South Metro Manila Skyway. Clearly, no public bidding was necessary because PNCC, the franchisee, merely
exercised its management prerogative when it decided to undertake the construction, operation, and maintenance of
the project roads through companies which are products of joint ventures with chosen partners.
Petitioners also insist that SOMCO is not qualified to operate a toll facility, because it does not meet the nationality
requirement for a corporation when scrutinized under the "grandfather rule." Other than advancing this argument,
however, petitioners have not shown how SOMCO fails to meet the nationality requirement for a public utility operator.
Petitioners only aver in their petition that 40% of SOMCO is owned by CMMTC, a foreign company, while the rest is
owned by the following: a) Toll Road Operation and Maintenance Venture Corporation (TROMVC), almost 40% of
which is owned by a Singaporean company; b) Asset values Holding Company, Inc. (AHCI), of which almost 40% is
Dutch-owned; and c) Metro Strategic Infrastructure Holdings, Inc. (MSIHI), 40% of which is owned by Metro Pacific
Corporation, whose ownership or nationality was not specified.108

Section 11, Article XII of the Constitution provides that "[n]o franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such
citizens x x x." Clearly, under the Constitution, a corporation at least 60% of whose capital is owned by Filipinos is of
Philippine nationality. Considering this constitutional provision, petitioners' silence on the ownership of the remaining
60% of the corporations cited is very telling.

In order to rebut petitioners' allegations, respondents readily present matrices showing the itemization of percentage
ownerships of the subscribed capital stock of SOMCO, as well as that of TROMVC, AHCI, and MSIHI. Respondents
attempt to show that all these corporations are of Philippine nationality, with 60% of their capital stock owned by
Filipino citizens. We need not reproduce the itemization here. Suffice it to say that in their Consolidated
Reply,109petitioners did not refute the unanimous claim of respondents. It is axiomatic that one who alleges a fact has
the burden of proving it. On this matter, we find that petitioners have failed to prove their allegation that SOMCO is
not qualified to operate a toll facility for failure to meet the nationality requirement under the Constitution.

Finally, no public notices and hearings were necessary prior to the issuance of the TOC to SOMCO. For the same
reason that a public bidding is not necessary, PNCC cannot be required to call for public hearings concerning matters
within its prerogative. At any rate, we have studied P.D. 1112 and the Implementing Rules and Regulations Authorizing
the Establishment of Toll Facilities and found no provision requiring the issuance of public notices and the conduct of
public hearings prior to the issuance of a TOC.

Approval of the AS TOA by the DOTC Secretary was approval by the President.

The doctrine of qualified political agency declares that, save in matters on which the Constitution or the circumstances
require the President to act personally, executive and administrative functions are exercised through executive
departments headed by cabinet secretaries, whose acts are presumptively the acts of the President unless
disapproved by the latter.110 As explained in Villena v. Executive Secretary,111 this doctrine is rooted in the
Constitution:

x x x With reference to the Executive Department of the government, there is one purpose which is crystal-clear and
is readily visible without the projection of judicial searchlight, and that is, the establishment of a single, not plural,
Executive. The first section of Article VII of the Constitution, dealing with the Executive Department, begins with the
enunciation of the principle that "The executive power shall be vested in a President of the Philippines." This means
that the President of the Philippines is the Executive of the Government of the Philippines, and no other. The heads
of the executive departments occupy political positions and hold office in an advisory capacity, and, in the language
of Thomas Jefferson, "should be of the President's bosom confidence," and, in the language of Attorney-General
Cushing, "are subject to the direction of the President." Without minimizing the importance of the heads of the various
departments, their personality is in reality but the projection of that of the President. Stated otherwise, and as forcibly
characterized by Chief Justice Taft of the Supreme Court of the United States, "each head of a department is, and
must be, the President's alter ego in the matters of that department where the President is required by law to exercise
authority." Secretaries of departments, of course, exercise certain powers under the law but the law cannot impair or
in any way affect the constitutional power of control and direction of the President. As a matter of executive policy,
they may be granted departmental autonomy as to certain matters but this is by mere concession of the executive, in
the absence of valid legislation in the particular field. If the President, then, is the authority in the Executive
Department, he assumes the corresponding responsibility. The head of a department is a man of his confidence; he
controls and directs his acts; he appoints him and can remove him at pleasure; he is the executive, not any of his
secretaries.112 x x x (Citations omitted)
Applying the doctrine of qualified political agency, we have ruled that the Secretary of Environment and Natural
Resources can validly order the transfer of a regional office by virtue of the power of the President to reorganize the
national government.113 In Constantino v. Cuisia,114 the Court upheld the authority of the Secretary of Finance to
execute debt-relief contracts. The authority emanates from the power of the President to contract foreign loans under
Section 20, Article VII of the Constitution. In Angeles v. Gaite,115 the Court ruled that there can be no issue with regard
to the President's act of limiting his power to review decisions and orders of the Secretary of Justice, especially since
the decision or order was issued by the secretary, the President's "own alter ego."116

There can be no question that the act of the secretary is the act of the President, unless repudiated by the latter. In
this case, approval of the ASTOA by the DOTC Secretary had the same effect as approval by the President. The
same would be true even without the issuance of E.O. 497, in which the President, on 24 January 2006, specifically
delegated to the DOTC Secretary the authority to approve contracts entered into by the TRB.

Petitioners are unimpressed. They cite Section 8 of P.D. 1113 and Section 13 of P.D. 1894 as follows:

SECTION 8. The GRANTEE shall not lease, transfer, grant the usufruct of, sell or assign this franchise nor the rights
or privileges acquired hereby, to any person, firm, company, corporation or other commercial or legal entity, nor merge
with any other company or corporation without the prior approval of the President of the Philippines. In the event that
this franchise is sold, transferred or assigned, the transferee shall be subject to all the conditions, terms, restrictions
and limitations of this Decree as fully and completely and to the same extents as if the franchise has been granted to
the same person, firm, company, corporation or other commercial or legal entity. (Emphasis supplied)

SECTION 13. The GRANTEE shall not lease, transfer, grant the usufruct of, sell or assign this franchise nor the rights
or privileges required hereby, to any person, firm, company, corporation or other legal entity, nor merge with any other
company or corporation without the prior approval of the President of the Philippines. In the event that this franchise
is sold, transferred or assigned, the transferee shall be subject to all the conditions, terms, restrictions and limitations
of this Decree as fully and completely and to the same extent as if the franchise has been granted to the said person,
firm, company, corporation or other legal entity. (Emphasis supplied) Petitioners insist that based on the above
provisions, it is the President who should give personal approval considering that the power to grant franchises was
exclusively vested in Congress. Hence, to allow the DOTC Secretary to exercise the power of approval would
supposedly dilute that legislative prerogative.

The argument of petitioners is founded on the assumption that PNCC in some way leased, transferred, granted the
usufruct of, sold, or assigned to SOMCO its franchise or the rights or privileges PNCC had acquired by it. Here lies
the error in petitioners' stand. First, as discussed above, the power to grant franchises or issue authorizations for the
operation of a public utility is not exclusively exercised by Congress. Second, except where the situation falls within
that special class that demands the exclusive and personal exercise by the President of constitutionally vested
power,117 the President acts through alter egos whose acts are as if the Chief Executive's own.

Third, no lease, transfer, grant of usufruct, sale, or assignment of franchise by PNCC or its merger with another
company ever took place.

The creation of the TRB and the grant of franchise to PNCC were made in the light of the recognition on the part of
the government that the private sector had to be involved as an alternative source of financing for the pursuance of
national infrastructure projects. As the franchise holder for the construction, maintenance and operation of
infrastructure toll facilities, PNCC was equipped with the right and privilege, but not necessarily the means, to
undertake the project. This is where joint ventures with private investors become necessary.

A joint venture is an association of companies jointly undertaking a commercial endeavor, with all of them contributing
assets and sharing risks, profits, and losses.118 It is hardly distinguishable from a partnership considering that their
elements are similar and, thus, generally governed by the law on partnership.119

In joint ventures with investor companies, PNCC contributes the franchise it possesses, while the partner contributes
the financing - both necessary for the construction, maintenance, and operation of the toll facilities. PNCC did not
thereby lease, transfer, grant the usufruct of, sell, or assign its franchise or other rights or privileges. This remains true
even though the partnership acquires a distinct and separate personality from that of the joint venturers or leads to
the formation of a new company that is the product of such joint venture, such as PSC and SOMCO in this case.
Hence, when we say that the approval by the DOTC Secretary in this case was approval by the President, it was not
in connection with the franchise of PNCC, as required under Section 8 of P.D. 1113 and Section 13 of P.D. 1894.
Rather, the approval was in connection with the powers of the TRB to enter into contracts on behalf of the government
as provided under Section 3(a) of P.D. 1112, which states:

SECTION 3. Powers and Duties of the Board. - The Board shall have in addition to its general powers of administration
the following powers and duties:

(a) Subject to the approval of the President of the Philippines, to enter into contracts in behalf of the Republic of the
Philippines with persons, natural or juridical, for the construction, operation and maintenance of toll facilities such as
but not limited to national highways, roads, bridges, and public thoroughfares. Said contract shall be open to citizens
of the Philippines and/or to corporations or associations qualified under the Constitution and authorized by law to
engage in toll operations; (Emphasis supplied)

VI

Petitioners have not shown that the transfer of toll operations to SOM CO was grossly disadvantageous to the
government.

In support of their contention that the transfer of toll operations from PSC to SOMCO was grossly disadvantageous to
the government, petitioners belittle the initial capital investment, private ownership, and track record of SOMCO.

When one uses the term "grossly disadvantageous to the government," the allegations in support thereof must reflect
the meaning accorded to the phrase. "Gross" means glaring, reprehensible, culpable, flagrant, and shocking.120 It
requires that the mere allegation shows that the disadvantage on the part of the government is unmistakable, obvious,
and certain.

In this case, we find that the allegations of petitioners are nothing more than speculations, apprehensions, and
suppositions.1âwphi1 They speculate that with its "measly" capital investment, SOMCO would not be able to cover
the overhead expenses for personal services alone. They fear that the revenue from toll operations would go to
"private pockets" in exchange for a small settlement amount to be given to PSC. Given that SOMCO has no proven
track record, petitioners deduce that its assumption of the toll operations would lead to poor delivery of toll services to
the public.

The aim in the establishment of toll facilities is to draw from private resources the financing of government
infrastructure projects. Naturally, these private investors would want to receive reasonable return on their investments.
Thus, the collection of toll fees for the use of public improvements has been authorized, subject to supervision and
regulation by the national government.121 As regards the ₱320 million settlement given to PSC, the amount was to be
used principally for the payment of its liabilities of PSC arising from the retrenchment of its employees. We note that
under the MOA, the residual assets of PSC shall still be offered for sale to CMMTC, subject to valuation. 122 Thus, it
would be inaccurate to say that PSC would receive only ₱320 million for the entire arrangement.

It is quite understandable that SOMCO does not yet have a proven track record in toll operations, considering that it
was only the ASTOA and the MOA that gave birth to it. We are not prepared to rule that this lack of track record would
result in poor delivery of toll services, especially because most of the former employees of PSC have been rehired by
SOMCO, an allegation of respondents that was never refuted by petitioners. Neither are we prepared to take the
amount of SOMCO's initial capital investment against it, as it is considerably higher than ₱500,000, the authorized
capital stock of PSC as of 2002.123

A FINAL NOTE

R.A. 8975 prohibits lower courts from issuing any temporary restraining order, preliminary injunction, or preliminary
mandatory injunction against the government - or any of its subdivisions, officials or any person or entity, whether
public or private, acting under the government's direction - to restrain, prohibit or compel acts related to the
implementation and completion of government infrastructure projects.
The rationale for the law is easily discernible. Injunctions and restraining orders tend to derail the expeditious and
efficient implementation and completion of government infrastructure projects; increase construction, maintenance
and repair costs; and delay the enjoyment of the social and economic benefits therefrom. Thus, unless the matter is
of extreme urgency involving a constitutional issue, judges of lower courts who shall issue injunctive writs or restraining
orders in violation of the law shall be administratively liable.

The law is clear that what is prohibited is merely the issuance of provisional orders enjoining the implementation of a
national government project. R.A. 8975 does not bar lower courts from assuming jurisdiction over complaints that
seek the nullification or implementation of a national government infrastructure project as ultimate relief.124

There is no question that the ultimate prayer in the instant case is the nullification of a national government project
considering that the ASTOA involved the design and construction of Stage 2 of the South Metro Manila Skyway, as
well as the operation and maintenance of Stage 1 thereof. The prayer is grounded on the contract's alleged
unconstitutionality, violation of the law, and gross disadvantage to the government. Such principal action and relief
were within the jurisdiction of the RTC, which acted correctly when it ordered respondents to file their respective
answers to the complaint, even while it denied the prayer for the issuance of a writ of preliminary injunction and/or
temporary restraining order in observance of R.A. 8975.

It was therefore error on the part of petitioners to come directly before this Court for the sole reason that the lower
courts will not be able to grant the prayer for the issuance of a writ of preliminary injunction and/or temporary restraining
order to enjoin the assumption of toll operations by SOMCO. The error even takes on a whole new meaning, because
SOMCO assumed responsibility for the operations and maintenance of the South Metro Manila Skyway at 10:00 p.m.
on 31 December 2007. On the other hand, the complaint before the RTC seeking to enjoin the assumption by SOMCO
was filed only on 3 January 2008, while the instant petition was filed on 4 February 2008.

As we held in Aznar Brothers Realty, Inc. v. CA,125 injunction does not lie when the act sought to be enjoined has
already become a fait accompli or an accomplished or consummated act.

Parties must observe the hierarchy of courts before seeking relief from this Court. Observance thereof minimizes the
imposition on the already limited time of this Court and prevents delay, intended or otherwise, in the adjudication of
cases.126 We do not appreciate the litigants' practice of directly seeking recourse before this Court, relying on the
gravitas of a personality yet making serious claims without the proof to support them.

WHEREFORE, the petition is DISMISSED. The prayer for the issuance of a writ of preliminary injunction and/or
temporary restraining order is DENIED. SO ORDERED.

Piercing the Viel of Corporate Fiction

1. Manila Gas Corp vs. CIR

G.R. No. L-42780 January 17, 1936

MANILA GAS CORPORATION, plaintiff-appellant,

vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

MALCOLM, J.:

This is an action brought by the Manila Gas Corporation against the Collector of Internal Revenue for the recovery of
P56,757.37, which the plaintiff was required by the defendant to deduct and withhold from the various sums paid it to
foreign corporations as dividends and interest on bonds and other indebtedness and which the plaintiff paid under
protest. On the trial court dismissing the complaint, with costs, the plaintiff appealed assigning as the principal errors
alleged to have been committed the following:

1. The trial court erred in holding that the dividends paid by the plaintiff corporation were subject to income tax
in the hands of its stockholders, because to impose the tax thereon would be to impose a tax on the plaintiff,
in violation of the terms of its franchise, and would, moreover, be oppressive and inequitable.
 2. The trial court erred in not holding that the interest on bonds and other indebtedness of the plaintiff
corporation, paid by it outside of the Philippine Islands to corporations not residing therein, were not, on the
part of the recipients thereof, income from Philippine sources, and hence not subject to Philippine income tax.

The facts, as stated by the appellant and as accepted by the appellee, may be summarized as follows: The plaintiff is
a corporation organized under the laws of the Philippine Islands. It operates a gas plant in the City of Manila and
furnishes gas service to the people of the metropolis and surrounding municipalities by virtue of a franchise granted
to it by the Philippine Government. Associated with the plaintiff are the Islands Gas and Electric Company domiciled
in New York, United States, and the General Finance Company domiciled in Zurich, Switzerland. Neither of these last
mentioned corporations is resident in the Philippines.

For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50 were paid by the plaintiff to the Islands
Gas and Electric Company in the capacity of stockholders upon which withholding income taxes were paid to the
defendant totalling P40,460.03 For the same years interest on bonds in the sum of P411,600 was paid by the plaintiff
to the Islands Gas and Electric Company upon which withholding income taxes were paid to the defendant totalling
P12,348. Finally for the stated time period, interest on other indebtedness in the sum of P131,644,90 was paid by the
plaintiff to the Islands Gas and Electric Company and the General Finance Company respectively upon which
withholding income taxes were paid to the defendant totalling P3,949.34.

Some uncertainty existing regarding the place of payment, we will not go into this factor of the case at this point,
except to remark that the bonds and other tokens of indebtedness are not to be found in the record. However, Exhibits
E, F, and G, certified correct by the Treasurer of the Manila Gas Corporation, purport to prove that the place of
payment was the United States and Switzerland.

The appeal naturally divides into two subjects, one covered by the first assigned error, and the other by the second
assigned error. We shall discuss these subjects and errors in order.

1. Appellant first contends that the dividends paid by it to its stockholders, the Islands Gas and Electric
Company , were not subject to tax because to impose a tax thereon would be to do so on the plaintiff
corporation, in violation of the terms of its franchise and would, moreover, be oppressive and inequitable. This
argument is predicated on the constitutional provision that no law impairing the obligation of contracts shall be
enacted. The particular portion of the franchise which is invoked provides:

The grantee shall annually on the fifth day of January of each year pay to the City of Manila and the
municipalities in the Province of Rizal in which gas is sold, two and one half per centum of the gross
receipts within said city and municipalities, respectively, during the preceding year. Said payment shall
be in lieu of all taxes, Insular, provincial and municipal, except taxes on the real estate, buildings,
plant, machinery, and other personal property belonging to the grantee.

The trial judge was of the opinion that the instant case was governed by our previous decision in the case
of Philippine Telephone and Telegraph Co., vs. Collector of Internal Revenue ([1933], 58 Phil. 639). In this
view we concur. It is true that the tax exemption provision relating to the Manila Gas Corporation hereinbefore
quoted differs in phraseology from the tax exemption provision to be found in the franchise of the Telephone
and Telegraph Company, but the ratio decidendi of the two cases is substantially the same. As there held and
as now confirmed, a corporation has a personality distinct from that of its stockholders, enabling the taxing
power to reach the latter when they receive dividends from the corporation. It must be considered as settled
in this jurisdiction that dividends of a domestic corporation, which are paid and delivered in cash to foreign
corporations as stockholders, are subject to the payment in the income tax, the exemption clause in the charter
of the corporation notwithstanding.

For the foreign reasons, we are led to sustain the decision of the trial court and to overrule appellant's first
assigned error.

2. In support of its second assignment of error, appellant contends that, as the Islands Gas and Electric
Company and the General Finance Company are domiciled in the United States and Switzerland respectively,
and as the interest on the bonds and other indebtedness earned by said corporations has been paid in their
respective domiciles, this is not income from Philippine sources within the meaning of the Philippine Income
Tax Law. Citing sections 10 (a) and 13 (e) of Act No. 2833, the Income Tax Law, appellant asserts that their
 applicability has been squarely determined by decisions of this court in the cases of Manila Railroad Co. vs.
Collector of Internal Revenue (No. 31196, promulgated December 2, 1929, nor reported), and Philippine
Railway Co. vs. Posadas (No. 38766, promulgated October 30, 1933 [58 Phil., 968]) wherein it was held that
interest paid to non-resident individuals or corporations is not income from Philippine sources, and hence not
subject to the Philippine Income Tax. The Solicitor-General answers with the observation that the cited
decisions interpreted the Income Tax Law before it was amended by Act No. 3761 to cover the interest on
bonds and other obligations or securities paid "within or without the Philippine Islands." Appellant rebuts this
argument by "assuming, for the sake of the argument, that by the amendment introduced to section 13 of Act
No. 2833 by Act No. 3761 the Legislature intended the interest from Philippine sources and so is subject to
tax," but with the necessary sequel that the amendatory statute is invalid and unconstitutional as being the
power of the Legislature to enact.

Taking first under observation that last point, it is to be observed that neither in the pleadings, the decision of the trial
court, nor the assignment of errors, was the question of the validity of Act No. 3761 raised. Under such circumstances,
and no jurisdictional issue being involved, we do not feel that it is the duty of the court to pass on the constitutional
question, and accordingly will refrain from doing so. (Cadwaller-Gibson Lumber Co. vs. Del Rosario [1913], 26 Phil.,
192; Macondray and Co. vs. Benito and Ocampo, P. 137, ante; State vs. Burke [1912], 175 Ala., 561.)

As to the applicability of the local cases cited and of the Porto Rican case of Domenech vs. United Porto Rican Sugar
co. ([1932], 62 F. [2d], 552), we need only observe that these cases announced good law, but that each he must be
decided on its particular facts. In other words, in the opinion of the majority of the court, the facts at bar and the facts
in those cases can be clearly differentiated. Also, in the case at bar there is some uncertainty concerning the place of
payment, which under one view could be considered the Philippines and under another view the United States and
Switzerland, but which cannot be definitely determined without the necessary documentary evidence before, us.

The approved doctrine is that no state may tax anything not within its jurisdiction without violating the due process
clause of the constitution. The taxing power of a state does not extend beyond its territorial limits, but within such it
may tax persons, property, income, or business. If an interest in property is taxed, the situs of either the property or
interest must be found within the state. If an income is taxed, the recipient thereof must have a domicile within the
state or the property or business out of which the income issues must be situated within the state so that the income
may be said to have a situs therein. Personal property may be separated from its owner, and he may be taxed on its
account at the place where the property is although it is not the place of his own domicile and even though he is not
a citizen or resident of the state which imposes the tax. But debts owing by corporations are obligations of the debtors,
and only possess value in the hands of the creditors. (Farmers Loan Co. vs. Minnesota [1930], 280 U.S., 204; Union
Refrigerator Transit Co. vs. Kentucky [1905], 199 U.S., 194 State Tax on Foreign held Bonds [1873, 15 Wall., 300;
Bick vs. Beach [1907], 206 U. S., 392; State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161 Wis., 111;
United States Revenue Act of 1932, sec. 143.)

These views concerning situs for taxation purposes apply as well to an organized, unincorporated territory or to a
Commonwealth having the status of the Philippines.

Pushing to one side that portion of Act No. 3761 which permits taxation of interest on bonds and other indebtedness
paid without the Philippine Islands, the question is if the income was derived from sources within the Philippine Islands.

In the judgment of the majority of the court, the question should be answered in the affirmative. The Manila Gas
Corporation operates its business entirely within the Philippines. Its earnings, therefore come from local sources. The
place of material delivery of the interest to the foreign corporations paid out of the revenue of the domestic corporation
is of no particular moment. The place of payment even if conceded to be outside of tho country cannot alter the fact
that the income was derived from the Philippines. The word "source" conveys only one idea, that of origin, and the
origin of the income was the Philippines.

In synthesis, therefore, we hold that conditions have not been provided which justify the court in passing on the
constitutional question suggested; that the facts while somewhat obscure differ from the facts to be found in the cases
relied upon, and that the Collector of Internal Revenue was justified in withholding income taxes on interest on bonds
and other indebtedness paid to non-resident corporations because this income was received from sources within the
Philippine Islands as authorized by the Income Tax Law. For the foregoing reasons, the second assigned error will be
overruled.
Before concluding, it is but fair to state that the writer's opinion on the first subject and the first assigned error herein
discussed is accurately set forth, but that his opinion on the second subject and the second assigned error is not
accurately reflected, because on this last division his views coincide with those of the appellant. However, in the
interest of the prompt disposition of this case, the decision has been written up in accordance with instructions received
from the court.

Judgment affirmed, with the cost of this instance assessed against the appellant.

2. Stockholders of F. Guanzon & Sons vs. Register of Deeds of Manila

G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs. REGISTER OF DEEDS OF MANILA, respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation
of the assets of the corporation reciting, among other things, that by virtue of a resolution of the stockholders adopted
on September 17, 1960, dissolving the corporation, they have distributed among themselves in proportion to their
shareholdings, as liquidating dividends, the assets of said corporation, including real properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration on seven
grounds, of which the following were disputed by the stockholders:

3. The number of parcels not certified to in the acknowledgment;

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to the document;

7. The judgment of the Court approving the dissolution and directing the disposition of the assets of the
corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled ground No. 7
and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal.

As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three grounds on
which the denial of the registration of the certificate of liquidation was predicated hinges on whether or not that
certificate merely involves a distribution of the corporation's assets or should be considered a transfer or conveyance.

Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a distribution of the
assets of the corporation which has ceased to exist for having been dissolved. This is apparent in the minutes for
dissolution attached to the document. Not being a conveyance the certificate need not contain a statement of the
number of parcel of land involved in the distribution in the acknowledgment appearing therein. Hence the amount of
documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the register of deeds.
Neither is it correct to require appellants to pay the amount of P430.50 as registration fee.

The Commissioner of Land Registration, however, entertained a different opinion. He concurred in the view expressed
by the register of deed to the effect that the certificate of liquidation in question, though it involves a distribution of the
corporation's assets, in the last analysis represents a transfer of said assets from the corporation to the stockholders.
Hence, in substance it is a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal property they do not represent property of the corporation.
The corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So.
75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when distributed according to law and equity (Hall & Faley
v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the capital of the
corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its
property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-
owner or tenant in common of the corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992).

On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders of the F.
Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of community property, but
rather a transfer or conveyance of the title of its assets to the individual stockholders. Indeed, since the purpose of
the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation
to the stockholders in proportion to their shareholdings, — and this is in effect the purpose which they seek to obtain
from the Register of Deeds of Manila, — that transfer cannot be effected without the corresponding deed of
conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of
liquidation as one in the nature of a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.

3. Magsaysay Labrador vs. CA

G.R. No. 58168 December 19, 1989

CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-CORPUZ,

assisted be her husband, Dr. Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAY-
DIAZ, petitioners,
vs. THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special Administratrix of the Estate of
the late Genaro F. Magsaysay respondents.

FERNAN, C.J.:

In this petition for review on certiorari, petitioners seek to reverse and set aside [1] the decision of the Court of Appeals
dated July l3, 1981, 1 affirming that of the Court of First Instance of Zambales and Olongapo City which denied
petitioners' motion to intervene in an annulment suit filed by herein private respondent, and [2] its resolution dated
September 7, 1981, denying their motion for reconsideration.

Petitioners are raising a purely legal question; whether or not respondent Court of Appeals correctly denied their
motion for intervention.

The facts are not controverted.

On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the late
Senator Genaro Magsaysay, brought before the then Court of First Instance of Olongapo an action against Artemio
Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of
Deeds of Zambales. In her complaint, she alleged that in 1958, she and her husband acquired, thru conjugal funds, a
parcel of land with improvements, known as "Pequena Island", covered by TCT No. 3258; that after the death of her
husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her husband
from his separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly executed by
the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in
the name of SUBIC; and [c] the registration of Deed of Mortgage dated April 28, 1977 in the amount of P 2,700,000.00
executed by SUBIC in favor of FILMANBANK; that the foregoing acts were void and done in an attempt to defraud
the conjugal partnership considering that the land is conjugal, her marital consent to the annotation on TCT No. 3258
was not obtained, the change made by the Register of Deeds of the titleholders was effected without the approval of
the Commissioner of Land Registration and that the late Senator did not execute the purported Deed of Assignment
or his consent thereto, if obtained, was secured by mistake, violence and intimidation. She further alleged that the
assignment in favor of SUBIC was without consideration and consequently null and void. She prayed that the Deed
of Assignment and the Deed of Mortgage be annulled and that the Register of Deeds be ordered to cancel TCT No.
22431 and to issue a new title in her favor.

On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the ground that on
June 20, 1978, their brother conveyed to them one-half (1/2 ) of his shareholdings in SUBIC or a total of 416,566.6
shares and as assignees of around 41 % of the total outstanding shares of such stocks of SUBIC, they have a
substantial and legal interest in the subject matter of litigation and that they have a legal interest in the success of the
suit with respect to SUBIC.

On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no legal interest
whatsoever in the matter in litigation and their being alleged assignees or transferees of certain shares in SUBIC
cannot legally entitle them to intervene because SUBIC has a personality separate and distinct from its stockholders.

On appeal, respondent Court of Appeals found no factual or legal justification to disturb the findings of the lower court.
The appellate court further stated that whatever claims the petitioners have against the late Senator or against SUBIC
for that matter can be ventilated in a separate proceeding, such that with the denial of the motion for intervention, they
are not left without any remedy or judicial relief under existing law.

Petitioners' motion for reconsideration was denied. Hence, the instant recourse.

Petitioners anchor their right to intervene on the purported assignment made by the late Senator of a certain portion
of his shareholdings to them as evidenced by a Deed of Sale dated June 20, 1978. 2 Such transfer, petitioners posit,
clothes them with an interest, protected by law, in the matter of litigation.

Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil. 857,862 & 853 (1927), 3petitioners
strongly argue that their ownership of 41.66% of the entire outstanding capital stock of SUBIC entitles them to a
significant vote in the corporate affairs; that they are affected by the action of the widow of their late brother for it
concerns the only tangible asset of the corporation and that it appears that they are more vitally interested in the
outcome of the case than SUBIC.

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent court's
holding that petitioners herein have no legal interest in the subject matter in litigation so as to entitle them to intervene
in the proceedings below. In the case of Batama Farmers' Cooperative Marketing Association, Inc. v. Rosal, 4 we held:
"As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the
party must have a legal interest in the matter in litigation, or in the success of either of the parties or an interest against
both, or he must be so situated as to be adversely affected by a distribution or other disposition of the property in the
custody of the court or an officer thereof ."

To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or otherwise
qualified; and [b] consideration must be given as to whether the adjudication of the rights of the original parties may
be delayed or prejudiced, or whether the intervenor's rights may be protected in a separate proceeding or not. Both
requirements must concur as the first is not more important than the second. 5

The interest which entitles a person to intervene in a suit between other parties must be in the matter in litigation and
of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and
effect of the judgment. Otherwise, if persons not parties of the action could be allowed to intervene, proceedings will
become unnecessarily complicated, expensive and interminable. And this is not the policy of the law. 6

The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put
the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff
could not recover. 7

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential
and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management
of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after
payment of the corporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest
the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable
or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person. 8

Petitioners further contend that the availability of other remedies, as declared by the Court of appeals, is totally
immaterial to the availability of the remedy of intervention.

We cannot give credit to such averment. As earlier stated, that the movant's interest may be protected in a separate
proceeding is a factor to be considered in allowing or disallowing a motion for intervention. It is significant to note at
this juncture that as per records, there are four pending cases involving the parties herein, enumerated as follows: [1]
Special Proceedings No. 122122 before the CFI of Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador,
et al. v. Subic Land Corp., et al.", involving the validity of the transfer by the late Genaro Magsaysay of one-half of his
shareholdings in Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of Zambales, Branch III, "Adelaida
Rodriguez-Magsaysay v. Panganiban, etc.; Concepcion Labrador, et al. Intervenors", seeking to annul the purported
Deed of Assignment in favor of SUBIC and its annotation at the back of TCT No. 3258 in the name of respondent's
deceased husband; [3] SEC Case No. 001770, filed by respondent praying, among other things that she be declared
in her capacity as the surviving spouse and administratrix of the estate of Genaro Magsaysay as the sole subscriber
and stockholder of SUBIC. There, petitioners, by motion, sought to intervene. Their motion to reconsider the denial of
their motion to intervene was granted; [4] SP No. Q-26739 before the CFI of Rizal, Branch IV, petitioners herein filing
a contingent claim pursuant to Section 5, Rule 86, Revised Rules of Court. 9 Petitioners' interests are no doubt amply
protected in these cases.

Neither do we lend credence to petitioners' argument that they are more interested in the outcome of the case than
the corporation-assignee, owing to the fact that the latter is willing to compromise with widow-respondent and since a
compromise involves the giving of reciprocal concessions, the only conceivable concession the corporation may give
is a total or partial relinquishment of the corporate assets. 10

Such claim all the more bolsters the contingent nature of petitioners' interest in the subject of litigation.

The factual findings of the trial court are clear on this point. The petitioners cannot claim the right to intervene on the
strength of the transfer of shares allegedly executed by the late Senator. The corporation did not keep books and
records. 11 Perforce, no transfer was ever recorded, much less effected as to prejudice third parties. The transfer must
be registered in the books of the corporation to affect third persons. The law on corporations is explicit. Section 63 of
the Corporation Code provides, thus: "No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of
the transfer, the number of the certificate or certificates and the number of shares transferred."

And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred from intervening
inasmuch as their rights can be ventilated and amply protected in another proceeding.

WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners. SO ORDERED.

4. Jardine Davies Inc vs. JRB Realty Inc.

G.R. No. 151438 July 15, 2005

JARDINE DAVIES, INC., Petitioners, vs. JRB REALTY, INC., Respondent.

CALLEJO, SR., J.:

Before us is a petition for review of the Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 54201 affirming in
toto that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific performance; and the Resolution dated
January 11, 2002 denying the motion for reconsideration thereof.
The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its parcel of land
located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was needed for the Blanco Law
Firm housed at the second floor of the building. On March 13, 1980, the respondent’s Executive Vice-President, Jose
R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration Industries, Inc.
(Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment with a net
total selling price of ₱99,586.00.2 Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each
to deliver 30,000 kcal or 120,000 BTUH3 were installed by Aircon. When the units with rotary compressors were
installed, they could not deliver the desired cooling temperature. Despite several adjustments and corrective
measures, the respondent conceded that Fedders Air Conditioning USA’s technology for rotary compressors for big
capacity conditioners like those installed at the Blanco Center had not yet been perfected. The parties thereby agreed
to replace the units with reciprocating/semi-hermetic compressors instead. In a Letter dated March 26, 1981,4 Aircon
stated that it would be replacing the units currently installed with new ones using rotary compressors, at the earliest
possible time. Regrettably, however, it could not specify a date when delivery could be effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the units, inclusive of
parts and services. In October 1987, the respondent learned, through newspaper ads,5 that Maxim Industrial and
Merchandising Corporation (Maxim, for short) was the new and exclusive licensee of Fedders Air Conditioning USA
in the Philippines for the manufacture, distribution, sale, installation and maintenance of Fedders air conditioners. The
respondent requested that Maxim honor the obligation of Aircon, but the latter refused. Considering that the ten-year
period of prescription was fast approaching, to expire on March 13, 1990, the respondent then instituted, on January
29, 1990, an action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders
Air Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc. 6 The
latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The respondent prayed
that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and expense deliver, install and place in operation
two
brand new units of each 10-tons capacity Fedders unitary packaged air conditioners with Fedders USA’s technology
perfected rotary compressors to always deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center
building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;

2. Ordering defendants to jointly and severally reimburse plaintiff not only the sums of ₱415,118.95 for unsaved
electricity from 21st October 1981 to 7th January 1990 and ₱99,287.77 for repair costs of the two service units from
7th March 1987 to 11th January 1990, with legal interest thereon from the filing of this Complaint until fully reimbursed,
but also like unsaved electricity costs and like repair costs therefrom until Prayer No. 1 above shall have been complied
with;

3. Ordering defendants to jointly and severally pay plaintiff’s ₱150,000.00 attorney’s fees and other costs of litigation,
as well as exemplary damages in an amount not less than or equal to Prayer 2 above; and

4. Granting plaintiff such other and further relief as shall be just and equitable in the premises.7

Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction over Aircon because
the latter ceased operations, as its corporate life ended on December 31, 1986.8 Upon motion, defendants Fedders
Air Conditioning USA and Maxim were declared in default.9

On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc., Fedders Air Conditioning USA,
Inc. and Maxim Industrial and Merchandising Corporation, jointly and severally:

1. To deliver, install and place into operation the two (2) brand new units of Fedders unitary packaged airconditioning
units each of 10 tons capacity with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to the second floor of
the Blanco Center building, or to pay plaintiff the current price for two such units;
2. To reimburse plaintiff the amount of ₱556,551.55 as and for the unsaved electricity bills from October 21, 1981 up
to April 30, 1995; and another amount of ₱185,951.67 as and for repair costs;

3. To pay plaintiff ₱50,000.00 as and for attorney’s fees; and

4. Cost of suit.10

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it liable because it was
not a party to the contract between JRB Realty, Inc. and Aircon, and that it had a personality separate and distinct
from that of Aircon.

On March 23, 2000, the CA affirmed the trial court’s ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:

I.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED CONTRACTUAL BREACH
OF AIRCON SOLELY BECAUSE THE LATTER WAS FORMERLY JARDINE’S SUBSIDIARY.

II.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE’S MERE ALTER EGO, THE COURT
OF APPEALS ERRED IN NOT DECLARING AIRCON’S OBLIGATION TO DELIVER THE TWO (2)
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH.

III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE’S MERE ALTER EGO, THE COURT
OF APPEALS ERRED IN NOT DECLARING JRB’S CAUSES OF ACTION AS HAVING BEEN BARRED BY LACHES.

IV.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINE’S MERE ALTER EGO, THE COURT
OF APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY
EXPENSES.

V.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEY’S FEES.

VI.

THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES. 11

It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are accorded high respect, even
finality at times. However, considering that the factual findings of the CA and the RTC were based on speculation and
conjectures, unsupported by substantial evidence, the Court finds that the instant case falls under one of the excepted
instances. There is, thus, a need to correct the error.

The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:

Plaintiff’s documentary evidence shows that at the time it contracted with Aircon on March 13, 1980 (Exhibit "D") and
on the date the revised agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase
"A subsidiary of Jardine Davies, Inc." was printed on Aircon’s letterhead of its March 13, 1980 contract with plaintiff
(Exhibit "D-1"), as well as the Aircon’s letterhead of Jardine’s Director and Senior Vice-President A.G. Morrison and
Aircon’s President in his March 26, 1981 letter to plaintiff (Exhibit "J-2") confirming the revised agreement. Aircon’s
newspaper ads of April 12 and 26, 1981 and a press release on August 30, 1982 (Exhibits "E," "F" and "L") also show
that defendant Jardine publicly represented Aircon to be its subsidiary.

Records from the Securities and Exchange Commission (SEC) also reveal that as per Jardine’s December 31, 1986
and 1985 Financial Statements that "The company acts as general manager of its subsidiaries" (Exhibit "P"). Jardine’s
Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning
94.35% of Aircon (Exhibit "P-1"). Also, Aircon’s reportorial General Information Sheet as of April 1980 and April 1981
filed with the SEC show that Jardine was 94.34% owner of Aircon (Exhibits "Q" and "R") and that out of seven
members of the Board of Directors of Aircon, four (4) are also of Jardine.

Defendant Jardine’s witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed Aircon &
Refrigeration Industries, Inc. "is one of the subsidiaries of Jardine Davies" (TSN, September 22, 1995, p. 12). She
also testified that Jardine nominated, elected, and appointed the controlling majority of the Board of Directors and the
highest officers of Aircon (Ibid, pp. 10,13-14).

The foregoing circumstances provide justifiable basis for this Court to disregard the fiction of corporate entity and treat
defendant Aircon as part of the instrumentality of co-defendant Jardine.12

The respondent court arrived at the same conclusion basing its ruling on the following documents, to wit:

(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);
(b) Newspaper Advertisements (Exhs. E-1 and F-1);
(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R. Blanco (Exh. J);
(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);
(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon as one of its subsidiaries (Exh. P);
(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);
(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1).13

Applying the doctrine of piercing the veil of corporate fiction, both the respondent and trial courts conveniently held
the petitioner liable for the alleged omissions of Aircon, considering that the latter was its instrumentality or corporate
alter ego. The petitioner is now before us, reiterating its defense of separateness, and the fact that it is not a party to
the contract.

We find merit in the petition.

It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested by law
with a personality separate and distinct from its stockholders and from other corporations to which it may be
connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association
of persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for
fraud or illegality.14 This is the doctrine of piercing the veil of corporate
fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime.15 The rationale behind piercing a corporation’s identity is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate
personality as a shield for undertaking certain proscribed activities.16

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon’s corporate legal
existence can just be disregarded. In Velarde v. Lopez, Inc.,17 the Court categorically held that a subsidiary has an
independent and separate juridical personality, distinct from that of its parent company; hence, any claim or suit
against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites must be
established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the
defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest
acts in contravention of plaintiff’s legal rights; and (3) the aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.18

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon’s majority of
capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be gathered that the
petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between the petitioner
and Aircon, and the latter is an entirely different entity from the petitioner.19

Jardine Davies, Inc., incorporated as early as June 28, 1946,20 is primarily a financial and trading company. Its Articles
of Incorporation states among many others that the purposes for which the said corporation was formed, are as
follows:

(a) To carry on the business of merchants, commission merchants, brokers, factors, manufacturers, and agents;

(b) Upon complying with the requirements of law applicable thereto, to act as agents of companies and underwriters
doing and engaging in any and all kinds of insurance business.21

On the other hand, Aircon, incorporated on December 27, 1952,22 is a manufacturing firm. Its Articles of Incorporation
states that its purpose is mainly -

To carry on the business of manufacturers of commercial and household appliances and accessories of any form,
particularly to manufacture, purchase, sell or deal in air conditioning and refrigeration products of every class and
description as well as accessories and parts thereof, or other kindred articles; and to erect, or buy, lease, manage, or
otherwise acquire manufactories, warehouses, and depots for manufacturing, assemblage, repair and storing, buying,
selling, and dealing in the aforesaid appliances, accessories and products. …23

The existence of interlocking directors, corporate officers and shareholders, which the respondent court considered,
is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy
considerations.24 But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil
of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime.25 To warrant resort to this extraordinary remedy, there must be proof that the corporation is being used
as a cloak or cover for fraud or illegality, or to work injustice.26 Any piercing of the corporate veil has to be done with
caution.27 The wrongdoing must be clearly and convincingly established. It cannot just be presumed.28

In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its creditors
or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a
manufacturing firm of air
conditioners, complied with its obligation of providing two air conditioning units for the second floor of the Blanco
Center in good faith, pursuant to its contract with the respondent. Unfortunately, the performance of the air conditioning
units did not satisfy the respondent despite several adjustments and corrective measures. In a Letter29dated October
22, 1980, the respondent even conceded that Fedders Air Conditioning USA has not yet perhaps perfected its
technology of rotary compressors, and agreed to change the compressors with the semi-hermetic type. Thus, Aircon
substituted the units with serviceable ones which delivered the cooling temperature needed for the law office. After
enjoying ten (10) years of its cooling power, respondent cannot now complain about the performance of these units,
nor can it demand a replacement thereof.

Moreover, it was reversible error to award the respondent the amount of ₱556,551.55 representing the alleged 30%
unsaved electricity costs and ₱185,951.67 as maintenance cost without showing any basis for such award. To justify
a grant of actual or compensatory damages, it is necessary to prove with a reasonable degree of certainty, premised
upon competent proof and on the best evidence obtainable by the injured party, the actual amount of loss. 30 The
respondent merely based its cause of action on Aircon’s alleged representation that Fedders air conditioners with
rotary compressors can save as much as 30% on electricity compared to other brands. Offered in evidence were
newspaper advertisements published on April 12 and 26, 1981. The respondent then recorded its electricity
consumption from October 21, 1981 up to April 3, 1995 and computed 30% thereof, which amounted to ₱556,551.55.
The Court rules that this amount is highly speculative and merely hypothetical, and for which the petitioner can not be
held accountable.

First. The respondent merely relied on the newspaper advertisements showing the Fedders window-type air
conditioners, which are far different from the big capacity air conditioning units installed at Blanco Center.

Second. After such print advertisements, the respondent informed Aircon that it was going to install an electric meter
to register its electric consumption so as to determine the electric costs not saved by the presently installed units with
semi-hermetic compressors. Contrary to the allegations of the respondent that this was in pursuance to their Revised
Agreement, no proof was adduced that Aircon agreed to the respondent’s proposition. It was a unilateral act on the
part of the respondent, which Aircon did not oblige or commit itself to pay.

Third. Needless to state, the amounts computed are mere estimates representing the respondent’s self-serving claim
of unsaved electricity cost, which is too speculative and conjectural to merit consideration. No other proofs, reports or
bases of comparison showing that Fedders Air Conditioning USA could indeed cut down electricity cost by 30% were
adduced.

Likewise, there is no basis for the award of ₱185,951.67 representing maintenance cost. The respondent merely
submitted a schedule31 prepared by the respondent’s accountant, listing the alleged repair costs from March 1987 up
to June 1994. Such evidence is self-serving and can not also be given probative weight, considering that there are no
proofs of receipts, vouchers, etc., which would substantiate the amounts paid for such services. Absent any more
convincing proof, the Court finds that the respondent’s claims are without basis, and cannot, therefore, be awarded.

We sustain the petitioner’s separateness from that of Aircon in this case. It bears stressing that the petitioner was
never a party to the contract. Privity of contracts take effect only between parties, their successors-in-interest, heirs
and assigns.32 The petitioner, which has a
separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court of Appeals, affirming
the decision of the Regional Trial Court is REVERSED and SET ASIDE. The complaint of the respondent
is DISMISSED. Costs against the respondent. SO ORDERED.

5. San Juan Structural & Steel Fabricators Inc. vs. CA

G.R. No. 129459 September 29, 1998

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,

vs. COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.

PANGANIBAN, J.:

May corporate treasurer, by herself and without any authorization from he board of directors, validly sell a parcel of
land owned by the corporation?. May the veil of corporate fiction be pierced on the mere ground that almost all of the
shares of stock of the corporation are owned by said treasurer and her husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for Review on Certiorari before
us, assailing the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR CV No. 46801 which, in turn, modified
the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro Manila, Branch 633 in Civil Case No. 89-3511.
The RTC dismissed both the Complaint and the Counterclaim filed by the parties. On the other hand, the Court of
Appeals ruled:

WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION

ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the
downpayment of P100,000.00 which she received from plaintiff-appellant. There is no pronouncement
as to costs. 4

The petition also challenges the June 10, 1997 CA Resolution denying reconsideration. 5

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint alleged that
on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee Motorich
Sales Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the Acropolis
Greens Subdivision located in the District of Murphy, Quezon City. Metro Manila, containing an area
of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876: that as stipulated
in the Agreement of 14 February 1989, plaintiff-appellant paid the downpayment in the sum of One
Hundred Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on
March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to
defendant-appellee Motorich Sales Corporation requesting for a computation of the balance to be paid:
that said letter was coursed through defendant-appellee's broker. Linda Aduca, who wrote the
computation of the balance: that on March 2, 1989, plaintiff-appellant was ready with the amount
corresponding to the balance, covered by Metrobank Cashier's Check No. 004223, payable to
defendant-appellee Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee
Motorich Sales Corporation were supposed to meet in the office of plaintiff-appellant but defendant-
appellee's treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales
Corporation despite repeated demands and in utter disregard of its commitments had refused to
execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of
title; that defendant ACL Development Corp. is impleaded as a necessary party since Transfer
Certificate of Title No. (362909) 2876 is still in the name of said defendant; while defendant JNM Realty
& Development Corp. is likewise impleaded as a necessary party in view of the fact that it is the
transferor of right in favor of defendant-appellee Motorich Sales Corporation: that on April 6, 1989,
defendant ACL Development Corporation and Motorich Sales Corporation entered into a Deed of
Absolute Sale whereby the former transferred to the latter the subject property; that by reason of said
transfer, the Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales
Corporation, represented by defendant-appellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg,
under Transfer Certificate of Title No. 3571; that as a result of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a formal Transfer of
Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal damages which may be
assessed against defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos;
that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's
unjustified and unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or
formal deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed exemplary
damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-
appellees' bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiff-
appellant, the latter lost the opportunity to construct a residential building in the sum of One Hundred
Thousand (P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a deed of sale in favor of
plaintiff-appellant, it has been constrained to obtain the services of counsel at an agreed fee of One
Hundred Thousand (P100,000.00) Pesos plus appearance fee for every appearance in court hearings.

In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed
as affirmative defense that the President and Chairman of Motorich did not sign the agreement
adverted to in par. 3 of the amended complaint; that Mrs. Gruenberg's signature on the agreement
(ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other signature, that of Mr.
Reynaldo Gruenberg, President and Chairman of Motorich, is required: that plaintiff knew this from the
very beginning as it was presented a copy of the Transfer of Rights (Annex B of amended complaint)
at the time the Agreement (Annex B of amended complaint) was signed; that plaintiff-appellant itself
drafted the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money;
that granting, without admitting, the enforceability of the agreement, plaintiff-appellant nonetheless
failed to pay in legal tender within the stipulated period (up to March 2, 1989); that it was the
understanding between Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of
Assignment will be signed only upon receipt of cash payment; thus they agreed that if the payment be
in check, they will meet at a bank designated by plaintiff-appellant where they will encash the check
and sign the Transfer of Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the
alleged availability of the check, by phone, only after banking hours.

On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing
plaintiff-appellant's complaint, ruling that:
 The issue to be resolved is: whether plaintiff had the right to compel defendants to
execute a deed of absolute sale in accordance with the agreement of February 14,
1989: and if so, whether plaintiff is entitled to damage.

As to the first question, there is no evidence to show that defendant Nenita Lee
Gruenberg was indeed authorized by defendant corporation. Motorich Sales, to
dispose of that property covered by T.C.T. No. (362909) 2876. Since the property is
clearly owned by the corporation. Motorich Sales, then its disposition should be
governed by the requirement laid down in Sec. 40. of the Corporation Code of the
Philippines, to wit:

Sec. 40, Sale or other disposition of assets. Subject to the provisions

of existing laws on illegal combination and monopolies, a corporation
may by a majority vote of its board of directors . . . sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets including its goodwill . . . when authorized
by the vote of the stockholders representing at least two third (2/3) of
the outstanding capital stock . . .

No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed
sale[;] neither was there evidence to show that the supposed transaction was ratified
by the corporation. Plaintiff should have been on the look out under these
circumstances. More so, plaintiff himself [owns] several corporations (tsn dated August
16, 1993, p. 3) which makes him knowledgeable on corporation matters.

Regarding the question of damages, the Court likewise, does not find substantial
evidence to hold defendant Nenita Lee Gruenberg liable considering that she did not
in anyway misrepresent herself to be authorized by the corporation to sell the property
to plaintiff (tsn dated September 27, 1991, p. 8).

In the light of the foregoing, the Court hereby renders judgment DISMISSING the
complaint at instance for lack of merit.

"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-

8; Rollo, pp. 34-35)

For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly organized and existing under

and by virtue of Philippine Laws, with principal office address at 5510 South Super Hi-
way cor. Balderama St., Pio del Pilar. Makati, Metro Manila, represented herein by its
Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the TRANSFEROR;

— and —

SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized

and existing under and by virtue of the laws of the Philippines, with principal office
address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented
herein by its President, ANDRES T. CO, hereinafter referred to as the TRANSFEREE.

WITNESSETH, That:
 WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the
ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila,
containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a
TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales
Corp. as the Transferee;

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as
follows:

1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS
(P5,200.00) per square meter; subject to the following terms:

a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS

(P100,000.00), will be paid upon the execution of this agreement and
shall form part of the total purchase price;

b. Balance shall be payable on or before March 2, 1989;

2. That the monthly amortization for the month of February 1989 shall be for the
account of the Transferor; and that the monthly amortization starting March 21, 1989
shall be for the account of the Transferee;

The transferor warrants that he [sic] is the lawful owner of the above-described property and that there
[are] no existing liens and/or encumbrances of whatsoever nature;

In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the earnest
money shall be forfeited in favor of the Transferor.

That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.

IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989
at Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS

TRANSFEROR TRANSFEREE

[SGD.] [SGD.]

By. NENITA LEE GRUENBERG By: ANDRES T. CO

Treasurer President

Signed In the presence of:

[SGD.] [SGD.]

————————————— ———————————6

In its recourse before the Court of Appeals, petitioner insisted:

1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in

accordance with the Agreement of February 14, 1989,

2. Plaintiff is entitled to damages. 7

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of the RTC with
the modification that Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the amount
remitted as "downpayment" or "earnest money." Hence, this petition before us.8

The Issues

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in
the instant case

II. Whether or not the appellate court may consider matters which the parties failed to
raise in the lower court

III. Whether or not there is a valid and enforceable contract between the petitioner and
the respondent corporation

IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s].

V. Whether or not respondents are liable for damages and attorney's fees 9

The Court synthesized the foregoing and will thus discuss them seriatim as follows:

1. Was there a valid contract of sale between petitioner and Motorich?

2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?

3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of

stenographic notes material to the disposition of this case?

4. Are respondents liable for damages and attorney's fees?

The Court's Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its
president, Andres Co, into the disputed Agreement with Respondent Motorich Sales Corporation, which was in turn
allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co affixed
their signatures on the contract they both consented to be bound by the terms thereof." Ergo, petitioner contends that
the contract is binding on the two corporations. We do not agree.

True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by Motorich
Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized
or ratified such sale.

A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property
of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or
members without express authorization from the corporation's board of directors. 10 Section 23 of BP 68, otherwise
known as the Corporation Code of the Philippines, provides;

Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
 property of such corporations controlled and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and qualified.

Indubitably, a corporation may act only through its board of directors or, when authorized either by its bylaws or by its
board resolution, through its officers or agents in the normal course of business. The general principles of agency
govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, bylaws,
or relevant provisions of law. 11 Thus, this Court has held that "a corporate officer or agent may represent and bind
the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon
him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course
of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added
by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that it has conferred." 12

Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent, whether the
assumed agency be a general or special one bound at their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden
of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer,
whose powers are limited, cannot bind the corporation in a sale of its assets. 14

In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer,
to sell the subject parcel of land. 15 Consequently, petitioner had the burden of proving that Nenita Gruenberg was in
fact authorized to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of
evidence before the trial court contained no proof of such authority. 16 It has not shown any provision of said
respondent's articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such
power.

That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of ascertaining the
extent of her authority to represent the corporation. Petitioner cannot assume that she, by virtue of her position, was
authorized to sell the property of the corporation. Selling is obviously foreign to a corporate treasurer's function, which
generally has been described as "to receive and keep the funds of the corporation, and to disburse them in accordance
with the authority given him by the board or the properly authorized officers." 17

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose of Motorich
is marketing, distribution, export and import in relation to a general merchandising business. 18Unmistakably, its
treasurer is not cloaked with actual or apparent authority to buy or sell real property, an activity which falls way beyond
the scope of her general authority.

Art. 1874 and 1878 of the Civil Code of the Philippines provides:

Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of
the latter shall be in writing: otherwise, the sale shall be void.

Art. 1878. Special powers of attorney are necessary in the following case:

xxx xxx xxx

(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration;

xxx xxx xxx.

Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its "acceptance of
benefits," as evidenced by the receipt issued by Respondent Gruenberg. 19 Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation. But
when these officers exceed their authority, their actions "cannot bind the corporation, unless it has ratified such acts
or is estopped from disclaiming them." 20

In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear to
any third person that she had the authority, to sell its land or to receive the earnest money. Neither was there any
proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its argument on the receipt which,
however, does not prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and it
bears only Nenita Gruenberg's signature. Certainly, this document alone does not prove that her acts were authorized
or ratified by Motorich.

Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the contracting parties;
(2) object certain which is the subject matter of the contract; (3) cause of the obligation which is established." As found
by the trial court 21 and affirmed by the Court of Appeals, 22 there is no evidence that Gruenberg was authorized to
enter into the contract of sale, or that the said contract was ratified by Motorich. This factual finding of the two courts
is binding on this Court. 23 As the consent of the seller was not obtained, no contract to bind the obligor was perfected.
Therefore, there can be no valid contract of sale between petitioner and Motorich.

Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we hold
that the February 14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the Civil
Code. Being inexistent and void from the beginning, said contract cannot be ratified. 24

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close
corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to
be accurate, of the subscribed capital stock" 25 of Motorich, petitioner argues that Gruenberg needed no authorization
from the board to enter into the subject contract. 26 It adds that, being solely owned by the Spouses Gruenberg, the
company can treated as a close corporation which can be bound by the acts of its principal stockholder who needs
no specific authority. The Court is not persuaded.

First, petitioner itself concedes having raised the issue belatedly, 27 not having done so during the trial, but only when
it filed its sur-rejoinder before the Court of Appeals. 28 Thus, this Court cannot entertain said issue at this late stage of
the proceedings. It is well-settled the points of law, theories and arguments not brought to the attention of the trial
court need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first
time on appeal. 29 Allowing petitioner to change horses in midstream, as it were, is to run roughshod over the basic
principles of fair play, justice and due process.

Second, even if the above mentioned argument were to be addressed at this time, the Court still finds no reason to
uphold it. True, one of the advantages of a corporate form of business organization is the limitation of an investor's
liability to the amount of the investment. 30 This feature flows from the legal theory that a corporate entity is separate
and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for
legitimate purposes. 31 On equitable considerations, the veil can be disregarded when it is utilized as a shield to
commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego
or business conduit of a person or an instrumentality, agency or adjunct of another corporation. 32

Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a fraud or an illegal
act or as vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection
of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals." 33

We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality
or inequity committed on third persons. The question of piercing the veil of corporate fiction is essentially, then, a
matter of proof. In the present case, however, the Court finds no reason to pierce the corporate veil of Respondent
Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose
of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was used to
conceal fraud, illegality or inequity at the expense of third persons like petitioner.

Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines
a close corporation as follows:

Sec. 96. Definition and Applicability of Title. — A close corporation, within the meaning of this Code,
is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. . . . .

The articles of incorporation 34 of Motorich Sales Corporation does not contain any provision stating that (1) the
number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or
of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited.
From its articles, it is clear that Respondent Motorich is not a close corporation. 35 Motorich does not become one
either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The
"[m]ere ownership by a single stockholder or by another corporation of all or capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personalities." 36 So, too, a narrow distribution of
ownership does not, by itself, make a close corporation.

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the Court ruled that ". . . petitioner
corporation is classified as a close corporation and, consequently, a board resolution authorizing the sale or mortgage
of the subject property is not necessary to bind the corporation for the action of its president." 38 But the factual milieu
in Dulay is not on all fours with the present case. In Dulay, the sale of real property was contracted by the president
of a close corporation with the knowledge and acquiescence of its board of directors. 39 In the present case, Motorich
is not a close corporation, as previously discussed, and the agreement was entered into by the corporate treasurer
without the knowledge of the board of directors.

The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the controlling
stockholder, may be considered as a binding corporate act and a board action as nothing more than a mere
formality." 40 The present case, however, is not one of them.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of Respondent
Motorich. 41Since Nenita is not the sole controlling stockholder of Motorich, the aforementioned exception does not
apply. Granting arguendo that the corporate veil of Motorich is to be disregarded, the subject parcel of land would
then be treated as conjugal property of Spouses Gruenberg, because the same was acquired during their marriage.
There being no indication that said spouses, who appear to have been married before the effectivity of the Family
Code, have agreed to a different property regime, their property relations would be governed by conjugal partnership
of gains. 42 As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here is
no co-ownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse
can alienate in favor of another his or interest in the partnership or in any property belonging to it; neither spouse can
ask for a partition of the properties before the partnership has been legally dissolved." 43

Assuming further, for the sake of argument, that the spouses' property regime is the absolute community of property,
the sale would still be invalid. Under this regime, "alienation of community property must have the written consent of
the other spouse or he authority of the court without which the disposition or encumbrance is void." 44 Both
requirements are manifestly absent in the instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN):
 Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell
the property?

A Yes, sir. 45

Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No" with an initial scribbled
above it. 46 This, however, is insufficient to prove that Nenita Gruenberg was authorized to represent Respondent
Motorich in the sale of its immovable property. Said excerpt be understood in the context of her whole testimony.
During her cross-examination. Respondent Gruenberg testified:

Q So, you signed in your capacity as the treasurer?

[A] Yes, sir.

Q Even then you kn[e]w all along that you [were] not authorized?

A Yes, sir.

Q You stated on direct examination that you did not represent that you were authorized
to sell the property?

A Yes, sir.

Q But you also did not say that you were not authorized to sell the property, you did
not tell that to Mr. Co, is that correct?

A That was not asked of me.

Q Yes, just answer it.

A I just told them that I was the treasurer of the corporation and it [was] also the
president who [was] also authorized to sign on behalf of the corporation.

Q You did not say that you were not authorized nor did you say that you were
authorized?

A Mr. Co was very interested to purchase the property and he offered to put up a
P100,000.00 earnest money at that time. That was our first meeting. 47

Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the other hand,
her testimony demonstrates that the president of Petitioner Corporation, in his great desire to buy the property, threw
caution to the wind by offering and paying the earnest money without first verifying Gruenberg's authority to sell the
lot.

Fourth Issue:
Damages and Attorney's Fees

Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice and bad faith,
respondents attempted and succeeded in impressing on the trial court and [the] Court of Appeals that Gruenberg did
not represent herself as authorized by Respondent Motorich despite the receipt issued by the former specifically
indicating that she was signing on behalf of Motorich Sales Corporation. Respondent Motorich likewise acted in bad
faith when it claimed it did not authorize Respondent Gruenberg and that the contract [was] not binding, [insofar] as it
[was] concerned, despite receipt and enjoyment of the proceeds of Gruenberg's act." 48 Assuming that Respondent
Motorich was not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable
because she "acted fraudulently and in bad faith [in] representing herself as duly authorized by [R]espondent
[C]orporation." 49
As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing allegations lack
factual bases. Hence, an award of damages or attorney's fees cannot be justified. The amount paid as "earnest
money" was not proven to have redounded to the benefit of Respondent Motorich. Petitioner claims that said amount
was deposited to the account of Respondent Motorich, because "it was deposited with the account of Aren Commercial
c/o Motorich Sales Corporation." 50 Respondent Gruenberg, however, disputes the allegations of petitioner. She
testified as follows:

Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed,
the check was encashed.

A Yes. sir, the check was paid in my name and I deposit[ed] it.

Q In your account?

A Yes, sir. 51

In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push through." 52

Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the president of
Petitioner Corporation for more than ten years and has also served as chief executive of two other corporate
entities. 53 Co cannot feign ignorance of the scope of the authority of a corporate treasurer such as Gruenberg. Neither
can he be oblivious to his duty to ascertain the scope of Gruenberg's authorization to enter into a contract to sell a
parcel of land belonging to Motorich.

Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court. Indubitably,
petitioner appears to be the victim of its own officer's negligence in entering into a contract with and paying an
unauthorized officer of another corporation.

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to petitioner the
amount she received as earnest money, as "no one shall enrich himself at the expense of another." 54 a principle
embodied in Article 2154 of Civil Code. 55 Although there was no binding relation between them, petitioner paid
Gruenberg on the mistaken belief that she had the authority to sell the property of Motorich. 56 Article 2155 of Civil
Code provides that "[p]ayment by reason of a mistake in the contruction or application of a difficult question of law
may come within the scope of the preceding article."

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. SO ORDERED.

6. Kukan International Corp vs. Reyes

G.R. No. 182729 September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,

vs. HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 21, and
ROMEO M. MORALES, doing business under the name and style "RM Morales Trophies and
Plaques,"Respondents.

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23, 2008 Decision1and
the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the Regional Trial Court (RTC)
of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo M. Morales, doing business under the name and
style RM Morales Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the separate corporate
identities of Kukan, Inc. and Kukan International Corporation and declared them to be one and the same entity.
Accordingly, the RTC held Kukan International Corporation, albeit not impleaded in the underlying complaint of Romeo
M. Morales, liable for the judgment award decreed in a Decision dated November 28, 2002 5 in favor of Morales and
against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages in a building
being constructed in Makati City. Morales tendered the winning bid and was awarded the PhP 5 million contract. Some
of the items in the project award were later excluded resulting in the corresponding reduction of the contract price to
PhP 3,388,502. Despite his compliance with his contractual undertakings, Morales was only paid the amount of PhP
1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands.
Shortchanged, Morales filed a Complaint6 with the RTC against Kukan, Inc. for a sum of money, the case docketed
as Civil Case No. 99-93173 and eventually raffled to Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued. However, starting
November 2000, Kukan, Inc. no longer appeared and participated in the proceedings before the trial court, prompting
the RTC to declare Kukan, Inc. in default and paving the way for Morales to present his evidence ex parte.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc., disposing as
follows:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of
evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR
PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06)
as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a writ of execution 8 against
Kukan, Inc. The sheriff then levied upon various personal properties found at what was supposed to be Kukan, Inc.’s
office at Unit 2205, 88 Corporate Center, Salcedo Village, Makati City. Alleging that it owned the properties thus levied
and that it was a different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of
Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating
in Civil Case No. 99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In it, Morales prayed,
applying the principle of piercing the veil of corporate fiction, that an order be issued for the satisfaction of the judgment
debt of Kukan, Inc. with the properties under the name or in the possession of KIC, it being alleged that both
corporations are but one and the same entity. KIC opposed Morales’ motion. By Order of May 29, 20039as reiterated
in a subsequent order, the court denied the omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship between the two,
Morales filed a Motion for Examination of Judgment Debtors dated May 4, 2005. In this motion Morales sought that
subponae be issued against the primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit.
This too was denied by the trial court in an Order dated May 24, 2005.10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually granted the motion.
The case was re-raffled to Branch 21, presided by public respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to declare KIC as
having no existence separate from Kukan, Inc. This time around, the RTC, by Order dated March 12, 2007, granted
the motion, the dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the amount awarded to
plaintiff pursuant to the decision of November [28], 2002 which has long been final and executory.

SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order dated June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated March 12, 2007
and June 7, 2007 of the court a quo are both AFFIRMED. No costs.

SO ORDERED.11

The CA later denied KIC’s motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the Court’s consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioner’s Constitutional Right to Due
Process was not violated by the public respondent in rendering the Orders dated March 12, 2007 and June 7,
2007 and in declaring petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc." to
private respondent – as petitioner is a stranger to the case and was never made a party in the case before
the trial court nor was it ever served a summons and a copy of the complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June
7, 2007 rendered by public respondent declaring the petitioner liable to the judgment obligations of the
corporation "Kukan, Inc." to private respondent are valid as said orders of the public respondent modify and/or
amend the trial court’s final and executory decision rendered on November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and June
7, 2007 rendered by public respondent declaring the petitioner [KIC] and the corporation "Kukan, Inc." as one
and the same, and, therefore, the Veil of Corporate Fiction between them be pierced – as the procedure
undertaken by public respondent which the [CA] upheld is not sanctioned by the Rules of Court and/or
established jurisprudence enunciated by this Honorable Supreme Court.12

In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after the judgment
against Kukan, Inc. has attained finality, execute it against the property of KIC; second, whether the trial court acquired
jurisdiction over KIC; and third, whether the trial and appellate courts correctly applied, under the premises, the
principle of piercing the veil of corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after adjudging Kukan, Inc. liable
for a sum of money in a final and executory judgment, execute such judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all proceedings on the execution
are proceedings in the suit. There is no question that the court which rendered the judgment has a general supervisory
control over its process of execution, and this power carries with it the right to determine every question of fact and
law which may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said branch has a general supervisory
control over its processes in the execution of its judgment with a right to determine every question of fact and law
which may be involved in the execution."

The court’s supervisory control does not, however, extend as to authorize the alteration or amendment of a final and
executory decision, save for certain recognized exceptions, among which is the correction of clerical errors. Else, the
court violates the principle of finality of judgment and its immutability, concepts which the Court, in Tan v.
Timbal,15 defined:

As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as embodied in the dispositive
part of a decision or order is the controlling factor as to settlement of rights of the parties. Once a decision or order
becomes final and executory, it is removed from the power or jurisdiction of the court which rendered it to further alter
or amend it. It thereby becomes immutable and unalterable and any amendment or alteration which substantially
affects a final and executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for
that purpose. An order of execution which varies the tenor of the judgment or exceeds the terms thereof is a nullity.
(Emphasis supplied.)

Republic v. Tango16 expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality becomes immutable
and unalterable. As such, it may no longer be modified in any respect even if the modification is meant to correct
erroneous conclusions of fact or law and whether it will be made by the court that rendered it or by the highest court
of the land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public policy and sound practice that,
at the risk of occasional error, the judgment of courts and the award of quasi-judicial agencies must become final on
some definite date fixed by law. The only exceptions to the general rule are the correction of clerical errors, the so-
called nunc pro tunc entries which cause no prejudice to any party, void judgments, and whenever circumstances
transpire after the finality of the decision which render its execution unjust and inequitable. None of the exceptions
obtains here to merit the review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the execution of its final
decision in a manner as would amount to its prohibited alteration or modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by preponderance of
evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:
 1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED TWENTY FOUR
PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS (P7,960.06)
as litigation expenses.

x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the aforementioned awards
to Morales. Thus, making KIC, thru the medium of a writ of execution, answerable for the above judgment liability is a
clear case of altering a decision, an instance of granting relief not contemplated in the decision sought to be executed.
And the change does not fall under any of the recognized exceptions to the doctrine of finality and immutability of
judgment. It is a settled rule that a writ of execution must conform to the fallo of the judgment; as an inevitable corollary,
a writ beyond the terms of the judgment is a nullity.17

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination of the other
issues raised by KIC would be proper.

Second Issue: Propriety of the RTC Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC and its property, given that
it was neither made a party nor impleaded in Civil Case No. 99-93173, let alone served with summons. In other words,
did the trial court acquire jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the jurisdiction of the
trial court owing to its filing of four (4) pleadings adverted to earlier, namely: (a) the Affidavit of Third-Party Claim;18(b)
the Comment and Opposition to Plaintiff’s Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order
dated March 12, 2007;20 and (d) the Motion for Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of the
Rules of Court, stated that "the procedural rule on service of summons can be waived by voluntary submission to the
court’s jurisdiction through any form of appearance by the party or its counsel."22

We cannot give imprimatur to the appellate court’s appreciation of the thrust of Sec. 20, Rule 14 of the Rules in
concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire jurisdiction over the parties in a
civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand, jurisdiction over the
defendants in a civil case is acquired either through the service of summons upon them or through their voluntary
appearance in court and their submission to its authority. (Emphasis supplied.)

In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security Corporation, stating: "[I]n civil
cases, the trial court acquires jurisdiction over the person of the defendant either by the service of summons or by the
latter’s voluntary appearance and submission to the authority of the former."

The court’s jurisdiction over a party-defendant resulting from his voluntary submission to its authority is provided under
Sec. 20, Rule 14 of the Rules, which states:

Section 20. Voluntary appearance. – The defendant’s voluntary appearance in the actions shall be equivalent to
service of summons. The inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the
person of the defendant shall not be deemed a voluntary appearance.
To be sure, the CA’s ruling that any form of appearance by the party or its counsel is deemed as voluntary appearance
finds support in the kindred Republic v. Ker & Co., Ltd.25 and De Midgely v. Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether superseded 27 by La Naval Drug
Corporation v. Court of Appeals,28 wherein the Court essentially ruled and elucidated on the current view in our
jurisdiction, to wit: "[A] special appearance before the court––challenging its jurisdiction over the person through a
motion to dismiss even if the movant invokes other grounds––is not tantamount to estoppel or a waiver by the movant
of his objection to jurisdiction over his person; and such is not constitutive of a voluntary submission to the jurisdiction
of the court."29

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is conceded that it
raised affirmative defenses through its aforementioned pleadings, KIC never abandoned its challenge, however
implicit, to the RTC’s jurisdiction over its person. The challenge was subsumed in KIC’s primary assertion that it was
not the same entity as Kukan, Inc. Pertinently, in its Comment and Opposition to Plaintiff’s Omnibus Motion dated
May 20, 2003, KIC entered its "special but not voluntary appearance" alleging therein that it was a different entity
and has a separate legal personality from Kukan, Inc. And KIC would consistently reiterate this assertion in all its
pleadings, thus effectively resisting all along the RTC’s jurisdiction of its person. It cannot be overemphasized that
KIC could not file before the RTC a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely
because KIC was neither impleaded nor served with summons. Consequently, KIC could only assert and claim
through its affidavits, comments, and motions filed by special appearance before the RTC that it is separate and
distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to the court’s lack of
jurisdiction over its person. It would defy logic to say that KIC unequivocally submitted itself to the jurisdiction of the
RTC when it strongly asserted that it and Kukan, Inc. are different entities. In the scheme of things obtaining, KIC had
no other option but to insist on its separate identity and plead for relief consistent with that position.

Third Issue: Piercing the Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts correctly applied the principle of
piercing the veil of corporate entity––called also as disregarding the fiction of a separate juridical personality of a
corporation––to support a conclusion that Kukan, Inc. and KIC are but one and the same corporation with respect to
the contract award referred to at the outset. This principle finds its context on the postulate that a corporation is an
artificial being invested with a personality separate and distinct from those of the stockholders and from other
corporations to which it may be connected or related.31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission,32 the Court revisited
the subject principle of piercing the veil of corporate fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical
personality of the corporation unifying the group. Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them
as identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately
pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not
hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. x x x (Emphasis
supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of
two corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is
the doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and
convincingly. It cannot be presumed.33 (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due process when, in
the execution of its November 28, 2002 Decision, the court authorized the issuance of the writ against KIC for Kukan,
Inc.’s judgment debt, albeit KIC has never been a party to the underlying suit. As a counterpoint, Morales argues that
KIC’s specific concern on due process and on the validity of the writ to execute the RTC’s November 28, 2002 Decision
would be mooted if it were established that KIC and Kukan, Inc. are indeed one and the same corporation.

Morales’ contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one
and the same juridical person with respect to a given transaction, is basically applied only to determine established
liability;34 it is not available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be subject to the court’s process of
piercing the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation
and, hence, any proceedings taken against that corporation and its property would infringe on its right to due process.
Aguedo Agbayani, a recognized authority on Commercial Law, stated as much:

23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case
after the court has already acquired jurisdiction over the corporation. Hence, before this doctrine can be applied,
based on the evidence presented, it is imperative that the court must first have jurisdiction over the corporation.35 x x
x (Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the corporation or
corporations involved before its or their separate personalities are disregarded; and (2) the doctrine of piercing the
veil of corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving
parties duly brought under the authority of the court by way of service of summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of the time and manner
of raising the principle in question, it is undisputed that no full-blown trial involving KIC was had when the RTC
disregarded the corporate veil of KIC. The reason for this actuality is simple and undisputed: KIC was not impleaded
in Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the case after it
reacted to the improper execution of its properties and veritably hauled to court, not thru the usual process of service
of summons, but by mere motion of a party with whom it has no privity of contract and after the decision in the main
case had already become final and executory. As to the propriety of a plea for the application of the principle by mere
motion, the following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is not available to settle
important questions of law, or to dispose of the merits of the case. A motion is usually a proceeding incidental to an
action, but it may be a wholly distinct or independent proceeding. A motion in this sense is not within this discussion
even though the relief demanded is denominated an "order."

A motion generally relates to procedure and is often resorted to in order to correct errors which have crept in along
the line of the principal action’s progress. Generally, where there is a procedural defect in a proceeding and no method
under statute or rule of court by which it may be called to the attention of the court, a motion is an appropriate remedy.
In many jurisdictions, the motion has replaced the common-law pleas testing the sufficiency of the pleadings, and
various common-law writs, such as writ of error coram nobis and audita querela. In some cases, a motion may be one
of several remedies available. For example, in some jurisdictions, a motion to vacate an order is a remedy alternative
to an appeal therefrom.

Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan, Inc.––assuming
hypothetically that he can, applying the piercing the corporate veil principle––resolves itself into the question of
whether a mere motion is the appropriate vehicle for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC liable on theory that
Kukan, Inc. was out to defraud him through the use of the separate and distinct personality of another corporation,
KIC. In net effect, Morales’ adverted motion to pierce the veil of corporate fiction dated January 3, 2007 stated a new
cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by KIC on the alleged identity of the
two corporations. This new cause of action should be properly ventilated in another complaint and subsequent trial
where the doctrine of piercing the corporate veil can, if appropriate, be applied, based on the evidence adduced.
Establishing the claim of Morales and the corresponding liability of KIC for Kukan Inc.’s indebtedness could hardly be
the subject, under the premises, of a mere motion interposed after the principal action against Kukan, Inc. alone had
peremptorily been terminated. After all, a complaint is one where the plaintiff alleges causes of action.

In any event, the principle of piercing the veil of corporate fiction finds no application to the instant case.

As a general rule, courts should be wary of lifting the corporate veil between corporations, however related. Philippine
National Bank v. Andrada Electric Engineering Company37 explains why:

A corporation is an artificial being created by operation of law. x x x It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest
of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be
mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must
be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended
may result from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part
of the estate of the decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate
issues either to promote or to shield unfair objectives or to cover up an otherwise blatant violation of the prohibition
against forum-shopping. Only in these and similar instances may the veil be pierced and disregarded. (Emphasis
supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing proof that the
separate and distinct personality of the corporation was purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings. To be sure, the Court has, on numerous occasions,38applied
the principle where a corporation is dissolved and its assets are transferred to another to avoid a financial liability of
the first corporation with the result that the second corporation should be considered a continuation and successor of
the first entity.

In those instances when the Court pierced the veil of corporate fiction of two corporations, there was a confluence of
the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a financial liability of the
first corporation; and

3. Both corporations are owned and controlled by the same persons such that the second corporation should
be considered as a continuation and successor of the first corporation.
In the instant case, however, the second and third factors are conspicuously absent. There is, therefore, no compelling
justification for disregarding the fiction of corporate entity separating Kukan, Inc. from KIC. In applying the principle,
both the RTC and the CA miserably failed to identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the following premises
and arguments:

While it is true that a corporation has a separate and distinct personality from its stockholder, director and officers, the
law expressly provides for an exception. When Michael Chan, the Managing Director of defendant Kukan, Inc.
(majority stockholder of the newly formed corporation [KIC]) confirmed the award to plaintiff to supply and install
interior signages in the Enterprise Center he (Michael Chan, Managing Director of defendant Kukan, Inc.) knew that
there was no sufficient corporate funds to pay its obligation/account, thus implying bad faith on his part and fraud in
contracting the obligation. Michael Chan neither returned the interior signages nor tendered payment to the plaintiff.
This circumstance may warrant the piercing of the veil of corporation fiction. Having been guilty of bad faith in the
management of corporate matters the corporate trustee, director or officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of
the case. x x x [A]nd the circumstances are: the signature of Michael Chan, Managing Director of Kukan, Inc.
appearing in the confirmation of the award sent to the plaintiff; signature of Chan Kai Kit, a British National appearing
in the Articles of Incorporation and signature of Michael Chan also a British National appearing in the Articles of
Incorporation [of] Kukan International Corp. give the impression that they are one and the same person, that Michael
Chan and Chan Kai Kit are both majority stockholders of Kukan International Corp. and Kukan, Inc. holding 40% of
the stocks; that Kukan International Corp. is practically doing the same kind of business as that of Kukan,
Inc.39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of Kukan, Inc. and KIC
on the main argument that Michael Chan owns 40% of the common shares of both corporations, obviously oblivious
that overlapping stock ownership is a common business phenomenon. It must be remembered, however, that KIC’s
properties were the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan for that matter.
Mere ownership by a single stockholder or by another corporation of a substantial block of shares of a corporation
does not, standing alone, provide sufficient justification for disregarding the separate corporate personality.40 For this
ground to hold sway in this case, there must be proof that Chan had control or complete dominion of Kukan and KIC’s
finances, policies, and business practices; he used such control to commit fraud; and the control was the proximate
cause of the financial loss complained of by Morales. The absence of any of the elements prevents the piercing of the
corporate veil.41 And indeed, the records do not show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x worth more than
three million pesos although it had only Php5,000.00 paid-up capital; [KIC] was incorporated shortly before Kukan,
Inc. suddenly ceased to appear and participate in the trial; [KIC’s] purpose is related and somewhat akin to that of
Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the outstanding stocks, while he
formerly held the same amount of stocks in Kukan Inc. These would lead to the inescapable conclusion that Kukan,
Inc. committed fraudulent representation by awarding to the private respondent the contract with full knowledge that
it was not in a position to comply with the obligation it had assumed because of inadequate paid-up capital. It bears
stressing that shareholders should in good faith put at the risk of the business, unencumbered capital reasonably
adequate for its prospective liabilities. The capital should not be illusory or trifling compared with the business to be
done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a. Chan Kai Kit has the
largest block of shares in both business enterprises. The emergence of the former was cleverly timed with the hasty
withdrawal of the latter during the trial to avoid the financial liability that was eventually suffered by the latter. The two
companies have a related business purpose. Considering these circumstances, the obvious conclusion is that the
creation of Kukan International Corporation served as a device to evade the obligation incurred by Kukan, Inc. and
yet profit from the goodwill attained by the name "Kukan" by continuing to engage in the same line of business with
the same list of clients.42 (Emphasis supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the business activities
in which both corporations are engaged as a jumping board to its conclusion that the creation of KIC "served as a
device to evade the obligation incurred by Kukan, Inc." The appellate court, however, left a gaping hole by failing to
demonstrate that Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was used to defeat Morales’ right to recover from
Kukan, Inc. Judging from the records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales
could not, thus, validly argue that Kukan, Inc. tried to avoid liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.’s closure is evidenced by its failure to file its 2001 General Information Sheet
(GIS) with the Securities and Exchange Commission. However, such fact does not necessarily mean that Kukan, Inc.
had altogether ceased operations, as Morales would have this Court believe, for it is stated on the face of the GIS that
it is only upon a failure to file the corporate GIS for five (5) consecutive years that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of PhP 5,000 is not
an indication of the intent on the part of its management to defraud creditors. Paid-up capital is merely seed money
to start a corporation or a business entity. As in this case, it merely represented the capitalization upon incorporation
in 1997 of Kukan, Inc. Paid-up capitalization of PhP 5,000 is not and should not be taken as a reflection of the firm’s
capacity to meet its recurrent and long-term obligations. It must be borne in mind that the equity portion cannot be
equated to the viability of a business concern, for the best test is the working capital which consists of the liquid assets
of a given business relating to the nature of the business concern.lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a badge of fraud, for it is
in compliance with Sec. 13 of the Corporation Code,43 which only requires a minimum paid-up capital of PhP
5,000.1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as they are by the
same stockholders, stands without factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the
outstanding capital stock of both corporations. But such circumstance, standing alone, is insufficient to establish
identity. There must be at least a substantial identity of stockholders for both corporations in order to consider this
factor to be constitutive of corporate identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development and Investment
Corporation.45 General Credit Corporation is factually not on all fours with the instant case. There, the common
stockholders of the corporations represented 90% of the outstanding capital stock of the companies, unlike here where
Michael Chan merely represents 40% of the outstanding capital stock of both KIC and Kukan, Inc., not even a majority
of it. In that case, moreover, evidence was adduced to support the finding that the funds of the second corporation
came from the first. Finally, there was proof in General Credit Corporation of complete control, such that one
corporation was a mere dummy or alter ego of the other, which is absent in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application of the principle of piercing
the veil of corporate fiction to the instant case. As shown by the records, the name Michael Chan, the similarity of
business activities engaged in, and incidentally the word "Kukan" appearing in the corporate names provide the nexus
between Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the identity of KIC as
the alter ego or successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who seek to pierce
the veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a
wrong, protect fraud, or perpetrate a deception. In the concrete and on the assumption that the RTC has validly
acquired jurisdiction over the party concerned, Morales ought to have proved by convincing evidence that Kukan, Inc.
was collapsed and thereafter KIC purposely formed and operated to defraud him. Morales has not to us discharged
his burden.

WHEREFORE, the petition is hereby GRANTED. The CA’s January 23, 2008 Decision and April 16, 2008 Resolution
in CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE. The levy placed upon the personal properties
of Kukan International Corporation is hereby ordered lifted and the personal properties ordered returned to Kukan
International Corporation. The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision dated
November 28, 2002 against Kukan, Inc. with reasonable dispatch. No costs. SO ORDERED.
 7. Secosa vs. Heirs of Erwin Suarez Francisco
477 Phil. 317

YNARES-SANTIAGO, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the decision [1] of the Court of
Appeals dated February 27, 2003 in CA-G.R. CV No. 61868, which affirmed in toto the June 19, 1998 decision[2] of
Branch 20 of the Regional Trial Court of Manila in Civil Case No. 96-79554.

The facts are as follows:

On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy
student of the Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard
Gate in the City of Manila. At the same time, petitioner, Raymundo Odani Secosa, was driving an Isuzu cargo truck
with plate number PCU-253 on the same road. The truck was owned by petitioner, Dassad Warehousing and Port
Services, Inc.

Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was being tailed by
the Isuzu truck driven by Secosa. The three vehicles were traversing the southbound lane at a fairly high speed. When
Secosa overtook the sand and gravel truck, he bumped the motorcycle causing Francisco to fall. The rear wheels of
the Isuzu truck then ran over Francisco, which resulted in his instantaneous death. Fearing for his life, petitioner
Secosa left his truck and fled the scene of the collision.[3]

Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa,
Dassad Warehousing and Port Services, Inc. and Dassad's president, El Buenasucenso Sy. The complaint was
docketed as Civil Case No. 96-79554 of the RTC of Manila, Branch 20.

On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in favor of herein respondents, the
dispositive portion of which states:

WHEREFORE, premised on the foregoing, judgment is hereby rendered in favor of the plaintiffs ordering the
defendants to pay plaintiffs jointly and severally:

1. The sum of P55,000.00 as actual and compensatory damages;

2. The sum of P20,000.00 for the repair of the motorcycle;

3. The sum of P100,000.00 for the loss of earning capacity;

4. The sum of P500,000.00 as moral damages;

5. The sum of P50,000.00 as exemplary damages;

6. The sum of P50,000.00 as attorney's fees plus cost of suit.

SO ORDERED.
Petitioners appealed the decision to the Court of Appeals, which affirmed the appealed decision in toto.[4]

Hence the present petition, based on the following arguments:

I.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
THAT PETITIONER DASSAD DID NOT EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE
SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN ACCORDANCE WITH ARTICLE 2180
OF THE NEW CIVIL CODE AND RELATED JURISPRUDENCE ON THE MATTER.
II.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT IN
HOLDING PETITIONER EL BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD AND SECOSA
IN VIOLATION OF THE CORPORATION LAW AND RELATED JURISPRUDENCE ON THE MATTER.

III.

THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF APPEALS AWARDING P500,000.00
AS MORAL DAMAGES IS MANIFESTLY ABSURD, MISTAKEN AND UNJUST.[5]
The petition is partly impressed with merit.

On the issue of whether petitioner Dassad Warehousing and Port Services, Inc. exercised the diligence of a good
father of a family in the selection and supervision of its employees, we find the assailed decision to be in full accord
with pertinent provisions of law and established jurisprudence.

Article 2176 of the Civil Code provides:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:

The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for those of
persons for whom one is responsible x x x.

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope
of their assigned tasks, even though the former are not engaged in any business or industry x x x.

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed
all the diligence of a good father of a family to prevent damage.
Based on the foregoing provisions, when an injury is caused by the negligence of an employee, there instantly arises
a presumption that there was negligence on the part of the employer either in the selection of his employee or in the
supervision over him after such selection. The presumption, however, may be rebutted by a clear showing on the part
of the employer that it exercised the care and diligence of a good father of a family in the selection and supervision of
his employee. Hence, to evade solidary liability for quasi-delict committed by an employee, the employer must adduce
sufficient proof that it exercised such degree of care.[6]

How does an employer prove that he indeed exercised the diligence of a good father of a family in the selection and
supervision of his employee? The case of Metro Manila Transit Corporation v. Court of Appeals[7] is instructive:

In fine, the party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting
at the trial such amount of evidence required by law to obtain a favorable judgment[8] . . . In making proof in its or his
case, it is paramount that the best and most complete evidence is formally entered.[9]

Coming now to the case at bar, while there is no rule which requires that testimonial evidence, to hold sway, must be
corroborated by documentary evidence, inasmuch as the witnesses' testimonies dwelt on mere generalities, we
cannot consider the same as sufficiently persuasive proof that there was observance of due diligence in the selection
and supervision of employees. Petitioner's attempt to prove its "deligentissimi patris familias" in the selection and
supervision of employees through oral evidence must fail as it was unable to buttress the same with any other
evidence, object or documentary, which might obviate the apparent biased nature of the testimony.[10]

Our view that the evidence for petitioner MMTC falls short of the required evidentiary quantum as would convincingly
and undoubtedly prove its observance of the diligence of a good father of a family has its precursor in the underlying
rationale pronounced in the earlier case of Central Taxicab Corp. vs. Ex-Meralco Employees Transportation Co., et
al.,[11] set amidst an almost identical factual setting, where we held that:
"The failure of the defendant company to produce in court any 'record' or other documentary proof tending to establish
that it had exercised all the diligence of a good father of a family in the selection and supervision of its drivers and
buses, notwithstanding the calls therefor by both the trial court and the opposing counsel, argues strongly against its
pretensions.

We are fully aware that there is no hard-and-fast rule on the quantum of evidence needed to prove due observance
of all the diligence of a good father of a family as would constitute a valid defense to the legal presumption of
negligence on the part of an employer or master whose employee has by his negligence, caused damage to another.
x x x (R)educing the testimony of Albert to its proper proportion, we do not have enough trustworthy evidence left to
go by. We are of the considered opinion, therefore, that the believable evidence on the degree of care and diligence
that has been exercised in the selection and supervision of Roberto Leon y Salazar, is not legally sufficient to
overcome the presumption of negligence against the defendant company.
The above-quoted ruling was reiterated in a recent case again involving the Metro Manila Transit Corporation,[12]thus:

In the selection of prospective employees, employers are required to examine them as to their qualifications,
experience, and service records.[13] On the other hand, with respect to the supervision of employees, employers
should formulate standard operating procedures, monitor their implementation, and impose disciplinary measures for
breaches thereof. To establish these factors in a trial involving the issue of vicarious liability, employers must submit
concrete proof, including documentary evidence.

In this case, MMTC sought to prove that it exercised the diligence of a good father of a family with respect to the
selection of employees by presenting mainly testimonial evidence on its hiring procedure. According to MMTC,
applicants are required to submit professional driving licenses, certifications of work experience, and clearances from
the National Bureau of Investigation; to undergo tests of their driving skills, concentration, reflexes, and vision; and,
to complete training programs on traffic rules, vehicle maintenance, and standard operating procedures during
emergency cases.

xxx xxx xxx

Although testimonies were offered that in the case of Pedro Musa all these precautions were followed, the records of
his interview, of the results of his examinations, and of his service were not presented. . . [T]here is no record that
Musa attended such training programs and passed the said examinations before he was employed. No proof was
presented that Musa did not have any record of traffic violations. Nor were records of daily inspections, allegedly
conducted by supervisors, ever presented. . . The failure of MMTC to present such documentary proof puts in doubt
the credibility of its witnesses.
Jurisprudentially, therefore, the employer must not merely present testimonial evidence to prove that he observed the
diligence of a good father of a family in the selection and supervision of his employee, but he must also support such
testimonial evidence with concrete or documentary evidence. The reason for this is to obviate the biased nature of
the employer's testimony or that of his witnesses.[14]

Applying the foregoing doctrines to the present case, we hold that petitioner Dassad Warehousing and Port Services,
Inc. failed to conclusively prove that it had exercised the requisite diligence of a good father of a family in the selection
and supervision of its employees.

Edilberto Duerme, the lone witness presented by Dassad Warehousing and Port Services, Inc. to support its position
that it had exercised the diligence of a good father of a family in the selection and supervision of its employees, testified
that he was the one who recommended petitioner Raymundo Secosa as a driver to Dassad Warehousing and Port
Services, Inc.; that it was his duty to scrutinize the capabilities of drivers; and that he believed petitioner to be physically
and mentally fit for he had undergone rigid training and attended the PPA safety seminar.[15]

Petitioner Dassad Warehousing and Port Services, Inc. failed to support the testimony of its lone witness with
documentary evidence which would have strengthened its claim of due diligence in the selection and supervision of
its employees. Such an omission is fatal to its position, on account of which, Dassad can be rightfully held solidarily
liable with its co-petitioner Raymundo Secosa for the damages suffered by the heirs of Erwin Francisco.

However, we find that petitioner El Buenasenso Sy cannot be held solidarily liable with his co-petitioners. While it may
be true that Sy is the president of petitioner Dassad Warehousing and Port Services, Inc., such fact is not by itself
sufficient to hold him solidarily liable for the liabilities adjudged against his co-petitioners.

It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from that of
its stockholders or members.[16] It has a personality separate and distinct from those of the persons composing it as
well as from that of any other entity to which it may be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the
separate corporate personality.[17] A corporation's authority to act and its liability for its actions are separate and apart
from the individuals who own it.[18]

The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers and
stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason
to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as an association of persons.[19] Also, the corporate entity
may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud
and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly
and convincingly established.[20] It cannot be presumed.[21]

The records of this case are bereft of any evidence tending to show the presence of any grounds enumerated above
that will justify the piercing of the veil of corporate fiction such as to hold the president of Dassad Warehousing and
Port Services, Inc. solidarily liable with it.

The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad Warehousing and Port
Services, Inc., and not in the name of El Buenasenso Sy. Raymundo Secosa is an employee of Dassad Warehousing
and Port Services, Inc. and not of El Buenasenso Sy. All these things, when taken collectively, point toward El
Buenasenso Sy's exclusion from liability for damages arising from the death of Erwin Francisco.

Having both found Raymundo Secosa and Dassad Warehousing and Port Services, Inc. liable for negligence for the
death of Erwin Francisco on June 27, 1996, we now consider the question of moral damages which his parents, herein
respondents, are entitled to recover. Petitioners assail the award of moral damages of P500,000.00 for being
manifestly absurd, mistaken and unjust. We are not persuaded.

Under Article 2206, the "spouse, legitimate and illegitimate descendants and ascendants of the deceased may
demand moral damages for mental anguish for the death of the deceased." The reason for the grant of moral damages
has been explained in this wise:

. . . the award of moral damages is aimed at a restoration, within the limits possible, of the spiritual status quo ante;
and therefore, it must be proportionate to the suffering inflicted. The intensity of the pain experienced by the relatives
of the victim is proportionate to the intensity of affection for him and bears no relation whatsoever with the wealth or
means of the offender."[22]
In the instant case, the spouses Francisco presented evidence of the searing pain that they felt when the premature
loss of their son was relayed to them. That pain was highly evident in the testimony of the father who was forever
deprived of a son, a son whose untimely death came at that point when the latter was nearing the culmination of every
parent's wish to educate their children. The death of Francis has indeed left a void in the lives of the respondents.
Antonio Francisco testified on the effect of the death of his son, Francis, in this manner:

Q: (Atty. Balanag): What did you do when you learned that your son was killed on June 27, 1996?
(ANTONIO FRANCISCO): I boxed the door and pushed the image of St. Niño telling why this happened
A:
to us.

Q: Mr. Witness, how did you feel when you learned of the untimely death of your son, Erwin Suares (sic)?
A: Masakit po ang mawalan ng anak. It's really hard for me, the thought that my son is dead.

xxx xxx xxx

Q: How did your family react to the death of Erwin Suarez Francisco?
A: All of my family and relatives were felt (sic) sorrow because they knew that my son is (sic) good.
 We know that it is impossible to put money terms(s) [on] the life of [a] human, but since you are now in
Q:
court and if you were to ask this court how much would you and your family compensate? (sic)
A: Even if they pay me millions, they cannot remove the anguish of my son (sic).[23]
Moral damages are emphatically not intended to enrich a plaintiff at the expense of the defendant. They are awarded
to allow the former to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has
undergone due to the defendant's culpable action and must, perforce, be proportional to the suffering inflicted.[24] We
have previously held as proper an award of P500,000.00 as moral damages to the heirs of a deceased family member
who died in a vehicular accident. In our 2002 decision in Metro Manila Transit Corporation v. Court of Appeals, et
al.,[25] we affirmed the award of moral damages of P500,000.00 to the heirs of the victim, a mother, who died from
injuries she sustained when a bus driven by an employee of the petitioner hit her. In the case at bar, we likewise affirm
the portion of the assailed decision awarding the moral damages.

Since the petitioners did not question the other damages adjudged against them by the court a quo, we affirm the
award of these damages to the respondents.

WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED with the MODIFICATIONthat petitioner
El Buenasenso Sy is ABSOLVED from any liability adjudged against his co-petitioners in this case. Costs against
petitioners. SO ORDERED.

8. PNB vs. Rittrato Group Inc

G.R. No. 142616 July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,

vs. RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.

KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul and set
aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming the Order issuing
a writ of preliminary injunction of the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and its Order
dated October 4, 1999, which denied petitioner's motion to dismiss.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law. Meanwhile,
respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic
corporations, likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing
business in Hong Kong, extended a letter of credit in favor of the respondents in the amount of US$300,000.00
secured by real estate mortgages constituted over four (4) parcels of land in Makati City. This credit facility was later
increased successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November 1996; to
US$1,425,000.00 in February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made
repayments of the loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the
real estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the
real estate mortgages and that the properties subject thereof were to be sold at a public auction on May 27, 1999 at
the Makati City Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order before the Regional Trial Court of Makati. The Executive Judge of the
Regional Trial Court of Makati issued a 72-hour temporary restraining order. On May 28, 1999, the case was raffled
to Branch 147 of the Regional Trial Court of Makati. The trial judge then set a hearing on June 8, 1999. At the hearing
of the application for preliminary injunction, petitioner was given a period of seven days to file its written opposition to
the application. On June 15, 1999, petitioner filed an opposition to the application for a writ of preliminary injunction to
which the respondents filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to
state a cause of action and the absence of any privity between the petitioner and respondents. On June 30, 1999, the
trial court judge issued an Order for the issuance of a writ of preliminary injunction, which writ was correspondingly
issued on July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of
merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of preliminary injunction
before the Court of Appeals. In the impugned decision,1 the appellate court dismissed the petition. Petitioner thus
seeks recourse to this Court and raises the following errors:

1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO,
CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS
AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-
FACT AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN EXCESS
OR LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS
PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101
SCRA 827.2

Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's Orders dated
June 30, 1999 and October 4, 1999 be set aside and the dismissal of the complaint in the instant case.3

In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two separate
entities, petitioner is still the party-in-interest in the application for preliminary injunction because it is tasked to commit
acts of foreclosing respondents' properties.4 Respondents maintain that the entire credit facility is void as it contains
stipulations in violation of the principle of mutuality of contracts.5 In addition, respondents justified the act of the court a
quo in applying the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter
ego or a business conduit of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the contract:

GROUNDS

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE
DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST AGREED
UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT THE
RATE OF INTEREST SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF
INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.7

Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure and
eventual sale of the property in order to protect their rights to said property by reason of void credit facilities as bases
for the real estate mortgage over the said property.8
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint,
respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia,
foreclose on the properties mortgaged to secure their loan obligations with PNB-IFL. In other words, herein petitioner
is an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate
mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and the party to
the loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere agent, the respondents
in their complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid
by them in accordance with the terms and conditions in the documents evidencing the credit facilities, and crediting
the amount previously paid to PNB by herein respondents.9

Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth in the contract.
Respondents, therefore, do not have any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned subsidiary
of defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-IFL.10 In justifying its
ruling, the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the corporate entity may be
disregarded where a corporation is the mere alter ego, or business conduit of a person or where the corporation is so
organized and controlled and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.12

We disagree.

The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual
stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. 13 The
mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their
being treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their
respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of separate
entity privilege and pierce the veil of corporate entity.

We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court disregarded
the separate existence of the parent and the subsidiary on the ground that the latter was formed merely for the purpose
of evading the payment of higher taxes. In the case at bar, respondents fail to show any cogent reason why the
separate entities of the PNB and PNB-IFL should be disregarded.

While there exists no definite test of general application in determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have been identified that will justify the application of the
treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern Railway Co.14 is
enlightening. The case involved a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car
Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against Southern
Railway Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works, hence, the
latter corporation was but a mere instrumentality of the former. The Tennessee Supreme Court stated that as a general
rule the stock ownership alone by one corporation of the stock of another does not thereby render the dominant
corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere
sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant
corporation. Said Court then outlined the circumstances which may be useful in the determination of whether the
subsidiary is but a mere instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the
infinite variations of fact that can arise but there are certain common circumstances which are important and
which, if present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
 (c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no assets except those
conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its business or financial responsibility is referred to as the
parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but
take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock
of Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The complaint must be
dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of a corporation is abused or used for
wrongful purposes. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation
is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.15

In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the doctrine of piercing
the veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and, unjust act in contravention of plaintiffs legal rights;
and,

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant's relationship to the operation.17

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative
factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration
that any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore,
the doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the
case at bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship
involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the
petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit
against an agent cannot without compelling reasons be considered a suit against the principal. Under the Rules of
Court, every action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise
authorized by law or these Rules.18 In mandatory terms, the Rules require that "parties-in-interest without whom no
final determination can be had, an action shall be joined either as plaintiffs or defendants." 19 In the case at bar, the
injunction suit is directed only against the agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but adjunct
to the main suit.20 A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by
a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal
action. The dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ. Further,
there is no showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of
Civil Procedure provides:

SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when
it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the act or acts complained of, or in requiring the performance of
an act or acts, either for a limited period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts complained of during the litigation
would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject
of the action or proceeding, and tending to render the judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation.21 Respondents do not deny their
indebtedness. Their properties are by their own choice encumbered by real estate mortgages. Upon the non-payment
of the loans, which were secured by the mortgages sought to be foreclosed, the mortgaged properties are properly
subject to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the contract only
when petitioner initiated the foreclosure proceedings. Clearly, respondents have failed to prove that they have a right
protected and that the acts against which the writ is to be directed are violative of said right.22 The Court is not
unmindful of the findings of both the trial court and the appellate court that there may be serious grounds to nullify the
provisions of the loan agreement. However, as earlier discussed, respondents committed the mistake of filing the case
against the wrong party, thus, they must suffer the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the contract the
provisions of which respondents seek to declare void. Accordingly, the case before the Regional Trial Court must be
dismissed and the preliminary injunction issued in connection therewith, must be lifted.

IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is
hereby REVERSED. The Orders dated June 30, 1999 and October 4, 1999 of the Regional Trial Court of Makati,
Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the complaint in said case
DISMISSED. SO ORDERED.

9. Concept Builders Inc vs. NLRC

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner, vs.

THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe; Rodolfo Raquel,
Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio
Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve,
Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and
Ruben Robalos, respondents.

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego
of a person or of another corporation. Where badges of fraud exist; where public convenience is defeated; where a
wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught. The
law in these instances will regard the corporation as a mere association of persons and, in case of two corporations,
merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability for damages, the
corporation may not be heard to say that it has a personality separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations Commission committed
grave abuse of discretion when it issued a "break-open order" to the sheriff to be enforced against personal property
found in the premises of petitioner's sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro
Manila, is engaged in the construction business. Private respondents were employed by said company as laborers,
carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of employment by
petitioner, effective on November 30, 1981. It was stated in the individual notices that their contracts of employment
had expired and the project in which they were hired had been completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private respondent's
employment, the project in which they were hired had not yet been finished and completed. Petitioner had to engage
the services of sub-contractors whose workers performed the functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their
legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to reinstate private respondents and
to pay them back wages equivalent to one year or three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for reconsideration
filed by petitioner on the ground that the said decision had already become final and executory.2

On October 16, 1986, the NLRC Research and Information Department made the finding that private respondents'
back wages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated
December 19, 1984. The writ was partially satisfied through garnishment of sums from petitioner's debtor, the
Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount was turned over to the
cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from
herein petitioner the sum of P117,414.76, representing the balance of the judgment award, and to reinstate private
respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner
through the security guard on duty but the service was refused on the ground that petitioner no longer occupied the
premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated November
2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they
were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had levied upon.4

The said special sheriff recommended that a "break-open order" be issued to enable him to enter petitioner's premises
so that he could proceed with the public auction sale of the aforesaid personal properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the
properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-
President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI
and petitioner corporation were owned by the same incorporator/stockholders. They also alleged that petitioner
temporarily suspended its business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which petitioner and HPPI may suffer
because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the General Informations
Sheet, dated May 15, 1987, submitted by petitioner to the Securities Exchange Commission (SEC) and the General
Information Sheet, dated May 25, 1987, submitted by HPPI to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed
HPPI P 6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member
Elisa C. Lim Member
Teodulo R. Dino Member
Virgilio O. Casino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila.5
On the other hand, the General Information Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
Antonio W. Lim P 400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
 Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa C. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a break-open order,
contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was
then engaged in construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion for break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the Labor Arbiter,
issued a break-open order and directed private respondents to file a bond. Thereafter, it directed the sheriff to proceed
with the auction sale of the properties already levied upon. It dismissed the third-party claim for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated December 3,
1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its decision
despite a third-party claim on the levied property. Petitioner further contends, that the doctrine of piercing the corporate
veil should not have been applied, in this case, in the absence of any showing that it created HPPI in order to evade
its liability to private respondents. It also contends that HPPI is engaged in the manufacture and sale of steel, concrete
and iron pipes, a business which is distinct and separate from petitioner's construction business. Hence, it is of no
consequence that petitioner and HPPI shared the same premises, the same President and the same set of officers
and subscribers.7

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders
and from other corporations to which it may be connected.8 But, this separate and distinct personality of a corporation
is merely a fiction created by law for convenience and to promote justice.9 So, when the notion of separate juridical
personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device
to defeat the labor laws,10 this separate personality of the corporation may be disregarded or the veil of corporate
fiction pierced.11 This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of
another corporation.12

The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative
factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate
juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact,
a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the "instrumentality"
may be disregarded. The control necessary to invoke the rule is not majority or even complete stock
control but such domination of instances, policies and practices that the controlled corporation has, so
to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been exercised at the time the acts complained
of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust
loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate entity
as to this transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty or dishonest and unjust act in contravention of
plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how
the corporation operated and the individual defendant's relationship to that operation.14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a
subterfuge is purely one of fact.15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it
filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casiño as the corporate secretary of both
corporations. It would also not be amiss to note that both corporations had the same president,
the same board of directors, the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the
third-party claimant shared the same address and/or premises. Under this circumstances, (sic) it
cannot be said that the property levied upon by the sheriff were not of respondents.16

Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages
and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation
and its emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner
corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had the occasion to
rule:
 Respondent court's findings that indeed the Claparols Steel and Nail Plant, which ceased operation of
June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1,
1957, up to December 7, 1962, when the latter finally ceased to operate, were not disputed by
petitioner. It is very clear that the latter corporation was a continuation and successor of the first entity
. . . . Both predecessors and successor were owned and controlled by petitioner Eduardo Claparols
and there was no break in the succession and continuity of the same business. This "avoiding-the-
liability" scheme is very patent, considering that 90% of the subscribed shares of stock of the Claparols
Steel Corporation (the second corporation) was owned by respondent . . . Claparols himself, and all
the assets of the dissolved Claparols Steel and Nail plant were turned over to the emerging Claparols
Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose
veil in the present case could, and should, be pierced as it was deliberately and maliciously designed
to evade its financial obligation to its employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution, private
respondents had no other recourse but to apply for a break-open order after the third-party claim of HPPI was
dismissed for lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of
Execution of Judgment which provides that:

Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative
entry to the place where the property subject of execution is located or kept, the judgment creditor
may apply to the Commission or Labor Arbiter concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were complied
with. Petitioner and the third-party claimant were given the opportunity to submit evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued by the
Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies supported by
substantial evidence are binding on this Court and are entitled to great respect, in the absence of showing of grave
abuse of a discretion.18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and
December 3, 1992, are AFFIRMED. SO ORDERED.

10. Koppel (Phil) vs. Yatco

G.R. No. L-47673 October 10, 1946

KOPPEL (PHILIPPINES), INC., plaintiff-appellant,

vs. ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.

This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First Instance of Manila in civil case
No. 51218 of said court dismissing said corporation's complaint for the recovery of the sum of P64,122.51 which it
had paid under protest to the Collector of Internal Revenue on October 30, 1936, as merchant sales tax. The main
facts of the case were stipulated in the court below as follows:

AGREED STATEMENT OF FACTS

Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the Solicitor General and
undersigned Assistant Attorney of the Bureau of Justice and, with leave of this Honorable Court, hereby
respectfully stipulated and agree to the following facts, to wit:

I. That plaintiff is a corporation duly organized and existing under and by virtue of the laws of the Philippines,
with principal office therein at the City of Manila, the capital stock of which is divided into thousand (1,000)
shares of P100 each. The Koppel Industrial Car and Equipment company, a corporation organized and
existing under the laws of the State of Pennsylvania, United States of America, and not licensed to do business
in the Philippines, owned nine hundred and ninety-five (995) shares out of the total capital stock of the plaintiff
from the year 1928 up to and including the year 1936, and the remaining five (5) shares only were and are
owned one each by officers of the plaintiff corporation.

II. That plaintiff, at all times material to this case, was and now is duly licensed to engage in business as a
merchant and commercial broker in the Philippines; and was and is the holder of the corresponding merchant's
and commercial broker's privilege tax receipts.

III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco.

IV. That during the period from January 1, 1929, up to and including December 31, 1932, plaintiff transacted
business in the Philippines in the following manner, with the exception of the transactions which are described
in paragraphs V and VI of this stipulation:

When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for
price quotations from plaintiff. Atypical form of such request is attached hereto and made a part hereof as
Exhibit A. (Exhibit A represents typical transactions arising from written requests for quotations, while Exhibits
B to G, inclusive, are typical transactions arising from verbal requests for quotation.) Plaintiff then cabled for
the quotation desired for Koppel Industrial Car and Equipment Company. A sample of the pertinent cable is
hereto attached and made a part hereof as Exhibit B. Koppel Industrial Car and Equipment Company
answered by cable quoting its cost price, usually A. C. I. F. Manila cost price, which was later followed by a
letter of confirmation. A sample of the said cable quotation and of the letter of confirmation are hereto attached
and made a part hereof as Exhibits C and C-1. Plaintiff, however, quoted by Koppel Industrial Car and
Equipment Company. Copy of the plaintiff's letter to purchaser is hereto attached and made a part hereof as
Exhibit D. On the basis of these quotations, orders were placed by the local purchasers, copies of which orders
are hereto attached as Exhibits E and E-1.

A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship the
merchandise to Manila forwarding the customer's order. Sample of said cable is hereto attached as Exhibit F.
The bills of lading were usually made to "order" and indorsed in blank with notation to the effect that the buyer
be notified of the shipment of the goods covered in the bills of lading; commercial invoices were issued by
Koppel Industrial Car and Equipment Company in the names of the purchasers and certificates of insurance
were likewise issued in their names, or in the name of Koppel Industrial Car and Equipment Company but
indorsed in blank and attached to drafts drawn by Koppel Industrial Car and Equipment Company on the
purchasers, which were forwarded through foreign banks to local banks. Samples of the bills of lading are
hereto attached as Exhibits F-1, I-1, I-2 and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have
been employed, but said Exhibits I-1, I-2 and I-3 have no connection with the transaction covered by Exhibits
B to G, inclusive. The purchasers secured the shipping papers by arrangement with the banks, and thereupon
received and cleared the shipments. If the merchandise were of European origin, and if there was not sufficient
time to forward the documents necessary for clearance, through foreign banks to local banks, to the
purchasers, the Koppel Industrial Car and Equipment company did, in many cases, send the documents
directly from Europe to plaintiff with instructions to turn these documents over to the purchasers. In many
cases, where sales was effected on the basis of C. I. F. Manila, duty paid, plaintiff advanced the sums required
for the payment of the duty, and these sums, so advanced, were in every case reimbursed to plaintiff by
Koppel Industrial Car and Equipment Company. The price were payable by drafts agreed upon in each case
and drawn by Koppel Industrial Car and Equipment Company on respective purchasers through local banks,
and payments were made to the banks by the purchasers on presentation and delivery to them of the above-
mentioned shipping documents or copies thereof. A sample of said drafts is hereto attached as Exhibit G.
Plaintiff received by way of compensation a percentage of the profits realized on the above transactions as
fixed in paragraph 6 of the plaintiff's contract with Koppel Industrial Car and Equipment Company, which
contract is hereto attached as Exhibit H, and suffered its corresponding share in the losses resulting from
some of the transactions.

That the total gross sales from January 1, 1929, up to and including December 31, 1932, effected in the
foregoing manner and under the above specified conditions, amount to P3, 596,438.84.
V. That when a local sugar central was interested in the purchase of railway materials, machinery and supplies,
it secured quotations from, and placed the corresponding orders with, the plaintiff in substantially the same
manner as outlined in paragraph IV of this stipulation, with the only difference that the purchase orders which
were agreed to by the central and the plaintiff are similar to the sample hereto attached and made a part
hereof as Exhibit I. Typical samples of the bills of lading covering the herein transaction are hereto attached
and made a part hereto as Exhibits I-1, I-2 and I-3. The value of the sales carried out in the manner mentioned
in this paragraph is P133,964.98.

VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines, placed an option with Koppel
Industrial Car and Equipment Company, through plaintiff, to purchase within three months a pair of Atlas-
Diesel Marine Engines. Koppel Industrial Car and Equipment Company purchased said Diesel Engines in
Stockholm, Sweden, for $16,508.32. The suppliers drew a draft for the amount of $16,508.32 on the Koppel
Industrial Car and Equipment Company, which paid the amount covered by the draft. Later, Miguel J. Ossorio
definitely called the deal off, and as Koppel Industrial Car and Equipment Company could not ship to or draw
on said Mr. Miguel J. Ossorio, it in turn drew another draft on plaintiff for the same amount at six months sight,
with the understanding that Koppel Industrial Car and Equipment Company would reimburse plaintiff when
said engines were disposed of. Plaintiff honored the draft and debited the said sum of $16,508.32 to
merchandise account. The engines were left stored at Stockholm, Sweden. On April 1, 1930, a new local
buyer, Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for $21,000
(P42,000) C. I. F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000 was drawn by
Koppel Industrial Car and Equipment Company on Mr. Cesar Barrios. After the draft was fully paid by Mr.
Barrios, Koppel Industrial Car and Equipment Company reimbursed plaintiff with cost price of $16,508.32 and
credited it with $1,152.95 as its share of the profit on the transaction. Exhibits J and J-1 are herewith attached
and made integral parts of this stipulation with particular reference to paragraph VI hereof.

VII. That plaintiff's share in the profits realized out of these transactions described in paragraphs IV, V and VI
hereof totaling P3,772,403.82, amounts to P132,201.30; and that plaintiff within the time provided by law
returned the aforesaid amount P132,201.30 for the purpose of the commercial broker's 4 per cent tax and
paid thereon the sum P5,288.05 as such tax.

VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the merchants' sales tax of 1% per
cent on the amount of P3,772,403.82, representing the total gross value of the sales mentioned in paragraphs
IV, V and VI hereof, including the 25 per cent surcharge for the late payment of the said tax, which tax and
surcharge were determined after the amount of P5,288.05 mentioned in paragraph VI hereof was deducted.

IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in order to avoid further
penalties, levy and distraint proceedings.

X. That defendant, on November 10, 1936, overruled plaintiff's protest, and defendant has failed and refused
and still fails and refuses, notwithstanding demands by plaintiff, to return to the plaintiff said sum of P64,122.51
or any part thereof.

xxx xxx xxx

That the parties hereby reserve the right to present additional evidence in support of their
respective contentions.

Manila, Philippines, December 26, 1939

(Sgd.) ROMAN OZAETA

Solicitor General

(Sgd.) ANTONIO CAÑIZARES

Assistant Attorney
 (Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila

Both parties adduced some oral evidence in clarification of or addition to their agreed statement of facts. A
preponderance of evidence has established, besides the facts thus stipulated, the following:

(a) The shares of stock of plaintiff corporation were and are all owned by Koppel Industries Car and
Equipment Company of Pennsylvania, U. S. A., exceptive which were necessary to qualify the Board
of Directors of said plaintiff corporation;

(b) In the transactions involved herein the plaintiff corporation acted as the representative of Koppel
Industrial Car and Equipment Company only, and not as the agent of both the latter company and the
respective local purchasers — plaintiff's principal witness, A.H. Bishop, its resident Vice-President, in
his testimony invariably referred to Koppel Industrial Car and Equipment Co. as "our principal" 9 t. s.
n., pp. 10, 11, 12, 19, 75), except that at the bottom of page 10 to the top of page 11, the witness
stated that they had "several principal" abroad but that "our principal abroad was, for the years in
question, Koppel Industrial Car and Equipment Company," and on page 68, he testified that what he
actually said was ". . . but our principal abroad" and not "our principal abroad" — as to which it is very
significant that neither this witness nor any other gave the name of even a single other principal abroad
of the plaintiff corporation;

(c) The plaintiff corporation bore alone incidental expenses — as, for instance, cable expenses-not
only those of its own cables but also those of its "principal" (t.s.n., pp. 52, 53);

(d) the plaintiff's "share in the profits" realized from the transactions in which it intervened was left
virtually in the hands of Koppel Industrial Car and Equipment Company (t.s.n., p. 51);

(e) Where drafts were not paid by the purchasers, the local banks were instructed not to protest them
but to refer them to plaintiff which was fully empowered by Koppel Industrial Car and Equipment
company to instruct the banks with regards to disposition of the drafts and documents (t.s.n., p. 50;
Exhibit G);lawphil.net

(f) Where the goods were European origin, consular invoices, bill of lading, and, in general, the
documents necessary for clearance were sent directly to plaintiff (t.s.n., p. 14);

(g) If the plaintiff had in stock the merchandise desired by local buyers, it immediately filled the orders
of such local buyers and made delivery in the Philippines without the necessity of cabling its principal
in America either for price quotations or confirmation or rejection of that agreed upon between it and
the buyer (t.s.n., pp. 39-43);

(h) Whenever the deliveries made by Koppel Industrial Car and Equipment Company were incomplete
or insufficient to fill the local buyer's orders, plaintiff used to make good the deficiencies by deliveries
from its own local stock, but in such cases it charged its principal only the actual cost of the
merchandise thus delivered by it from its stock and in such transactions plaintiff did not realize any
profit (t.s.n., pp. 53-54);

(i) The contract of sale involved herein were all perfected in the Philippines.

Those described in paragraph IV of the agreed statement of facts went through the following process: (1)
"When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for
price quotations from plaintiff"; (2) "Plaintiff then cabled for the quotation desired from Koppel Industrial Car
and Equipment Company"; (3) "Plaintiff, however, quoted to the purchaser a selling price above the figures
quoted by Koppel Industrial Car and Equipment Company"; (4) "On the basis of these quotations, orders were
placed by the local purchasers . . ."
 Those described in paragraph V of said agreed statement of facts were transacted "in substantially the same
manner as outlined in paragraph IV."

As to the single transaction described in paragraph VI of the same agreed statement of facts, discarding the
Ossorio option which anyway was called off, "On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo,
Philippines, was found and the same engines were sold to him for $21,000(P42,000) C.I.F. Hongkong."
(Emphasis supplied.).

(j) Exhibit H contains the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform only the functions of a
broker as set forth above, and shall not take possession of any of the materials or equipment applying to said
orders or perform any acts or duties outside the scope of a broker; and in no sense shall this contract be
construed as granting to the broker the power to represent the principal as its agent or to make commitments
on its behalf.

The Court of First Instance held for the defendant and dismissed plaintiff's complaint with costs to it.

Upon this appeal, seven errors are assigned to said judgment as follows:.

1. That the court a quo erred in not holding that appellant is a domestic corporation distinct and separate from,
and not a mere branch of Koppel Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated January 31, 1931, Exhibit M;
3. the court a quo erred in not holding that a character of a broker is determined by the nature of the transaction
and not by the basis or measure of his compensation;
4. The court a quo erred in not holding that appellant acted as a commercial broker in the transactions covered
under paragraph VI of the agreed statement of facts;
5. The court a quo erred in not holding that appellant acted as a commercial broker in the transactions covered
under paragraph v of the agreed statement of facts;
6. The court a quo erred in not holding that appellant acted as a commercial broker in the sole transaction
covered under paragraph VI of the agreed statement of facts;
7. the court a quo erred in dismissing appellant's complaint.

The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach ("hechura") of Koppel
industrial Car and Equipment Company. The lower court did not deny legal personality to Koppel (Philippines), Inc.
for any and all purposes, but in effect its conclusion was that, in the transactions involved herein, the public interest
and convenience would be defeated and what would amount to a tax evasion perpetrated, unless resort is had to the
doctrine of "disregard of the corporate fiction."

I. In its first assignment of error appellant submits that the trial court erred in not holding that it is a domestic corporation
distinct and separate from and not a mere branch of Koppel Industrial Car and Equipment Company. It contends that
its corporate existence as Philippine corporation can not be collaterally attacked and that the Government is estopped
from so doing. As stated above, the lower court did not deny legal personality to appellant for any and all purposes,
but held in effect that in the transaction involved in this case the public interest and convenience would be defeated
and what would amount to a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of the corporate
fiction." In other words, in looking through the corporate form to the ultimate person or corporation behind that form,
in the particular transactions which were involved in the case submitted to its determination and judgment, the court
did so in order to prevent the contravention of the local internal revenue laws, and the perpetration of what would
amount to a tax evasion, inasmuch as it considered — and in our opinion, correctly — that appellant Koppel
(Philippines), Inc. was a mere branch or agency or dummy ("hechura") of Koppel Industrial Car and Equipment Co.
The court did not hold that the corporate personality of Koppel (Philippines), Inc., would also be disregarded in other
cases or for other purposes. It would have had no power to so hold. The courts' action in this regard must be confined
to the transactions involved in the case at bar "for the purpose of adjudging the rights and liabilities of the parties in
the case. They have no jurisdiction to do more." (1 Flethcer, Cyclopedia of Corporation, Permanent ed., p. 124, section
41.)

A leading and much cited case puts it as follows:

 If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked
upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the
notion of legal entity is used to defeat public convinience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of persons. (1 Fletcher Cyclopedia of Corporation [Permanent
Edition], pp. 135, 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255, per Sanborn,
J.)

In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or subsidiary of Koppel
Industrial Car and Equipment Co., a Pennsylvania corporation not licensed to do business in the Philippines but
actually doing business here through the plaintiff; that the said foreign corporation holds 995 of the 1,000 shares of
the plaintiff's capital stock, the remaining five shares being held by the officers of the plaintiff herein in order to permit
the incorporation thereof and to enable its aforesaid officers to act as directors of the plaintiff corporation; and that
plaintiff was organized as a Philippine corporation for the purpose of evading the payment by its parent foreign
corporation of merchants' sales tax on the transactions involved in this case and others of similar nature."

By most courts the entity is normally regarded but is disregarded to prevent injustice, or the distortion or hiding
of the truth, or to let in a just defense. (1 Fletcher, Cyclopedia of Corporation, Permanent Edition, pp. 139,140;
emphasis supplied.)

Another rule is that, when the corporation is the mere alter ego, or business conduit of a person, it may de
disregarded." (1 Fletcher, Cyclopedia of Corporation, Permanent Edition, p. 136.)

Manifestly, the principle is the same whether the "person" be natural or artificial.

A very numerous and growing class of cases wherein the corporate entity is disregarded is that (it is so
organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation)." (1 Fletcher, Cyclopedia of Corporation, Permanent ed., pp. 154,
155.)

While we recognize the legal principle that a corporation does not lose its entity by the ownership of the bulk
or even the whole of its stock, by another corporation (Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46
Atl., 99; 79 Am. St. Rep., 685) yet it is equally well settled and ignore corporate forms." (Colonial Trust Co. vs.
Montello Brick Works, 172 Fed., 310.)

Where it appears that two business enterprises are owned, conducted and controlled by the same parties,
both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that
two corporations are distinct entities, and treat them as identical. (Abney vs. Belmont Country Club Properties,
Inc., 279 Pac., 829.)

. . . the legal fiction of distinct corporate existence will be disregarded in a case where a corporation is so
organized and controlled and its affairs are so conducted, as to make it merely an instrumentality or adjunct
of another corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed., 665.)

In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme Court of the United
States disregarded the artificial personality of the subsidiary coal company in order to avoid that the parent corporation,
the Lehigh Valley R. Co., should be able, through the fiction of that personality, to evade the prohibition of the Hepburn
Act against the transportation by railroad companies of the articles and commodities described therein.

Chief Justice White, speaking for the court, said:

. . . Coming to discharge this duty it follows, in view of the express prohibitions of the commodities clause, it
must be held that while the right of a railroad company as a stockholder to use its stock ownership for the
purpose of a bona fide separate administration of the affairs of a corporation in which it has a stock interest
may not be denied, the use of such stock ownership in substance for the purpose of destroying the entity of a
producing, etc., corporation, and commingling its affairs in administration with the affairs of the railroad
company, so as to make the two corporations virtually one, brings the railroad company so voluntarily acting
as to such producing, etc., corporation within the prohibitions of the commodities clause. In other words, that
 by operation and effect of the commodities clause there is duty cast upon a railroad company proposing to
carry in interstate commerce the product of a producing, etc., corporation in which it has a stock interest, not
to abuse such power so as virtually to do by indirection that which the commodities clause prohibits, — a duty
which plainly would be violated by the unnecessary commingling of the affairs of the producing company with
its own, so as to cause them to be one and inseparable.

Corrobarative authorities can be cited in support of the same proposition, which we deem unnecessary to mention
here.

From the facts hereinabove stated, as established by a preponderance of the evidence , particularly those narrated
in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed statement of facts, we find that, in so far as the
sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial Car and Equipment company
are to all intents and purposes one and the same; or, to use another mode of expression, that, as regards those
transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To our mind, this is
conclusively borne out by the fact, among others, that the amount of he so-called "share in the profits" of Koppel
(Philippines), Inc., was ultimately left to the sole, unbridled control of Koppel Industrial Car and Equipment Company.
If, in their relations with each other, Koppel (Philippines), Inc., was considered and intended to function as a bona
fide separate corporation, we can not conceive how this arrangement could have been adopted, for if there was any
factor in its business as to which it would in that case naturally have been opposed to being thus controlled, it must
have been precisely the amount of profit which it could endeavor and hope to earn. No group of businessmen could
be expected to organize a mercantile corporation — the ultimate end of which could only be profit — if the amount of
that profit were to be subjected to such a unilateral control of another corporation, unless indeed the former has
previously been designed by the incorporators to serve as a mere subsidiary, branch or agency of the latter. Evidently,
Koppel Industrial Car and Equipment Company made us of its ownership of the overwhelming majority — 99.5% —
of the capital stock of the local corporation to control the operations of the latter to such an extent that it had the final
say even as to how much should be allotted to said local entity in the so-called sharing in the profits. We can not
overlook the fact that in the practical working of corporate organizations of the class to which these two entities belong,
the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is
determined by the virtual ownership of the totality of the shares, dominate not only the selection of the Board of
Directors but, more often than not, also the action of that Board. Applying this to the instant case, we can not conceive
how the Philippine corporation could effectively go against the policies, decisions, and desires of the American
corporation with regards to the scheme which was devised through the instrumentality of the contract Exhibit H, as
well as all the other details of the system which was adopted in order to avoid paying the 1½ per cent merchants sales
tax. Neither can we conceive how the Philippine corporation could avoid following the directions of the American
corporation held 99.5 per cent of the capital stock of the Philippine corporation. In the present instance, we note that
Koppel (Philippines), Inc., was represented in the Philippines by its "resident Vice-President." This fact necessarily
leads to the inference that the corporation had at least a Vice-President, and presumably also a President, who were
not resident in the Philippines but in America, where the parent corporation is domiciled. If Koppel (Philippines), Inc.,
had been intended to operate as a regular domestic corporation in the Philippines, where it was formed, the record
and the evidence do not disclose any reason why all its officers should not reside and perform their functions in the
Philippines.

Other facts appearing from the evidence, and presently to be stated, strengthen our conclusion, because they can
only be explained if the local entity is considered as a mere subsidiary, branch or agency of the parent organization.
Plaintiff charged the parent corporation no more than actual cost — without profit whatsoever — for merchandise
allegedly of its own to complete deficiencies of shipments made by said parent corporation (t.s.n., pp. 53, 54) — a
fact which could not conceivably have been the case if plaintiff had acted in such transactions as an entirely
independent entity doing business — for profit, of course — with the American concern. There has been no attempt
even to explain, if the latter situation really obtained, why these two corporations should have thus departed from the
ordinary course of business. Plaintiff was charged by the American corporation with the cost even of the latter's cable
quotations — from ought that appears from the evidence, this can only be comprehended by considering plaintiff as
such a subsidiary, branch or agency of the parent entity, in which case it would be perfectly understandable that for
convenient accounting purposes and the easy determination of the profits or losses of the parent corporation's
Philippines should be charged against the Philippine office and set off against its receipts, thus separating the
accounts of said branch from those which the central organization might have in other countries. The reference to
plaintiff by local banks, under a standing instruction of the parent corporation, of unpaid drafts drawn on Philippine
customers by said parent corporation, whenever said customers dishonored the drafts, and the fact that the American
corporation had previously advised said banks that plaintiff in those cases was "fully empowered to instruct (the banks)
with regard to the disposition of the drafts and documents" (t.s.n., p. 50), in the absence of any other satisfactory
explanation naturally give rise to the inference that plaintiff was a subsidiary, branch or agency of the American
concern, rather than an independent corporation acting as a broker. For, without such positive explanation, this
delegation of power is indicative of the relations between central and branch offices of the same business enterprise,
with the latter acting under instructions already given by the former. Far from disclosing a real separation between the
two entities, particularly in regard to the transactions in question, the evidence reveals such commongling and
interlacing of their activities as to render even incomprehensible certain accounting operations between them, except
upon the basis that the Philippine corporation was to all intents and purposes a mere subsidiary, branch, or agency
of the American parent entity. Only upon this basis can it be comprehended why it seems not to matter at all how
much profit would be allocated to plaintiff, or even that no profit at all be so allocated to it, at any given time or after
any given period.

As already stated above, under the evidence the sales in the Philippines of the railway materials, machinery and
supplies imported here by Koppel Industrial Car and Equipment Company could have been as conviniently and
efficiently transacted and handled — if not more so — had said corporation merely established a branch or agency in
the Philippines and obtained license to do business locally; and if it had done so and said sales had been effected by
such branch or agency, there seems to be no dispute that the 1½ per cent merchants' sales tax then in force would
have been collectible. So far as we can discover, there would be only one, but very important, difference between the
two schemes — a difference in tax liability on the ground that the sales were made through another and distinct
corporation, as alleged broker, when we have seen that this latter corporation is virtually owned by the former, or that
they practically one and the same, is to sanction a circumvention of our tax laws, and permit a tax evasion of no mean
proportions and the consequent commission of a grave injustice to the Government. Not only this; it would allow the
taxpayer to do by indirection what the tax laws prohibited to be done directly (non-payment of legitimate taxes),
paraphrasing the United States Supreme Court in United States vs. Lehigh Valley R. Co., supra.

The act of one corporation crediting or debiting the other for certain items, expenses or even merchandise sold or
disposed of, is perfectly compatible with the idea of the domestic entity being or acting as a mere branch, agency or
subsidiary of the parent organization. Such operations were called for any way by the exigencies or convenience of
the entire business. Indeed, accounting operation such as these are invitable, and have to be effected in the ordinary
course of business enterprise extends its trade to another land through a branch office, or through another scheme
amounting to the same thing.

If plaintiff were to act as broker in the Philippines for any other corporation, entity or person, distinct from Koppel
Industrial Car and Equipment company, an entirely different question will arise, which, however, we are not called
upon, nor in a position, to decide.

As stated above, Exhibit H contains to the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall perform only the functions of a
broker as set forth above, and shall not take possession of any of the materials or equipment applying to said
orders or perform any acts or duties outside the scope of a broker; and in no sense shall this contract be
construed as granting to the broker the power to represent the principal as its agent or to make commitments
on its behalf.

The foregoing paragraph, construed in the light of other facts noted elsewhere in this decision, betrays, we think a
deliberate intent, through the medium of a scheme devised with great care, to avoid the payment of precisely the 1½
per cent merchants' sales tax in force in the Philippines before, at the time of, and after, the making of the said contract
Exhibit H. If this were to be allowed, the payment of a tax, which directly could not have been avoided, could be
evaded by indirection, consideration being had of the aforementioned peculiar relations between the said American
and local corporations. Such evasion, involving as it would, a violation of the former Internal Revenue Law, would
even fall within the penal sanction of section 2741 of the Revised Administrative Code. Which only goes to show the
illegality of the whole scheme. We are not here concerned with the impossibility of collecting the merchants' sales tax,
as a mere incidental consequence of transactions legal in themselves and innocent in their purpose. We are dealing
with a scheme the primary, not to say the sole, object of which the evasion of the payment of such tax. It is this aim
of the scheme that makes it illegal.

We have said above that the contracts of sale involved herein were all perfected in the Philippines. From the facts
stipulated in paragraph IV of the agreed statement of facts, it clearly appears that the Philippine purchasers had to
wait for Koppel Industrial Car and Equipment Company to communicate its cost prices to Koppel (Philippines), Inc.,
were perfected in the Philippines. In those cases where no such price quotations from the American corporation were
needed, of course, the sales effected in those cases described in paragraph V of the agreed statement of facts were,
as expressed therein, transacted "in substantially the same manner as outlined in paragraph VI." Even the single
transaction described in paragraph VI of the agreed statement of facts was also perfected in the Philippines, because
the contracting parties were here and the consent of each was given here. While it is true that when the contract was
thus perfected in the Philippines the pair of Atlas-Diesel Marine Engines were in Sweden and the agreement was to
deliver them C.I.F. Hongkong, the contract of sale being consensual — perfected by mere consent — (Civil Code,
article 1445; 10 Manresa, 4th ed., p. 11), the location of the property and the place of delivery did not matter in the
question of where the agreement was perfected.

In said paragraph VI, we read the following, as indicating where the contract was perfected, considering beforehand
that one party, Koppel (Philippines),Inc., which in contemplation of law, as to that transaction, was the same Koppel
Industrial Car Equipment Co., was in the Philippines:

. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was found and the same
engines were sold to him for $21,000 (P42,000) C.I.F. Hongkong . . . (Emphasis supplied.)

Under the revenue law in force when the sales in question took place, the merchants' sales tax attached upon the
happening of the respective sales of the "commodities, goods, wares, and merchandise" involved, and we are clearly
of opinion that such "sales" took place upon the perfection of the corresponding contracts. If such perfection took
place in the Philippines, the merchants' sales tax then in force here attached to the transactions.

Even if we should consider that the Philippine buyers in the cases covered by paragraph IV and V of the agreed
statement of facts, contracted with Koppel Industrial Car and Equipment company, we will arrive at the same final
result. It can not be denied in that case that said American corporation contracted through Koppel (Philippines), Inc.,
which was in the Philippines. The real transaction in each case of sale, in final effect, began with an offer of sale from
the seller, said American corporation, through its agent, the local corporation, of the railway materials, machinery, and
supplies at the prices quoted, and perfected or completed by the acceptance of that offer by the local buyers when
the latter, accepting those prices, placed their orders. The offer could not correctly be said to have been made by the
local buyers when they asked for price quotations, for they could not rationally be taken to have bound themselves to
buy before knowing the prices. And even if we should take into consideration the fact that the american corporation
contracted, at least partly, through correspondence, according to article 54 of the Code of Commerce, the respective
contracts were completed from the time of the acceptance by the local buyers, which happened in the Philippines.

Contracts executed through correspondence shall be completed from the time an answer is made accepting
the proposition or the conditions by which the latter may be modified." (Code of Commerce, article 54;
emphasis supplied.)

A contract is as a rule considered as entered into at the place where the place it is performed. So where
delivery is regarded as made at the place of delivery." (13 C. J., 580-81, section 581.)

(In the consensual contract of sale delivery is not needed for its perfection.)

II. Appellant's second assignment of error can be summarily disposed of. It is clear that the ruling of the Secretary of
Finance, Exhibit M, was not binding upon the trial court, much less upon this tribunal, since the duty and power of
interpreting the laws is primarily a function of the judiciary. (Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.) Plaintiff
cannot be excused from abiding by this legal principle, nor can it properly be heard to say that it relied on the
Secretary's ruling and that, therefore, the courts should not now apply an interpretation at variance therewith. The rule
of stare decisis is undoubtedly entitled to more respect in the construction of statutes than the interpretations given
by officers of the administrative branches of the government, even those entrusted with the administration of particular
laws. But this court, in Philippine Trust Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:

. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in the business field, is
desirable. But idolatrous reverence for precedent, simply as precedent, no longer rules. More important than
anything else is that court should be right. . . .
III. In the view we take of the case, and after the disposition made above of the first assignment of error, it becomes
unnecessary to make any specific ruling on the third, fourth, fifth, sixth, and seventh assignments of error, all of which
are necessarily disposed of adversely to appellant's contention.

Wherefore, he judgment appealed from is affirmed, with costs of both instances against appellant. So ordered.

11. LBP vs. CA

G.R. No. 127181 September 4, 2001

LAND BANK OF THE PHILIPPINES, petitioner,

vs. THE COURT OF APPEALS, ECO MANAGEMENT CORPORATION and EMMANUEL C. OÑATE, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks to reverse and set aside the decision 1 promulgated on June 17, 1996 in
CA-GR No. CV-43239 of public respondent and its resolution2 dated November 29, 1996 denying petitioner’s motion
for reconsideration.3

The facts of this case as found by the Court of Appeals and which we find supported by the records are as follows:

On various dates in September, October, and November, 1980, appellant Land Bank of the Philippines (LBP)
extended a series of credit accommodations to appellee ECO, using the trust funds of the Philippine Virginia
Tobacco Administration (PVTA) in the aggregate amount of P26,109,000.00. The proceeds of the credit
accommodations were received on behalf of ECO by appellee Oñate.

On the respective maturity dates of the loans, ECO failed to pay the same. Oral and written demands were
made, but ECO was unable to pay. ECO claims that the company was in financial difficulty for it was unable
to collect its investments with companies which were affected by the financial crisis brought about by the
Dewey Dee scandal.

xxx

On October 20, 1981, ECO proposed and submitted to LBP a "Plan of Payment" whereby the former would
set up a financing company which would absorb the loan obligations. It was proposed that LBP would
participate in the scheme through the conversion of P9,000,000.00 which was part of the total loan, into equity.

On March 4, 1982, LBP informed ECO of the action taken by the former’s Trust Committee concerning the
"Plan of Payment" which reads in part, as follows:

xxx

Please be informed that the Bank’s Trust Committee has deliberated on the plan of payment during
its meetings on November 6, 1981 and February 23, 1982. The Committee arrived at a decision that
you may proceed with your Plan of Payment provided Land Bank shall not participate in the
undertaking in any manner whatsoever.

In view thereof, may we advise you to make necessary revision in the proposed Plan of Payment and
submit the same to us as soon as possible. (Records, p. 428)

On May 5, 1982, ECO submitted to LBP a "Revised Plan of Payment" deleting the latter’s participation in the
proposed financing company. The Trust Committee deliberated on the "Revised Plan of Payment" and
resolved to reject it. LBP then sent a letter to the PVTA for the latter’s comments. The letter stated that if LBP
did not hear from PVTA within five (5) days from the latter’s receipt of the letter, such silence would be
construed to be an approval of LBP’s intention to file suit against ECO and its corporate officers. PVTA did
not respond to the letter.

On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money against ECO and Emmanuel
C. Oñate before the Regional Trial Court of Manila, Branch 50.

After trial on the merits, a judgment was rendered in favor of LBP; however, appellee Oñate was absolved
from personal liability for insufficiency of evidence.

Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP claimed that there was an
error in computation in the amounts to be paid. LBP also questioned the dismissal of the case with regard to
Oñate.

On the other hand, ECO questioned its being held liable for the amount of the loan. Upon order of the court,
both parties submitted Supplemental Motions for Reconsideration and their respective Oppositions to each
other’s Motions.

On February 3, 1993, the trial court rendered an Amended Decision, the dispositive portion of which reads as
follows:

ACCORDINGLY, the Decision, dated December 3, 1990, is hereby modified to read as follows:

WHEREFORE, judgment is rendered ordering defendant Eco Management Corporation to pay

plaintiff Land Bank of the Philippines:

A. The sum of P26,109,000.00 representing the total amount of the ten (10) loan accommodations
plus 16% interest per annum computed from the dates of their respective maturities until fully paid,
broken down as follows:

1. the principal amount of P4,000,000.00 with interest at 16% computed from September 18,
1981;
2. the principal amount of P5,000,000.00 with interest at 16% computed from September 21,
1981;
3. the principal amount of P1,000,000.00 with interest rate at 16% computed from September
28, 1981;
4. the principal amount of P1,000,000.00 with interest at 15% computed from October 5, 1981;
5. the principal amount of P2,000,000.00 with interest rate at of 16% computed from October
8, 1981;
6. the principal amount of P2,000,000.00 with interest rate at of 16% from October 23, 1981;
7. the principal amount of P814,000.00 with interest rate at of 16% computed from November
1, 1981;
8. the principal amount of P2,295,000.00 with interest rate at of 16% computed from November
6, 1981;
9. the principal amount of P3,000,000.00 with interest rate at of 16% computed from November
7, 1981;
10. the principal amount of P5,000,000.00 with interest rate at 16% computed from November
9, 1981;

B. The sum of P260,000.00 as attorney’s fees; and

C. The costs of the suit.

The case as against defendant Emmanuel Oñate is dismissed for insufficiency of evidence.

SO ORDERED. (Records, p. 608)4

The Court of Appeals affirmed in toto the amended decision of the trial court.5
On June 9, 1996, petitioner filed a motion for reconsideration, which was denied in a resolution dated November 29,
1996. Hence, this present petition, assigning the following errors allegedly committed by the Court of Appeals:

THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT BASED ON THE FACTS AS
ESTABLISHED BY EVIDENCE, THERE EXISTS A SUBSTANTIAL AND JUSTIFIABLE GROUND UPON
WHICH THE LEGAL NOTION OF THE CORPORATE FICTION OF RESPONDENT ECO MANAGEMENT
CORPORATION MAY BE PIERCED.

THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING LIABILITY TO RESPONDENT

EMMANUEL C. OÑATE JOINTLY AND SEVERALLY WITH RESPONDENT ECO MANAGEMENT
CORPORATION FOR THE PRINCIPAL SUM OF P26 M PLUS INTEREST THEREON.

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE RULING OF THE LOWER COURT THE
SAME NOT BEING SUPPORTED BY THE EVIDENCE AND APPLICABLE LAWS AND JURISPRUDENCE. 6

The primary issues for resolution here are (1) whether or not the corporate veil of ECO Management Corporation
should be pierced; and (2) whether or not Emmanuel C. Oñate should be held jointly and severally liable with ECO
Management Corporation for the loans incurred from Land Bank.

Petitioner contends that the personalities of Emmanuel Oñate and of ECO Management Corporation should be treated
as one, for the particular purpose of holding respondent Oñate liable for the loans incurred by corporate respondent
ECO from Land Bank. According to petitioner, the said corporation was formed ostensibly to allow Oñate to acquire
loans from Land Bank which he used for his personal advantage.

Petitioner submits the following arguments to support its stand: (1) Respondent Oñate owns the majority of the interest
holdings in respondent corporation, specifically during the crucial time when appellees applied for and obtained the
loan from LANDBANK, sometime in September to November, 1980. (2) The acronym ECO stands for the initials of
Emmanuel C. Oñate, which is the logical, sensible and concrete explanation for the name ECO, in the absence of
evidence to the contrary. (3) Respondent Oñate has always referred to himself as the debtor, not merely as an officer
or a representative of respondent corporation. (4) Respondent Oñate personally paid P1 Million taken from trust
accounts in his name. (5) Respondent Oñate made a personal offering to pay his personal obligation. (6) Respondent
Oñate controlled respondent corporation by simultaneously holding two (2) corporate positions, viz., as Chairman and
as treasurer, beginning from the time of respondent corporation’s incorporation and continuously thereafter without
benefit of election. (7) Respondent corporation had not held any meeting of the stockholders or of the Board of
Directors, as shown by the fact that no proceeding of such corporate activities was filed with or borne by the record of
the Securities and Exchange Commission (SEC). The only corporate records respondent corporation filed with the
SEC were the following: Articles of Incorporation, Treasurer’s Affidavit, Undertaking to Change Corporate Name,
Statement of Assets and Liabilities.7

Private respondents, in turn, contend that Oñate’s only participation in the transaction between petitioner and
respondent ECO was his execution of the loan agreements and promissory notes as Chairman of the corporation’s
Board of Directors. There was nothing in the loan agreement nor in the promissory notes which would indicate that
Oñate was binding himself jointly and severally with ECO. Respondents likewise deny that ECO stands for Emmanuel
C. Oñate. Respondents also note that Oñate is no longer a majority stockholder of ECO and that the payment by a
third person of the debt of another is allowed under the Civil Code. They also alleged that there was no fraud and/or
bad faith in the transactions between them and Land Bank. Hence, private respondents conclude, there is no legal
ground to pierce the veil of respondent corporation’s personality.8

At the outset, we find the matters raised by petitioner in his argumentation are mainly questions of fact which are not
proper in a petition of this nature.9 Petitioner is basically questioning the evaluation made by the Court of Appeals of
the evidence submitted at the trial. The Court of Appeals had found that petitioner’s evidence was not sufficient to
justify the piercing of ECO’s corporate personality.10 Petitioner contended otherwise. It is basic that where what is
being questioned is the sufficiency of evidence, it is a question of fact.11 Nevertheless, even if we regard these matters
as tendering an issue of law, we still find no reason to reverse the findings of the Court of Appeals.

A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those
persons composing it as well as from any other legal entity to which it may be related.12 By this attribute, a stockholder
may not, generally, be made to answer for acts or liabilities of the said corporation, and vice versa. 13This separate
and distinct personality is, however, merely a fiction created by law for convenience and to promote the ends of
justice.14 For this reason, it may not be used or invoked for ends subversive to the policy and purpose behind its
creation15 or which could not have been intended by law to which it owes its being.16 This is particularly true when the
fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime,17 confuse legitimate legal or
judicial issues,18 perpetrate deception or otherwise circumvent the law.19 This is likewise true where the corporate
entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another
corporate entity.20 In all these cases, the notion of corporate entity will be pierced or disregarded with reference to the
particular transaction involved.21

The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using the personality of the
corporation as a means to perpetrate fraud and/or escape a liability and responsibility demanded by law. In order to
disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly
established.22 In the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be made
personally liable for corporate liabilities.23

The mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude that Oñate and ECO
is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is
not by itself sufficient reason for disregarding the fiction of separate corporate personalities. 24 Neither is the fact that
the name "ECO" represents the first three letters of Oñate’s name sufficient reason to pierce the veil. Even if it did, it
does not mean that the said corporation is merely a dummy of Oñate. A corporation may assume any name provided
it is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its
shareholders.

That respondent corporation in this case was being used as a mere alter ego of Oñate to obtain the loans had not
been shown. Bad faith or fraud on the part of ECO and Oñate was not also shown. As the Court of Appeals observed,
if shareholders of ECO meant to defraud petitioner, then they could have just easily absconded instead of going out
of their way to propose "Plans of Payment."25 Likewise, Oñate volunteered to pay a portion of the corporation’s
debt.26 This offer demonstrated good faith on his part to ease the debt of the corporation of which he was a part. It is
understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in
the said corporation are secured. In this case, it was established that the P1 Million did not come solely from Oñate.
It was taken from a trust account which was owned by Oñate and other investors.27 It was likewise proved that the P1
Million was a loan granted by Oñate and his co-depositors to alleviate the plight of ECO.28 This circumstance should
not be construed as an admission that he was really the debtor and not ECO.

In sum, we agree with the Court of Appeals’ conclusion that the evidence presented by the petitioner does not suffice
to hold respondent Oñate personally liable for the debt of co-respondent ECO. No reversible error could be attributed
to respondent court’s decision and resolution which petitioner assails.

WHEREFORE, the petition is DENIED for lack of merit. The decision and resolution of the Court of Appeals in CA-
G.R. CV No. 43239 are AFFIRMED. Costs against petitioner. SO ORDERED.

12. Arnolds vs. Willets and Patterson Ltd

G.R. No. L-20214 March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs. WILLITS & PATTERSON, LTD., defendant-appellee.

STATEMENT
For a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of the International
Banking Corporation of Manila, and it is conceded that he is a competent and experienced business man. July 31,
1916, C. D. Willits and I. L. Patterson were partners doing business in San Francisco, California, under the name of
Willits & Patterson. The plaintiff was then in San Francisco, and as a result of negotiations the plaintiff and the firm
entered into a written contract, known in the record as Exhibit A, by which the plaintiff was employed as the agent of
the firm in the Philippine Islands for certain purposes for the period of five years at a minimum salary of $200 per
month and travelling expenses. The plaintiff returned to Manila and entered on the discharge of his duties under the
contract. As a result of plaintiff's employment and the world war conditions, the business of the firm in the Philippines
very rapidly increased and grew beyond the fondest hopes of either party. A dispute arose between the plaintiff and
the firm as to the construction of Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile
Patterson retired from the firm and Willits became the sole owner of its assets. For convenience of operation and to
serve his own purpose, Willits organized a corporation under the laws of California with its principal office at San
Francisco, in and by which he subscribed for, and became the exclusive owner of all the capital stock except a few
shares for organization purposes only, and the name of the firm was used as the name of the corporation. A short
time after that Willits came to Manila and organized a corporation here known as Willits & Patterson, Ltd., in and to
which he again subscribed for all of the capital stock except the nominal shares necessary to qualify the directors. In
legal effect, the San Francisco corporation took over and acquired all of the assets and liabilities of the Manila
corporation. At the time that Willits was in Manila and while to all intents and purposes he was the sole owner of the
stock of corporations, there was a conference between him and the plaintiff over the disputed construction of Exhibit
A. As a result of which another instrument, known in the record as Exhibit B, was prepared in the form of a letter which
the plaintiff addressed to Willits at Manila on November 10, 1919, the purpose of which was to more clearly define
and specify the compensation which the plaintiff was to receive for his services. Willits received and confirmed this
letter by signing the name of Willits & Patterson, By C.d. Willits. At the time both corporations were legally organized,
and there is nothing in the corporate minutes to show that Exhibit B was ever formally ratified or approved by either
corporation. After its organization, the Manila corporation employed a regular accountant whose duty it was to audit
the accounts of the company and render financial statements both for the use of the local banks and the local and
parent corporations at San Francisco. From time to time and in the ordinary course of business such statements of
account were prepared by the accountant and duly forwarded to the home office, and among other things was a
statement of July 31, 1921, showing that there was due and owing the plaintiff under Exhibit B the sum of P106,277.50.
A short time previous to that date, the San Francisco corporation became involved in financial trouble, and all of its
assets were turned over to a "creditors' committee." When this statement was received, the "creditors' committee"
immediately protested its allowance. An attempt was made without success to adjust the matter on a friendly basis
and without litigation. January 10, 1922, the plaintiff brought this action to recover from the defendant the sum of
P106,277.50 with legal interest and costs, and written instruments known in the record as Exhibits A and B were
attached to, and made a part of, the complaint.

For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and denies each and
every other allegation, except as specifically admitted, and alleges that what is known as Exhibit B was signed by
Willits without the authority of the defendant corporation or the firm of Willits & Patterson, and that it is not an
agreement which was ever entered into with the plaintiff by the defendant or the firm, and, as a separate defense and
counterclaim, it alleges that on the 30th of June, 1920, there was a balance due and owing the plaintiff from the
defendant under the contract Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921,
under Exhibit A was $400 per month, or a total of P10,400. That about July 6, 1921, the plaintiff wrongfully took
P30,000 from the assets of the firm, and that he is now indebted to the firm in the sum of P10,858.95, with interest
and costs, from which it prays judgement.

The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and authority of the
defendant, and denies all other new matter in the answer.

Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant as prayed for in its
counterclaim, from which the plaintiff appeals, contending that the trial court erred in not holding that the contract
between the parties is that which is embodied in Exhibits A and B, and that the defendant assumed all partnership
obligations, and in failing to render judgment for the plaintiff, as prayed for, and in dismissing his complaint, and
denying plaintiff's motion for a new trial.

JOHNS, J.:
In their respective briefs opposing counsel agree that the important questions involved are "what was the contract
under which the plaintiff rendered services for five years ending July 31, 1921," and "what is due the plaintiff under
that contract." Plaintiff contends that his services were performed under Exhibits A and B, and that the defendant
assumed all of the obligations of the original partnership under Exhibit A, and is now seeking to deny its liability under,
and repudiate, Exhibit B. The defendant admits that Exhibit A was the original contract between Arnold and the firm
of Willits & Patterson by which he came to the Philippine Islands, and that it was therein agreed that he was to be
employed for a period of five years as the agent of Willits & Patterson in the Philippine Islands to operate a certain oil
mill, and to do such other business as might be deemed advisable for which he was to receive, first, the travelling
expenses of his wife and self from San Francisco to Manila, second, the minimum salary of $200 per month, third, a
brokerage of 1 per cent upon all purchases and sales of merchandise, except for the account of the coconut oil mill,
fourth, one-half of the profits on any transaction in the name of the firm or himself not provided for in the agreement.
That the agreement also provided that if it be found that the business was operated at a loss, Arnold should receive
a monthly salary of $400 during such period. That the business was operated at a loss from June 30, 1920, to July
31, 1921, and that for such reason, he was entitled to nothing more than a salary of $400 per month, or for that period
P10,400. Adding this amount to the P8,741.05, which the defendant admits he owed Arnold on June 30, 1920, makes
a total of P19,141.05, leaving a balance due the defendant as set out in the counterclaim. In other words, that the
plaintiff's compensation was measured by, and limited to, the above specified provisions in the contract Exhibit A, and
that the defendant corporation is not bound by the terms or provisions of Exhibit B, which is as follows:

WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.

CHAS. D. WILLITS, Esq.,

Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits & Patterson is as
under:

Commissions. Willits & Patterson, San Francisco, pay me a commission of one per cent on all
purchases made for them in the Philippines or sales made to them by Manila and one per cent on all
sales made for them in the Philippines, or purchases made from them by Manila. If such purchases or
sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis the commission
is computed on the c. i. f. price

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits & Patterson, San Francisco,
and Willits & Patterson, Ltd., Manila.

Profits. On all business transacted between Willits & Patterson, Ltd. and others than Willits &
Patterson, San Francisco, half the profits are to be credited to my account and half to the Profit & Loss
account of Willits & Patterson, Ltd., Manila.

On all other business, such as the Cooperative Coconut Products Co. account, or any other business
we may undertake as agents or managers, half the profits are to be credited to my account and half
to the Profit & Loss account of Willits & Patterson, Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have their own funds
invested in the capital stock or a corporation, I of course do not participate in the earnings of such
stock, any more than Willits & Patterson would participate in the earnings of stock held by me on my
account.

If the foregoing conforms to your understanding of our agreement, please confirm below.

Yours faithfully,
 (Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON

By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L. Patterson constituted
the firm of Willits & Patterson doing business in the City of San Francisco; that later Patterson retired from the firm,
and Willits acquired all of his interests and thereafter continued the business under the name and style of Willits &
Patterson; that the original contract Exhibit A was made between the plaintiff and the old firm at San Francisco on
July 31, 1916, to cover a period of five years from that date; that plaintiff entered upon the discharged of his duties
and continued his services in the Philippine Islands to someone for the period of five years; that on November 10,
1919, and as a result of conferences between Willits and the plaintiff, Exhibit B was addressed and signed in the
manner and form above stated in the City of Manila. A short time prior to that date Willits organized a corporation in
San Francisco, in the State of California, which took over and acquired all of the assets of the firm's business in
California then being conducted under the name and style of Willits & Patterson; that he subscribed for all of the
capital stock of the corporation, and that in truth and in fact he was the owner of all of its capital stock. After this was
done he caused a new corporation to be organized under the laws of the Philippine Islands with principal office at
Manila, which took over and acquired all the business and assets of the firm of Willits & Patterson in the Philippine
Islands, in and to which, in legal effect, he subscribed for all of its capital stock, and was the owner of all of its stock.
After both corporations were organized the above letter was drafted and signed. The plaintiff contends that the signing
of Exhibit B in the manner and under the conditions in which it was signed, and through the subsequent acts and
conduct of the parties, was ratified and, in legal effect, became and is now binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he was to all intents
and purposes the legal owner of all the stock in both corporations. It also appears from the evidence that the parent
corporation at San Francisco took over and acquired all of the assets and liabilities of the local corporation at Manila.
That after it was organized the Manila corporation kept separate records and account books of its own, and that from
time to time financial statements were made and forwarded to the home office, from which it conclusively appears that
plaintiff was basing his claim for services upon Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit
B was signed was there ever any dispute between plaintiff and Willits as to the compensation for plaintiff's services.
That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed and at all times in force and effect,
after it was signed November 10, 1919. It appears from an analysis of Exhibit B that it was for the mutual interest of
both parties. From a small beginning, the business was then in a very flourishing conditions and growing fast, and the
profits were very large and were running into big money.

Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall be divided in
equal shares between the said parties hereto; (b) that Arnold should receive a brokerage of 1 per cent from all
purchases and sales of merchandise, except for the account of the coconut mills; (c) that the net profits from all other
business should be divided in equal half shares between the parties hereto."

Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all the profits and a
brokerage of 1 per cent from all purchases and sales, except those for the account of the coconut oil mills, which
under the volume of business then existing would run into a very large sum of money. It was for such reason and after
personal conferences between them, and to settle all disputed questions, that Exhibit B was prepared and signed.

The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff faithfully performed
all the duties incumbent upon him under his contract of employment, it being understood, however, that this admission
does not include an admission that the plaintiff placed a proper interpretation upon his right to remuneration under
said contract of employment."

It being admitted that the plaintiff worked "under his contract of employment" for the period of five years, the question
naturally arises, for whom was he working? His contract was made with the original firm of Willits & Patterson, and
that firm was dissolved and it ceased to exist, and all of its assets were merged in, and taken over by, the parent
corporation at San Francisco. In the very nature of things, after the corporation was formed, the plaintiff could not and
did not continue to work for the firm, and, yet, he continued his employment for the full period of five years. For whom
did he work after the partnership was merged in the corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the mutual interests of both
parties, and that if the contract Exhibit A was to be enforced according to its terms, that Arnold might well contend for
a much larger sum of money for his services. In truth and in fact Willits and both corporations recognized his
employment and accepted the benefits of his services. He continued his employment and rendered his services after
the corporation were organized and Exhibit B was signed just the same as he did before, and both corporations
recognized and accepted his services. Although the plaintiff was president of the local corporation, the testimony is
conclusive that both of them were what is known as a one man corporation, and Willits, as the owner of all of the
stock, was the force and dominant power which controlled them. After Exhibit B was signed it was recognized by
Willits that the plaintiff's services were to be performed and measured by its term and provisions, and there never was
any dispute between plaintiff and Willits upon that question.

The controversy first arose after the corporation was in financial trouble and the appointment of what is known in the
record as a "creditors' committee." There is no claim or pretense that there was any fraud or collusion between plaintiff
and Willits, and it is very apparent that Exhibit B was to the mutual interest of both parties. It is elementary law that if
Exhibit B is a binding contract between the plaintiff and Willits and the corporations, it is equally binding upon the
creditors' committee. It would not have any higher or better legal right than the corporation itself, and could not make
any defense which it could not make. It is very significant that the claim or defense which is now interposed by the
creditors' committee was never made or asserted at any previous time by the defendant, and that it never was made
by Willits, and it is very apparent that if he had remained in control of the corporation, it would never have made the
defense which is now made by the creditors' committee. The record is conclusive that at the time he signed Exhibit B,
Willits was, in legal effect, the owner and holder of all the stock in both corporations, and that he approved it in their
interest, and to protect them from the plaintiff having and making a much larger claim under Exhibit A. As a matter of
fact, it appears from the statement of Mr. Larkin, the accountant, in the record that if plaintiff's cause of action was
now founded upon Exhibit A, he would have a claim for more than P160,000.

Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from its membership has its
limitations. It must be noted that this separate existence is for particular purposes. It must also be remembered
that there can be no corporate existence without persons to compose it; there can be no association without
associates. This separate existence is to a certain extent a legal fiction. Whenever necessary for the interests
of the public or for the protection or enforcement of the rights of the membership, courts will disregard this
legal fiction and operate upon both the corporation and the persons composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L. R. A., 145, in which the Supreme
Court of Ohio says:

"So long as a proper use is made of the fiction that a corporation is an entity apart from its shareholders, it is
harmless, and, because convenient, should not be called in question; but where it is urged to an end
subversive of its policy, or such is the issue, the fiction must be ignored, and the question determined whether
the act in question, though done by shareholders, — that is to say, by the persons uniting in one body, — was
done simply as individuals, and with respect to their individual interest as shareholders, or was done ostensibly
as such, but, as a matter of fact, to control the corporation, and affect the transaction of its business, in the
same manner as if the act had been clothed with all the formalities of a corporate act. This must be so,
because, the stockholders having a dual capacity, and capable of acting in either, and a possible interest to
conceal their character when acting in their corporate capacity, the absence of the formal evidence of the
character of the act cannot preclude judicial inquiry on the subject. If it were otherwise, then in that department
of the law fraud would enjoy an immunity awarded to it in no other."

Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit
of such individual owner, the corporation and the individual should be deemed to be the same. (U. S. Gypsum
Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

 While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it in the first
instance could not have made, it may by ratification render binding on it a contract, entered into on its behalf
by its officers or agents without authority. As a general rule such ratification need not be manifested by any
voted or formal resolution of the corporation or be authenticated by the corporate seal; no higher degree of
evidence is requisite in establishing ratification on the part of a corporation, than is requisite in showing an
antecedent authorization.

xxx xxx xxx

SEC. 666. The assent or approval of a corporation to acts done on its account may be inferred in the same
manner that the absent of a natural person may be, and it is well settled that where a corporation with full
knowledge of the unauthorized act of its officer or agents acquiesces in and consents to such acts, it thereby
ratifies them, especially where the acquiescence results in prejudice to a third person.

xxx xxx xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer has been allowed in his official
capacity to manage its affair, his authority to represent the corporation may be inferred from the manner in
which he has been permitted by the directors to transact its business.

SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate officers or agents
within the scope or apparent scope of their authority is attributed to the corporation.

SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act received and
enjoys the benefits thereof, it impliedly ratifies the unauthorized act if it is one capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more easily inferred where the
corporation receives and retains property under it, and as a general rule where a corporation, through its
proper officers or board, takes and retains the benefits of the unauthorized act or contract of an officer or
agent, with full knowledge of all the material facts, it thereby ratifies and becomes bound by such act of
contract, together with all the liabilities and burdens resulting therefrom, and in some jurisdiction this rule is,
in effect, declared by statute. Thus the corporation is liable on the ground of ratification where, with knowledge
of the facts, it accepts the benefit of services rendered under an unauthorized contract of employment . . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to time and in the
ordinary course of business made and prepared financial statements showing its assets and liabilities, true copies of
which were sent to the home office in San Francisco. It appears upon their face that plaintiff's compensation was
made and founded on Exhibit B, and that such statements were made and prepared by the accountant on the
assumption that Exhibit B was in full force and effect as between the plaintiff and the defendant. In the course of
business in the early part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for future delivery at
P740 per ton. Due to break in the market, plaintiff was able to purchase the oil at P380 per ton or a profit of P180,000.

It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San
Francisco, half the profit are to be credited to may account and half to the Profit & Loss account Willits &
Patterson, Ltd., Manila.

The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed that all of the oil
purchased should be held as security for the full payment of the purchase price. As a result, the defendant itself
received the P105,000 in cash, P75,000 in notes, and still holds the 500 tons of oil as security for the balance of the
purchase price. This transaction was shown in the semi-annual financial statement for the period ending December
31, 1920. That is to say, the business was transacted by and through the plaintiff, and the defendant received and
accepted all of the profits on the deal, and the statement which was rendered gave him a credit for P90,737.88, or
half the profit as provided in the contract Exhibit B, with interest.

Although the previous financial statements show upon their face that the account of plaintiff was credit with several
small items on the same basis, it was not until the 23d of March, 1921, that any objection was ever made by anyone,
and objection was made for the first time by the creditors' committee in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon the defendant
corporation, and the plaintiff is entitled to recover for his services on that writing as it modified the original contract
Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the plaintiff is entitled to
recover P106,277.50. It is very apparent that his statement was based upon the assumption that there was a net profit
of P180,000 on the 500 tons of oil, of which the plaintiff was entitled to one-half.

In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the amount which
the defendant paid for them at the time of the purchase or P380 per ton, and the record shows that the defendant took
and now has the possession of all of the oil secure the payment of the price at which it was sold. Hence, the profit on
the deal to the defendant at the time of the sale would amount to the difference between what the defendant paid for
the oil and the amount which it received for the oil at the time it sold the oil. It appears that at the time of the sale the
defendant only received P105,000 in cash, and that it took and accepted the promissory notes of Cruz & Tan Chong
Say, the purchasers, for P75,000 more which have been collected and may never be. Hence, it must follow that the
amount evidence by the notes cannot now be deemed or treated as profits on the deal and cannot be until such times
as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be entered here in favor of the plaintiff and
against the defendant for the sum of P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th day
of January, 1922. In addition thereto, judgment will be rendered against the defendant in substance and to the effect
that the plaintiff is the owner of an undivided one-half interest in the promissory notes for P75,000 which were executed
by Cruz & Tan Chong Say, as a part of the purchase price of the oil, and that he is entitled to have and receive one-
half of all the proceeds from the notes or either of them, and that also he have judgment against the defendant for
costs. So ordered.

13. Lidell & Co vs CIR

G.R. No. L-9687 June 30, 1961

LIDDELL & CO., INC., petitioner-appellant,

vs. THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

BENGZON, C.J.:

Statement. This is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency liability of
P1,317,629.61 on Liddell & Co., Inc.

Said Company lists down several issues which may be boiled to the following:

(a) Whether or not Judge Umali of the Tax Court below could validly participate in the making of the decision;

(b) Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical corporations, the
latter being merely .the alter ego of the former;

(c) Whether or not, granting the identical nature of the corporations, the assessment of tax liability, including
the surcharge thereon by the Court of Tax Appeals, is correct.

Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right to present additional
evidence.
Said undisputed facts are substantially as follows:

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation establish in the Philippines
on February 1, 1946, with an authorized capital of P100,000 divided into 1000 share at P100 each. Of this
authorized capital, 196 shares valued at P19,600 were subscribed and paid by Frank Liddell while the other
four shares were in the name of Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano at one shares
each. Its purpose was to engage in the business of importing and retailing Oldsmobile and Chevrolet
passenger cars and GMC and Chevrolet trucks..

On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able to declare a 90%
stock dividend after which declaration on, Frank Liddells holding in the Company increased to 1,960 shares
and the employees, Charles Kurz E.J. Darras, Angel Manzano and Julian Serrano at 10 share each. The
declaration of stock dividend was followed by a resolution increasing the authorized capital of the company to
P1,000.000 which the Securities & Exchange Commission approved on March 3, 1947. Upon such approval,
Frank Liddell subscribed to 3,000 additional shares, for which he paid into the corporation P300,000 so that
he had in his own name 4,960 shares.

On May 24, 1957, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and Serrano on the other,
executed an agreement (Exhibit A) which was further supplemented by two other agreements (Exhibits B and
C) dated May 24, 1947 and June 3, 1948, wherein Frank Liddell transferred (On June 7, 1948) to various
employees of Liddell & Co. shares of stock.

At the annual meeting of stockholders of Liddell & Co. held on March 9, 1948, a 100% stock dividend was
declared, thereby increasing the issued capital stock of aid corporation from P1,000.000 to P 3,000,000 which
increase was duly approved by the Securities and Exchange Commission on June 7, 1948. Frank Liddell
subscribed to and paid 20% of the increase of P400,000. He paid 25% thereof in the amount of P100,000 and
the balance of P3,000,000 was merely debited to Frank Liddell-Drawing Account and credited to Subscribed
Capital Stock on December 11, 1948.

On March 8, 1949, stock dividends were again issued by Liddell & Co. and in accordance with the agreements,
Exhibits A, B, and C, the stocks of said company stood as follows:

No. of
Name Amount Per Cent
Shares
Frank Liddell 13,688 P1,368,800 72.00%
Irene Liddell 1 100 .01%
Mercedes Vecin 1 100 .01%
Charles Kurz 1,225 122,500 6.45%
E.J. Darras 1,225 122,500 6.45%
Angel Manzano 1,150 115,000 6.06%
Julian Serrano 710 71,000 3.74%
E. Hasim 500 50,000 2.64%
G. W. Kernot 500 50,000 2.64%
19,000 P1,900,000 100.00%

On November 15, 1948, in accordance with a resolution of a special meeting of the Board of Directors of Liddell &
Co., stock dividends were again declared. As a result of said declaration and in accordance with the agreements,
Exhibits, A, B, and C, the stockholdings in the company appeared to be:

No. of
Name Amount Per Cent
Shares
Frank Liddell 19,738 P1,973,800 65.791%
Irene Liddell 1 100 .003%
 Mercedes Vecin 1 100 .003%
Charles Kurz 2,215 221,500 7.381%
E.J. Darras 2,215 221,500 7.381%
Angel Manzano 1,810 181,000 6.031%
Julian Serrano 1,700 170,000 5.670%
E. Hasim 830 83,000 2.770%
G. W. Kernot 1,490 149,000 4.970%
30,000 P3,000,000 100.000%

On the basis of the agreement Exhibit A, (May, 1947) "40%" of the earnings available for dividends accrued to Frank
Liddell although at the time of the execution of aid instrument, Frank Liddell owned all of the shares in said corporation.
45% accrued to the employees, parties thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2% and Julian
Serrano 7-1/2%. The agreement Exhibit A was also made retroactive to 1946. Frank Liddell reserved the right to
reapportion the 45% dividends pertaining to the employees in the future for the purpose of including such other faithful
and efficient employees as he may subsequently designate. (As a matter of fact, Frank Liddell did so designate two
additional employees namely: E. Hasim and G. W. Kernot). It was for such inclusion of future faithful employees that
Exhibits B-1 and C were executed. As per Exhibit C, dated May 13, 1948, the 45% given by Frank Liddell to his
employees was reapportioned as follows: C. Kurz — 12,%; E. J. Darras — 12%; A. Manzano — l2%; J. Serrano —
3-1/2%; G. W. Kernot — 2%.

Exhibit B contains the employees' definition in detail of the manner by which they sought to prevent their share-
holdings from being transferred to others who may be complete strangers to the business on Liddell & Co.

From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation of Liddell & Co. Inc.,
was amended so as to limit its business activities to importations of automobiles and trucks, Liddell & Co. was engaged
in business as an importer and at the same time retailer of Oldsmobile and Chevrolet passenger cars and GMC and
Chevrolet trucks.

On December 20, 1948, the Liddell Motors, Inc. was organized and registered with the Securities and Exchange
Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed and paid for as follows:
Irene Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario
and Esmenia Silva, 1 share each.

At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from their respective positions in the
Retail Dept. of Liddell & Co. and they were taken in and employed by Liddell Motors, Inc.: Kurz as Manager-Treasurer,
Manzano as General Sales Manager for cars and Kernot as General Sales Manager for trucks.

Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them instead to Liddell Motors,
Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then, Liddell & Co. paid sales taxes on
the basis of its sales to Liddell Motors Inc. considering said sales as its original sales.

Upon review of the transactions between Liddell & Co. and Liddell Motors, Inc. the Collector of Internal Revenue
determined that the latter was but an alter ego of Liddell & Co. Wherefore, he concluded, that for sales tax purposes,
those sales made by Liddell Motors, Inc. to the public were considered as the original sales of Liddell & Co.
Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. a sales tax deficiency, including
surcharges, in the amount of P1,317,629.61. In the computation, the gross selling price of Liddell Motors, Inc. to the
general public from January 1, 1949 to September 15, 1950, was made the basis without deducting from the selling
price, the taxes already paid by Liddell & Co. in its sales to the Liddell Motors Inc.

The Court of Tax Appeals upheld the position taken by the Collector of Internal Revenue.

A. Judge Umali: Appellant urges the disqualification on of Judge Roman M. Umali to participate in the decision of the
instant case because he was Chief of the Law Division, then Acting Deputy Collector and later Chief Counsel of the
Bureau of Internal Revenue during the time when the assessment in question was made.1 In refusing to disqualify
himself despite admission that had held the aforementioned offices, Judge Umali stated that he had not in any way
participated, nor expressed any definite opinion, on any question raised by the parties when this case was presented
for resolution before the said bureau. Furthermore, after careful inspection of the records of the Bureau, he (Judge
Umali as well as the other members of the court below), had not found any indication that he had expressed any
opinion or made any decision that would tend to disqualify him from participating in the consideration of the case in
the Tax Court.

At this juncture, it is well to consider that petitioner did not question the truth of Judge Umali's statements. In view
thereof, this Tribunal is not inclined to disqualify said judge. Moreover, in furtherance of the presumption of the judge's
moral sense of responsibility this Court has adopted, and now here repeats, the ruling that the mere participation of a
judge in prior proceedings relating to the subject in the capacity of an administrative official does not necessarily
disqualify him from acting as judge.2

Appellant also contends that Judge Umali signed the said decision contrary to the provision of Section 13, Republic
Act No. 1125;3 that whereas the case was submitted for decision of the Court of Tax Appeals on July 12, 1955, and
the decision of Associate Judge Luciano and Judge Nable were both signed on August 11, 1955 (that is, on the last
day of the 30-day period provided for in Section 13, Republic Act No. 1125), Judge Umali signed the decision August
31, 1955 or 20 days after the lapse of the 30-day period allotted by law.

By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating the Court of Tax Appeals) like the
law governing the procedure in the court of Industrial Relations, there is no provision invalidating decisions rendered
after the lapse of 30 days, the requirement of Section 13, Republic Act No. 1125 should be construed as directory.4

Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No. 1125 (quoted in the
margin)5 confirms this view; because in providing for two thirty-day periods, the law means that decision may still be
rendered within the second period of thirty days (Judge Umali signed his decision within that period).

B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. is the alter ego of Liddell & Co.
Inc., we are fully convinced that Liddell & Co. is wholly owned by Frank Liddell. As of the time of its organization, 98%
of the capital stock belonged to Frank Liddell. The 20% paid-up subscription with which the company began its
business was paid by him. The subsequent subscriptions to the capital stock were made by him and paid with his own
money.

These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the authority to designate in the future
the employee who could receive earnings of the corporation; to apportion among the stock holders the share in the
profits; (2) that all certificates of stock in the names of the employees should be deposited with Frank Liddell duly
indorsed in blank by the employees concerned; (3) that each employee was required to sign an agreement with the
corporation to the effect that, upon his death or upon his retirement or separation for any cause whatsoever from the
corporation, the said corporation should, within a period of sixty days therefor, have the absolute and exclusive option
to purchase and acquire the whole of the stock interest of the employees so dying, resigning, retiring or separating.

These stipulations in our opinion attest to the fact that Frank Liddell also owned it. He supplied the original his complete
control over the corporation.

As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell also owned it. He supplied the original capital
funds.6 It is not proven that his wife Irene, ostensibly the sole incorporator of Liddell Motors, Inc. had money of her
own to pay for her P20,000 initial subscription.7 Her income in the United States in the years 1943 and 1944 and the
savings therefrom could not be enough to cover the amount of subscription, much less to operate an expensive trade
like the retail of motor vehicles. The alleged sale of her property in Oregon might have been true, but the money
received therefrom was never shown to have been saved or deposited so as to be still available at the time of the
organization of the Liddell Motors, Inc.

The evidence at hand also shows that Irene Liddell had scant participation in the affairs of Liddell Motors, Inc. She
could hardly be said to possess business experience. The income tax forms record no independent income of her
own. As a matter of fact, the checks that represented her salary and bonus from Liddell Motors, Inc. found their way
into the personal account of Frank Liddell. Her frequent absences from the country negate any active participation in
the affairs of the Motors company.
There are quite a series of conspicuous circumstances that militate against the separate and distinct personality of
Liddell Motors, Inc. from Liddell & Co.8 We notice that the bulk of the business of Liddell & Co. was channeled through
Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no activities except to secure cars, trucks, and
spare parts from Liddell & Co. Inc. and then sell them to the general public. These sales of vehicles by Liddell & Co.
to Liddell Motors, Inc. for the most part were shown to have taken place on the same day that Liddell Motors, Inc. sold
such vehicles to the public. We may even say that the cars and trucks merely touched the hands of Liddell Motors,
Inc. as a matter of formality.

During the first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank Liddell which were deposited
by Frank Liddell in his personal account with the Philippine National Bank. During this time also, he issued in favor of
Liddell Motors, Inc. six (6) checks drawn against his personal account with the same bank. The checks issued by
Frank Liddell to the Liddell Motors, Inc. were significantly for the most part issued on the same day when Liddell &
Co. Inc. issued the checks for Frank Liddell9 and for the same amounts.

It is of course accepted that the mere fact that one or more corporations are owned and controlled by a single
stockholder is not of itself sufficient ground for disregarding separate corporate entities. Authorities10 support the rule
that it is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific
activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a substantial
one, conducted lawfully and without fraud on another, its separate identity is to be respected.

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank
Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one
from the other. There is, however, in this instant case, a peculiar consequence of the organization and activities of
Liddell Motors, Inc.

Under the law in force at the time of its incorporation the sales tax on original sales of cars (sections 184, 185 and
186 of the National Internal Revenue Code), was progressive, i.e. 10% of the selling price of the car if it did not exceed
P5000, and 15% of the price if more than P5000 but not more than P7000, etc. This progressive rate of the sales tax
naturally would tempt the taxpayer to employ a way of reducing the price of the first sale. And Liddell Motors, Inc. was
the medium created by Liddell & Co. to reduce the price and the tax liability.

Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co. Inc. to Liddell Motors, Inc. on January
17, 1948 for P4,546,000.00 including tax; the price of the car was P4,133,000.23, the tax paid being P413.22, at 10%.
And when this car was later sold (on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5500, no more sales
tax was paid.11 In this price of P5500 was included the P413.32 representing taxes paid by Liddell & Co. Inc. in the
sale to Liddell Motors, Inc. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. the price of P5500, the
balance of P5,087.68 would have been the net selling price of Liddell & Co., Inc. to the general public (had Liddell
Motors, Inc. not participated and intervened in the sale), and 15% sales tax would have been due. In this transaction,
P349.68 in the form of taxes was evaded. All the other transactions (numerous) examined in this light will inevitably
reveal that the Government coffers had been deprived of a sizeable amount of taxes.

As opined in the case of Gregory v. Helvering,12 "the legal right of a taxpayer to decrease the amount of what otherwise
would be his taxes, or altogether avoid them by means which the law permits, cannot be doubted." But, as held in
another case,13 "where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended
only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a
mischievous fiction."

Consistently with this view, the United States Supreme Court14 held that "a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard the separate
corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the benefits
of the transactions as the person accordingly taxable."

Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made through an other and
distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and
the same is to sanction a circumvention of our tax laws.15

C. Tax liability computation: In the Yutivo case16 the same question involving the computation of the alleged deficiency
sales tax has been raised. In accordance with our ruling in said case we hold as correctly stated by Judge Nable in
his concurring and dissenting opinion on this case, that the deficiency sales tax should be based on the selling price
obtained by Liddell Motors, Inc. to the public AFTER DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO.,
INC. in its sales to Liddell Motors, Inc.

On the imposition of the 50% surcharge by reason of fraud, we see that the transactions between Liddell Motors Inc.
and Liddell & Co., Inc. have always been embodied in proper documents, constantly subject to inspection by the tax
authorities. Liddell & Co., Inc. have always made a full report of its income and receipts in its income tax returns.

Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on the basis of its sales to Liddell
Motors, Inc. and not on those by the latter to the public, it cannot be held that the Liddell & Co., Inc. deliberately made
a false return for the purpose of defrauding the government of its revenue, and should suffer a 50% surcharge. But
penalty for late payment (25%) should be imposed.

In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co., Inc. is declared liable only for
the amount of P426,811.67 with 25% surcharge for late payment and 6% interest thereon from the time the judgment
becomes final.

As it appears that, during the pendency of this litigation appellant paid under protest to the Government the total
amount assessed by the Collector, the latter is hereby required to return the excess to the petitioner. No costs.

14. PNB vs. Hyrdo Resources Corp

G.R. No. 167530 March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner,

vs. HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

x-----------------------x

G.R. No. 167561

ASSET PRIVATIZATION TRUST, Petitioner,

vs. HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

x-----------------------x

G.R. No. 167603

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs. HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 dated November 30, 2004 and the Resolution3 dated
March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said Decision affirmed the Decision4 dated
November 6, 1995 of the Regional Trial Court (RTC) of Makati City, Branch 62, granting a judgment award of
₱8,370,934.74, plus legal interest, in favor of respondent Hydro Resources Contractors Corporation (HRCC) with the
modification that the Privatization and Management Office (PMO), successor of petitioner Asset Privatization Trust
(APT),5 has been held solidarily liable with Nonoc Mining and Industrial Corporation (NMIC)6 and petitioners Philippine
National Bank (PNB) and Development Bank of the Philippines (DBP), while the Resolution denied reconsideration
separately prayed for by PNB, DBP, and APT.

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque
Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the
assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC.7 DBP and PNB
owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares.8As of September 1984,
the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo
Agulto, and Faustino Agbada, were either from DBP or PNB.9

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road Construction Program
in 1985 for a total contract price of ₱35,770,120. After computing the payments already made by NMIC under the
program and crediting the NMIC’s receivables from

Hercon, Inc., the latter found that NMIC still has an unpaid balance of ₱8,370,934.74.10 Hercon, Inc. made several
demands on NMIC, including a letter of final demand dated August 12, 1986, and when these were not heeded, a
complaint for sum of money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and
PNB solidarily liable for the amount owing Hercon, Inc.11 The case was docketed as Civil Case No. 15375.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the
amendment of the complaint to substitute HRCC for Hercon, Inc.12

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT
for the expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant
to the said Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of
the National Government assigning, transferring and conveying certain assets and liabilities, including their respective
stakes in NMIC.13 In turn and on even date, the National Government transferred the said assets and liabilities to the
APT as trustee under a Trust Agreement.14 Thus, the complaint was amended for the second time to implead and
include the APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was
entered into by its then President without any authority. Moreover, the said contract allegedly failed to comply with
laws, rules and regulations concerning government contracts. NMIC further claimed that the contract amount was
manifestly excessive and grossly disadvantageous to the government. NMIC made counterclaims for the amounts
already paid to Hercon, Inc. and attorney’s fees, as well as payment for equipment rental for four trucks, replacement
of parts and other services, and damage to some of NMIC’s properties.16

For its part, DBP’s answer17 raised the defense that HRCC had no cause of action against it because DBP was not
privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate from that of DBP. DBP further
interposed a counterclaim for attorney’s fees.18

PNB’s answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCC’s part and laches as
defenses, claiming that the inclusion of PNB in the complaint was the first time a demand for payment was made on
it by HRCC. PNB also invoked the separate juridical personality of NMIC and made counterclaims for moral damages
and attorney’s fees.20

APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity between Hercon,
Inc. and APT, and the National Government’s preferred lien over the assets of NMIC.22

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It pierced the corporate
veil of NMIC and held DBP and PNB solidarily liable with NMIC:

On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this Court likewise finds
for the plaintiff.

From the documentary evidence adduced by the plaintiff, some of which were even adopted by defendants and DBP
and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and
submarkings, inclusive), it had been established that except for five (5) qualifying shares, NMIC is owned by
defendants DBP and PNB, with the former owning 57% thereof, and the latter 43%. As of September 24, 1984, all the
members of NMIC’s Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo
Agulto, and Faustino Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando
M. Zosa, then Governor of DBP, who was signing and entering into contracts with third persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard
legal fiction that two (2) corporations are distinct entities, and treat them as identical." (Phil. Veterans Investment
Development Corp. vs. CA, 181 SCRA 669).

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB.
Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s unpaid obligations to plaintiff.23

Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the trial court reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO RESOURCES
CONTRACTORS CORPORATION and against the defendants NONOC

MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE
NATIONAL BANK, ordering the aforenamed defendants, to pay the plaintiff jointly and severally, the sum of
₱8,370,934.74 plus legal interest thereon from date of demand, and attorney’s fees equivalent to 25% of the judgment
award.

The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND INDUSTRIAL
CORPORATION is directed to ensure compliance with this Decision.24

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong for the RTC to
pierce the veil of NMIC’s corporate personality and hold DBP and PNB solidarily liable with NMIC.25

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the veil of the
corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In particular, the Court of
Appeals made the following findings:

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of 57% and
43% respectively; that said two (2) appellants are the only stockholders, with the qualifying stockholders of five (5)
consisting of its own officers and included in its charter merely to comply with the requirement of the law as to number
of incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.

xxxx

We find it therefore correct for the lower court to have ruled that:

"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB.
Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s unpaid obligation to
plaintiff."26(Citation omitted.)

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the corporate veil of
NMIC should be pierced, ratiocinating:

For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial contracts, and
then using such separate entity to evade the payment of a just debt, would be the height of injustice and iniquity.
Surely that could not have been the intendment of the law with respect to corporations. x x x.27

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in favor of
appellee Hydro Resources Contractors Corporation in the amount of ₱8,370,934.74 with legal interest from date of
demand is hereby AFFIRMED, but the dismissal of the case as against Assets Privatization Trust is REVERSED, and
its successor the Privatization and Management Office is INCLUDED as one of those jointly and severally liable for
such indebtedness. The award of attorney’s fees is DELETED.

All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of DBP, PNB, and APT were denied.29

Hence, these consolidated petitions.30

All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and distinct from both
PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is not a sufficient ground for
disregarding the separate corporate personality of NMIC because NMIC was not a mere adjunct, business conduit or
alter ego of DBP and PNB. According to them, the application of the doctrine of piercing the corporate veil is
unwarranted as nothing in the records would show that the ownership and control of the shareholdings of NMIC by
DBP and PNB were used to commit fraud, illegality or injustice. In the absence of evidence that the stock control by
DBP and PNB over NMIC was used to commit some fraud or a wrong and that said control was the proximate cause
of the injury sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is misplaced.31

DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMIC’s exclusive and
separate corporate indebtedness to HRCC, such liability of the two banks was transferred to and assumed by the
National Government through the APT, now the PMO, under the respective deeds of transfer both dated February 27,
1997 executed by DBP and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and Administrative Order
No. 14 dated February 3, 1987.32

For its part, the APT contends that, in the absence of an unqualified assumption by the National Government of all
liabilities incurred by NMIC, the National Government through the APT could not be held liable for NMIC’s contractual
liability. The APT asserts that HRCC had not sufficiently shown that the APT is the successor-in-interest of all the
liabilities of NMIC, or of DBP and PNB as transferors, and that the adjudged liability is included among the liabilities
assigned and transferred by DBP and PNB in favor of the National Government.33

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of corporate fiction."
It claims that NMIC was the alter ego of DBP and PNB which owned, conducted and controlled the business of NMIC
as shown by the following circumstances: NMIC was owned by DBP and PNB, the officers of DBP and PNB were also
the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC further argues that a parent
corporation may be held liable for the contracts or obligations of its subsidiary corporation where the latter is a mere
agency, instrumentality or adjunct of the parent corporation.34

Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC because the APT
assumed the obligations of DBP and PNB as the successor-in-interest of the said banks with respect to the assets
and liabilities of NMIC.35 As trustee of the Republic of the Philippines, the APT also assumed the responsibility of the
Republic pursuant to the following provision of Section 2.02 of the respective deeds of transfer executed by DBP and
PNB in favor of the Republic:

SECTION 2. TRANSFER OF BANK’S LIABILITIES

xxxx

2.02 With respect to the Bank’s liabilities which are contingent and those liabilities where the Bank’s creditors consent
to the transfer thereof is not obtained, said liabilities shall remain in the books of the BANK with the GOVERNMENT
funding the payment thereof.36

After a careful review of the case, this Court finds the petitions impressed with merit.

A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers,
attributes, and properties expressly authorized by law or incident to its existence.37 It has a personality separate and
distinct from that of its stockholders and from that of other corporations to which it may be connected. 38 As a
consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital
formation,39 a corporation incurs its own liabilities and is legally responsible for payment of its obligations. 40 In other
words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or
credit of the stockholder.41 This protection from liability for shareholders is the principle of limited liability.42

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest
of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.43

However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may
be applied. Otherwise an injustice, although unintended, may result from its erroneous application.44 Thus, cutting
through the corporate cover requires an approach characterized by due care and caution:

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be
mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must
be clearly and convincingly established; it cannot be presumed. x x x.45 (Emphases supplied; citations omitted.)

Sarona v. National Labor Relations Commission46 has defined the scope of application of the doctrine of piercing the
corporate veil:

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience
as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the
corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation
is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. (Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of DBP and
PNB) should be held solidarily liable for using NMIC as alter ego.47 The RTC sustained the allegation of HRCC and
pierced the corporate veil of NMIC pursuant to the alter ego theory when it concluded that NMIC "is a mere adjunct,
business conduit or alter ego of both DBP and PNB."48 The Court of Appeals upheld such conclusion of the trial
court.49 In other words, both the trial and appellate courts relied on the alter ego theory when they disregarded the
separate corporate personality of NMIC.

In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which
is also known as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right;
and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained
of.50 (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the
control and domination of the parent.51 It examines the parent corporation’s relationship with the subsidiary.52 It
inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make
it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate
entity will be ignored.53 It seeks to establish whether the subsidiary corporation has no autonomy and the parent
corporation, though acting through the subsidiary in form and appearance, "is operating the business directly for
itself."54

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful.55 It examines the relationship of the plaintiff to the corporation.56 It
recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the
plaintiff creditor.57 As such, it requires a showing of "an element of injustice or fundamental unfairness."58

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a
fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered.59 A causal connection between the
fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage
incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby,
suffer damages.60

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements:
control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the
plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of
any of these elements prevents piercing the corporate veil.61

This Court finds that none of the tests has been satisfactorily met in this case.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated
and the individual defendant’s relationship to that operation.62 With respect to the control element, it refers not to paper
or formal control by majority or even complete stock control but actual control which amounts to "such domination of
finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence
of its own, and is but a conduit for its principal."63 In addition, the control must be shown to have been exercised at
the time the acts complained of took place.64

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of NMIC
based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of NMIC, and (2) the alleged
interlocking directorates of DBP, PNB and NMIC.65 Unfortunately, the conclusion of the trial and appellate courts that
the DBP and PNB fit the alter ego theory with respect to NMIC’s transaction with HRCC on the premise of complete
stock ownership and interlocking directorates involved a quantum leap in logic and law exposing a gap in reason and
fact.

While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking
directorates may serve as indicia of control, by themselves and without more, however, these circumstances are
insufficient to establish an alter ego relationship or connection between DBP and PNB on the one hand and NMIC on
the other hand, that will justify the puncturing of the latter’s corporate cover. This Court has declared that "mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the separate corporate personality."66 This Court has likewise ruled that
the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the
veil of corporate fiction in the absence of fraud or other public policy considerations."67

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to this Court,
provided they are borne out of the record or are based on substantial evidence.68 It is equally true that the question
of whether one corporation is merely an alter ego of another is purely one of fact. So is the question of whether a
corporation is a paper company, a sham or subterfuge or whether the requisite quantum of evidence has been
adduced warranting the piercing of the veil of corporate personality.69 Nevertheless, it has been held in Sarona v.
National Labor Relations Commission70 that this Court has the power to resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or whether the corporate fiction was invoked for fraudulent or
malevolent ends, if the findings in the assailed decision are either not supported by the evidence on record or based
on a misapprehension of facts.

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated
by DBP and PNB in such a way that NMIC could be considered to have no separate mind, will or existence of its own
but a mere conduit for DBP and PNB. On the contrary, the evidence establishes that HRCC knew and acted on the
knowledge that it was dealing with NMIC, not with NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s
predecessor-in-interest, regarding the contract for NMIC’s mine stripping and road construction program was
addressed to and accepted by NMIC.71 The various billing reports, progress reports, statements of accounts and
communications of Hercon, Inc./HRCC regarding NMIC’s mine stripping and road construction program in 1985
concerned NMIC and NMIC’s officers, without any indication of or reference to the control exercised by DBP and/or
PNB over NMIC’s affairs, policies and practices.72

HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the alleged undue
disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services rendered by HRCC in connection
with NMIC’s mine stripping and road construction program in 1985. On the contrary, the overall picture painted by the
evidence offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical person acting through
its own corporate officers.73

Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has no basis.
HRCC’s Exhibit "I-5,"74 the initial General Information Sheet submitted by NMIC to the Securities and Exchange
Commission, relied upon by the trial court and the Court of Appeals may have proven that DBP and PNB owned the
stocks of NMIC to the extent of 57% and 43%, respectively. However, nothing in it supports a finding that NMIC, DBP,
and PNB had interlocking directors as it only indicates that, of the five members of NMIC’s board of directors, four
were nominees of either DBP or PNB and only one was a nominee of both DBP and PNB.75 Only two members of the
board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be members of the board of
governors of DBP and none was proved to be a member of the board of directors of PNB.76 No director of NMIC was
shown to be also sitting simultaneously in the board of governors/directors of both DBP and PNB.

In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and NMIC on the other
hand, the Court of Appeals invoked Sibagat Timber Corporation v. Garcia,77 which it described as "a case under a
similar factual milieu."78 However, in Sibagat Timber Corporation, this Court took care to enumerate the circumstances
which led to the piercing of the corporate veil of Sibagat Timber Corporation for being the alter ego of Del Rosario &
Sons Logging Enterprises, Inc. Those circumstances were as follows: holding office in the same building, practical
identity of the officers and directors of the two corporations and assumption of management and control of Sibagat
Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.

Here, DBP and PNB maintain an address different from that of NMIC.79 As already discussed, there was insufficient
proof of interlocking directorates. There was not even an allegation of similarity of corporate officers. Instead of
evidence that DBP and PNB assumed and controlled the management of NMIC, HRCC’s evidence shows that NMIC
operated as a distinct entity endowed with its own legal personality. Thus, what obtains in this case is a factual
backdrop different from, not similar to, Sibagat Timber Corporation.

In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or
unjust act in contravention of a plaintiff’s legal rights must be clearly and convincingly established; it cannot be
presumed. Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it does not
apply.80

In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that NMIC was used to
conceal fraud. x x x.81

Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC which DBP and
PNB used "to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal rights." It is a recognition that, even assuming that DBP and PNB
exercised control over NMIC, there is no evidence that the juridical personality of NMIC was used by DBP and PNB
to commit a fraud or to do a wrong against HRCC.

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC by DBP
and PNB under the guise of NMIC, there is no basis to hold that NMIC was a mere alter ego of DBP and PNB. As this
Court ruled in Ramoso v. Court of Appeals82:
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary
appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded
in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally,
involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For
the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or fundamental
unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm could be said to have been
proximately caused by DBP and PNB on HRCC for which HRCC could hold DBP and PNB solidarily liable with
NMIC.1âwphi1

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as transferee of the
rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB are held liable, the APT incurs no
liability for the judgment indebtedness of NMIC. Even HRCC recognizes that "as assignee of DBP and PNB 's loan
receivables," the APT simply "stepped into the shoes of DBP and PNB with respect to the latter's rights and
obligations" in NMIC.83 As such assignee, therefore, the APT incurs no liability with respect to NMIC other than
whatever liabilities may be imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC invokes, the
APT cannot be held liable. The contingent liability for which the National Government, through the APT, may be held
liable under the said provision refers to contingent liabilities of DBP and PNB. Since DBP and PNB may not be held
solidarily liable with NMIC, no contingent liability may be imputed to the APT as well. Only NMIC as a distinct and
separate legal entity is liable to pay its corporate obligation to HRCC in the amount of ₱8,370,934.74, with legal
interest thereon from date of demand.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the judgment against it.
The APT itself acknowledges this.84

WHEREFORE, the petitions are hereby GRANTED.

The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the Asset
Privatization Trust, now the Privatization and Management Office, is DISMISSED for lack of merit. The Asset
Privatization Trust, now the Privatization and Management Office, as trustee of Nonoc Mining and Industrial
Corporation, now the Philnico Processing Corporation, is DIRECTED to ensure compliance by the Nonoc Mining and
Industrial Corporation, now the Philnico Processing Corporation, with this Decision. SO ORDERED.

15. Prisma Construction & Dev’t Corp vs. Menchavez

G.R. No. 160545 March 9, 2010

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON, Petitioners,

vs. ARTHUR F. MENCHAVEZ, Respondent.

DECISION

BRION, J.:

We resolve in this Decision the petition for review on certiorari1 filed by petitioners Prisma Construction & Development
Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set
aside the Decision2 dated May 5, 2003 and the Resolution3 dated October 22, 2003 of the Former Ninth Division of
the Court of Appeals (CA) in CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the Regional
Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment of
₱3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the interest rate from 4% per month to
12% per annum, computed from the filing of the complaint to full payment. The assailed CA Resolution denied the
petitioners’ Motion for Reconsideration.

FACTUAL BACKGROUND

The facts of the case, gathered from the records, are briefly summarized below.

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained a
₱1,000,000.004loan from the respondent, with a monthly interest of ₱40,000.00 payable for six months, or a total
obligation of ₱1,240,000.00 to be paid within six (6) months,5 under the following schedule of payments:

January 8, 1994 …………………. ₱40,000.00

February 8, 1994 ………………... ₱40,000.00

March 8, 1994 …………………... ₱40,000.00

April 8, 1994 ……………………. ₱40,000.00

May 8, 1994 …………………….. ₱40,000.00
June 8, 1994 ………………… ₱1,040,000.006
Total ₱1,240,000.00

To secure the payment of the loan, Pantaleon issued a promissory note7 that states:

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY THOUSAND
PESOS (P1,240,000), Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-month loan payable
according to the following schedule:

January 8, 1994 …………………. ₱40,000.00

February 8, 1994 ………………... ₱40,000.00

March 8, 1994 …………………... ₱40,000.00

April 8, 1994 ……………………. ₱40,000.00

May 8, 1994 …………………….. ₱40,000.00

June 8, 1994 ………………… ₱1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged.8

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the promissory note in
his personal capacity,9 and as duly authorized by the Board of Directors of PRISMA.10 The petitioners failed to
completely pay the loan within the stipulated six (6)-month period.

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the respondent:

September 8, 1994 ……………… ₱320,000.00

October 8, 1995…………………. ₱600,000.00
November 8, 1995……………. ₱158,772.00

January 4, 1997 …………………. ₱30,000.0011

As of January 4, 1997, the petitioners had already paid a total of ₱1,108,772.00. However, the respondent found that
the petitioners still had an outstanding balance of ₱1,364,151.00 as of January 4, 1997, to which it applied a 4%
monthly interest.12 Thus, on August 28, 1997, the respondent filed a complaint for sum of money with the RTC to
enforce the unpaid balance, plus 4% monthly interest, ₱30,000.00 in attorney’s fees, ₱1,000.00 per court appearance
and costs of suit.13

In their Answer dated October 6, 1998, the petitioners admitted the loan of ₱1,240,000.00, but denied the stipulation
on the 4% monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied
that he made himself personally liable and that he made representations that the loan would be repaid within six (6)
months.14

THE RTC RULING

The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for ₱1,000,000.00 in
favor of the petitioners for a loan that would earn an interest of 4% or ₱40,000.00 per month, or a total of ₱240,000.00
for a 6-month period. It noted that the petitioners made several payments amounting to ₱1,228,772.00, but they were
still indebted to the respondent for ₱3,526,117.00 as of February 11,15 1999 after considering the 4% monthly interest.
The RTC observed that PRISMA was a one-man corporation of Pantaleon and used this circumstance to justify the
piercing of the veil of corporate fiction. Thus, the RTC ordered the petitioners to jointly and severally pay the
respondent the amount of ₱3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid.16

The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court, insisting that
there was no express stipulation on the 4% monthly interest.

THE CA RULING

The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly interest principally
based on the board resolution that authorized Pantaleon to transact a loan with an approved interest of not more than
4% per month. The appellate court, however, noted that the interest of 4% per month, or 48% per annum, was
unreasonable and should be reduced to 12% per annum. The CA affirmed the RTC’s finding that PRISMA was a mere
instrumentality of Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC
Decision by imposing a 12% per annum interest, computed from the filing of the complaint until finality of judgment,
and thereafter, 12% from finality until fully paid.17

After the CA's denial18 of their motion for reconsideration,19 the petitioners filed the present petition for review on
certiorari under Rule 45 of the Rules of Court.

THE PETITION

The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the parties agreed to a
4% monthly interest because the board resolution was not an evidence of a loan or forbearance of money, but merely
an authorization for Pantaleon to perform certain acts, including the power to enter into a contract of loan. The
expressed mandate of Article 1956 of the Civil Code is that interest due should be stipulated in writing, and no such
stipulation exists. Even assuming that the loan is subject to 4% monthly interest, the interest covers the six (6)-month
period only and cannot be interpreted to apply beyond it. The petitioners also point out the glaring inconsistency in
the CA Decision, which reduced the interest from 4% per month or 48% per annum to 12% per annum, but failed to
consider that the amount of ₱3,526,117.00 that the RTC ordered them to pay includes the compounded 4% monthly
interest.

THE CASE FOR THE RESPONDENT

The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest because the
board resolution is attached to, and an integral part of, the promissory note based on which the petitioners obtained
the loan. The respondent further contends that the petitioners are estopped from assailing the 4% monthly interest,
since they agreed to pay the 4% monthly interest on the principal amount under the promissory note and the board
resolution.
THE ISSUE

The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate
of interest apply to the 6-month payment period only or until full payment of the loan?

OUR RULING

We find the petition meritorious.

Interest due should be stipulated in writing; otherwise, 12% per annum

Obligations arising from contracts have the force of law between the contracting parties and should be complied with
in good faith.20 When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties,
the literal meaning of its stipulations governs.21 In such cases, courts have no authority to alter the contract by
construction or to make a new contract for the parties; a court's duty is confined to the interpretation of the contract
the parties made for themselves without regard to its wisdom or folly, as the court cannot supply material stipulations
or read into the contract words the contract does not contain.22 It is only when the contract is vague and ambiguous
that courts are permitted to resort to the interpretation of its terms to determine the parties’ intent.

In the present case, the respondent issued a check for ₱1,000,000.00.23 In turn, Pantaleon, in his personal capacity
and as authorized by the Board, executed the promissory note quoted above. Thus, the ₱1,000,000.00 loan shall be
payable within six (6) months, or from January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an
interest of ₱40,000.00 per month, for a total obligation of ₱1,240,000.00 for the six-month period. We note that this
agreed sum can be computed at 4% interest per month, but no such rate of interest was stipulated in the
promissory note; rather a fixed sum equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it has been expressly
stipulated in writing." Under this provision, the payment of interest in loans or forbearance of money is allowed only if:
(1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was
reduced in writing. The concurrence of the two conditions is required for the payment of interest at a stipulated rate.
Thus, we held in Tan v. Valdehueza24 and Ching v. Nicdao25 that collection of interest without any stipulation in writing
is prohibited by law.1avvphi1

Applying this provision, we find that the interest of ₱40,000.00 per month corresponds only to the six (6)-month period
of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter,
the interest on the loan should be at the legal interest rate of 12% per annum, consistent with our ruling in Eastern
Shipping Lines, Inc. v. Court of Appeals:26

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code." (Emphasis supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,27 Sulit v. Court of Appeals,28Crismina
Garments, Inc. v. Court of Appeals, 29 Eastern Assurance and Surety Corporation v. Court of
Appeals, 30Sps. Catungal v. Hao, 31 Yong v. Tiu,32 and Sps. Barrera v. Sps. Lorenzo.33 Thus, the RTC and the CA
misappreciated the facts of the case; they erred in finding that the parties agreed to a 4% interest, compounded by
the application of this interest beyond the promissory note’s six (6)-month period. The facts show that the parties
agreed to the payment of a specific sum of money of ₱40,000.00 per month for six months, not to a 4% rate of
interest payable within a six (6)-month period.

Medel v. Court of Appeals not applicable

The CA misapplied Medel v. Court of Appeals34 in finding that a 4% interest per month was unconscionable.
In Medel, the debtors in a ₱500,000.00 loan were required to pay an interest of 5.5% per month, a service charge of
2% per annum, and a penalty charge of 1% per month, plus attorney’s fee equivalent to 25% of the amount due, until
the loan is fully paid. Taken in conjunction with the stipulated service charge and penalty, we found the interest rate
of 5.5% to be excessive, iniquitous, unconscionable, exorbitant and hence, contrary to morals, thereby rendering the
stipulation null and void.

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v. Salazar35 of 6% per month
or 72% per annum interest on a ₱60,000.00 loan; in Ruiz v. Court of Appeals,36 of 3% per month or 36% per annum
interest on a ₱3,000,000.00 loan; in Imperial v. Jaucian,37 of 16% per month or 192% per annum interest on a
₱320,000.00 loan; in Arrofo v. Quiño,38 of 7% interest per month or 84% per annum interest on a ₱15,000.00 loan;
in Bulos, Jr. v. Yasuma,39 of 4% per month or 48% per annum interest on a ₱2,500,000.00 loan; and in Chua v.
Timan,40 of 7% and 5% per month for loans totalling ₱964,000.00. We note that in all these cases, the terms of the
loans were open-ended; the stipulated interest rates were applied for an indefinite period.

Medel finds no application in the present case where no other stipulation exists for the payment of any extra amount
except a specific sum of ₱40,000.00 per month on the principal of a loan payable within six months. Additionally,
no issue on the excessiveness of the stipulated amount of ₱40,000.00 per month was ever put in issue by the
petitioners;41 they only assailed the application of a 4% interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and
conditions they have agreed to, which is the law between them, the only limitation being that these stipulations,
clauses, terms and conditions are not contrary to law, morals, public order or public policy.42 The payment of the
specific sum of money of ₱40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent.
There is nothing from the records and, in fact, there is no allegation showing that petitioners were victims of fraud
when they entered into the agreement with the respondent.

Therefore, as agreed by the parties, the loan of ₱1,000,000.00 shall earn ₱40,000.00 per month for a period of six (6)
months, or from December 8, 1993 to June 8, 1994, for a total principal and interest amount of ₱1,240,000.00.
Thereafter, interest at the rate of 12% per annum shall apply. The amounts already paid by the petitioners during the
pendency of the suit, amounting to ₱1,228,772.00 as of February 12, 1999,43 should be deducted from the total
amount due, computed as indicated above. We remand the case to the trial court for the actual computation of the
total amount due.

Doctrine of Estoppel not applicable

The respondent submits that the petitioners are estopped from disputing the 4% monthly interest beyond the six-
month stipulated period, since they agreed to pay this interest on the principal amount under the promissory note and
the board resolution.

We disagree with the respondent’s contention.

We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as established by
the record, negate its application. Under the promissory note,44 what the petitioners agreed to was the payment of
a specific sum of ₱40,000.00 per month for six months – not a 4% rate of interest per month for six (6) months
– on a loan whose principal is ₱1,000,000.00, for the total amount of ₱1,240,000.00. Thus, no reason exists to
place the petitioners in estoppel, barring them from raising their present defenses against a 4% per month interest
after the six-month period of the agreement. The board resolution,45 on the other hand, simply authorizes Pantaleon
to contract for a loan with a monthly interest of not more than 4%. This resolution merely embodies the extent of
Pantaleon’s authority to contract and does not create any right or obligation except as between Pantaleon and the
board. Again, no cause exists to place the petitioners in estoppel.

Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and
distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a
fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.46 In the
absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer
cannot be made personally liable for corporate liabilities.47

In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or unlawful act on the
part of PRISMA to justify piercing its corporate veil. While Pantaleon denied personal liability in his Answer, he made
himself accountable in the promissory note "in his personal capacity and as authorized by the Board Resolution" of
PRISMA.48 With this statement of personal liability and in the absence of any representation on the part of PRISMA
that the obligation is all its own because of its separate corporate identity, we see no occasion to consider piercing
the corporate veil as material to the case.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May 5, 2003 of
the Court of Appeals in CA-G.R. CV No. 69627. The petitioners’ loan of ₱1,000,000.00 shall bear interest of
₱40,000.00 per month for six (6) months from December 8, 1993 as indicated in the promissory note. Any portion of
this loan, unpaid as of the end of the six-month payment period, shall thereafter bear interest at 12% per annum. The
total amount due and unpaid, including accrued interests, shall bear interest at 12% per annum from the finality of this
Decision. Let this case be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the proper
computation of the amount due as herein directed, with due regard to the payments the petitioners have already
remitted. Costs against the respondent. SO ORDERED.

16. Livesey vs. Binswanger Phil Inc.

March 19, 2014 G.R. No. 177493

ERIC GODFREY STANLEY LIVESEY, Petitioner,

vs. BINSWANGER PHILIPPINES, INC. and KEITH ELLIOT, Respondent.

BRION, J.:

We resolve this petition for review on certiorari1 assailing the decision2 dated August 18, 2006 and the
resolution3dated March 29, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 94461.

The Antecedents

In December 2001, petitioner Eric Godfrey Stanley Livesey filed a complaint for illegal dismissal with money
claims4against CBB Philippines Strategic Property Services, Inc. (CBB) and Paul Dwyer. CBB was a domestic
corporation engaged in real estate brokerage and Dwyer was its President.

Designated as Acting Member in lieu of Associate Justice Estela M. Perlas-Bernabe, per Special Order No. 1650
dated March 13, 2014.

Livesey alleged that on April 12, 2001, CBB hired him as Director and Head of Business Space Development, with a
monthly salary of US$5,000.00; shareholdings in CBB’s offshore parent company; and other benefits. In August 2001,
he was appointed as Managing Director and his salary was increased to US$16,000.00 a month. Allegedly, despite
the several deals for CBB he drew up, CBB failed to pay him a significant portion of his salary. For this reason, he
was compelled to resign on December 18, 2001. He claimed CBB owed him US$23,000.00 in unpaid salaries.

CBB denied liability. It alleged that it engaged Livesey as a corporate officer in April 2001: he was elected Vice-
President (with a salary of P75,000.00/month), and thereafter, he became President (at P1,200,000.00/year). It
claimed that Livesey was later designated as Managing Director when it became an extension office of its principal in
Hongkong.5
On December 17, 2001, Livesey demanded that CBB pay him US$25,000.00 in unpaid salaries and, at the same
time, tendered his resignation. CBB posited that the labor arbiter (LA) had no jurisdiction as the complaint involved an
intra-corporate dispute.

In his decision dated September 20, 2002,6 LA Jaime M. Reyno found that Livesey had been illegally dismissed. LA
Reyno ordered CBB to reinstate Livesey to his former position as Managing Director and to pay him US$23,000.00 in
accrued salaries (from July to December 2001), and US$5,000.00 a month in back salaries from January 2002 until
reinstatement; and 10% of the total award as attorney’s fees.

Thereafter, the parties entered into a compromise agreement7 which LA Reyno approved in an order dated November
6, 2002.8 Under the agreement, Livesey was to receive US$31,000.00 in full satisfaction of LA Reyno’s decision,
broken down into US$13,000.00 to be paid by CBB to Livesey or his authorized representative upon the signing of
the agreement; US$9,000.00 on or before June 30, 2003; and US$9,000.00 on or before September 30, 2003. Further,
the agreement provided that unless and until the agreement is fully satisfied, CBB shall not: (1) sell, alienate, or
otherwise dispose of all or substantially all of its assets or business; (2) suspend, discontinue, or cease its entire, or
a substantial portion of its business operations; (3) substantially change the nature of its business; and (4) declare
bankruptcy or insolvency.

CBB paid Livesey the initial amount of US$13,000.00, but not the next two installments as the company ceased
operations. In reaction, Livesey moved for the issuance of a writ of execution. LA Eduardo G. Magno granted the
writ,9 but it was not enforced. Livesey then filed a motion for the issuance of an alias writ of execution, 10 alleging that
in the process of serving respondents the writ, he learned "that respondents, in a clear and willful attempt to avoid
their liabilities to complainant x x x have organized another corporation, [Binswanger] Philippines, Inc." 11 He claimed
that there was evidence showing that CBB and Binswanger Philippines, Inc. (Binswanger) are one and the same
corporation, pointing out that CBB stands for Chesterton Blumenauer Binswanger.12 Invoking the doctrine of piercing
the veil of corporate fiction, Livesey prayed that an alias writ of execution be issued against respondents Binswanger
and Keith Elliot, CBB’s former President, and now Binswanger’s President and Chief Executive Officer (CEO).

The Compulsory Arbitration Rulings

In an order13 dated March 22, 2004, LA Catalino R. Laderas denied Livesey’s motion for an alias writ of execution,
holding that the doctrine of piercing the corporate veil was inapplicable in the case. He explained that the stockholders
of the two corporations were not the same. Further, LA Laderas stressed that LA Reyno’s decision had already
become final and could no longer be altered or modified to include additional respondents.

Livesey filed an appeal which the National Labor Relations Commission (NLRC) granted in its decision14 dated
September 7, 2005. It reversed LA Laderas’ March 22, 2004 order and declared the respondents jointly and severally
liable with CBB for LA Reyno’s decision15 of September 20, 2002 in favor of Livesey. The respondents moved for
reconsideration, filed by an Atty. Genaro S. Jacosalem,16 not by their counsel of record at the time, Corporate
Counsels Philippines, Law Offices. The NLRC denied the motion in its resolution of January 6, 2006. 17The
respondents then sought relief from the CA through a petition for certiorari under Rule 65 of the Rules of Court.

The respondents charged the NLRC with grave abuse of discretion for holding them liable to Livesey and in exercising
jurisdiction over an intra-corporate dispute. They maintained that Binswanger is a separate and distinct corporation
from CBB and that Elliot signed the compromise agreement in CBB’s behalf, not in his personal capacity. It was error
for the NLRC, they argued, when it applied the doctrine of piercing the veil of corporate fiction to the case, despite the
absence of clear evidence in that respect.

For his part, Livesey contended that the petition should be dismissed outright for being filed out of time. He claimed
that the respondents’ counsel of record received a copy of the NLRC resolution denying their motion for
reconsideration as early as January 19, 2006, yet the petition was filed only on May 15, 2006. He insisted that in any
event, there was ample evidence supporting the application of the doctrine of piercing the veil of corporate fiction to
the case.

The CA Decision

The CA granted the petition,18 reversed the NLRC decision19 of September 7, 2005 and reinstated LA Laderas’
order20 of March 22, 2004. The CA found untenable Livesey’s contention that the petition for certiorari was filed out of
time, stressing that while there was no valid substitution or withdrawal of the respondents’ former counsel, the NLRC
impliedly recognized Atty. Jacosalem as their new counsel when it resolved the motion for reconsideration which he
filed.

On the merits of the case, the CA disagreed with the NLRC finding that the respondents are jointly and severally liable
with CBB in the case. It emphasized that the mere fact that Binswanger and CBB have the same President is not in
itself sufficient to pierce the veil of corporate fiction of the two entities, and that although Elliot was formerly CBB’s
President, this circumstance alone does not make him answerable for CBB’s liabilities, there being no proof that he
was motivated by malice or bad faith when he signed the compromise agreement in CBB’s behalf; neither was there
proof that Binswanger was formed, or that it was operated, for the purpose of shielding fraudulent or illegal activities
of its officers or stockholders or that the corporate veil was used to conceal fraud, illegality or inequity at the expense
of third persons like Livesey.

Livesey moved for reconsideration, but the CA denied the motion in its resolution dated March 29, 2007.21 Hence, the
present petition.

The Petition

Livesey prays for a reversal of the CA rulings on the basis of the following arguments:

1. The CA erred in not denying the respondents’ petition for certiorari dated May 12, 2006 for being filed out of time.

Livesey assails the CA’s reliance on the Court’s pronouncement in Rinconada Telephone Co., Inc. v. Hon.
Buenviaje22 to justify its ruling that the receipt on March 17, 2006 by Atty. Jacosalem of the NLRC’s denial of the
respondents’ motion for reconsideration was the reckoning date for the filing of the petition for certiorari, not the receipt
of a copy of the same resolution on January 19, 2006 by the respondents’ counsel of record, the Corporate Counsels
Philippines, Law Offices. The cited Court’s pronouncement reads:

In view of respondent judge’s recognition of Atty. Santos as new counsel for petitioner without even a valid substitution
or withdrawal of petitioner’s former counsel, said new counsel logically awaited for service to him of any action taken
on his motion for reconsideration. Respondent judge’s sudden change of posture in insisting that Atty. Maggay is the
counsel of record is, therefore, a whimsical and capricious exercise of discretion that prevented petitioner and Atty.
Santos from taking a timely appeal[.]23

With the above citation, Livesey points out, the CA opined that a copy of the NLRC resolution denying the respondents’
motion for reconsideration should have been served on Atty. Jacosalem and no longer on the counsel of record, so
that the sixty (60)-day period for the filing of the petition should be reckoned from March 17, 2006 when Atty.
Jacosalem secured a copy of the resolution from the NLRC (the petition was filed by a Jeffrey Jacosalem on May 15,
2006).24 Livesey submits that the CA’s reliance on Rinconada was misplaced. He argues that notwithstanding the
signing by Atty. Jacosalem of the motion for reconsideration, it was only proper that the NLRC served a copy of the
resolution on the Corporate Counsels Philippines, Law Offices as it was still the respondents’ counsel at the time.25 He
adds that Atty. Jacosalem never participated in the NLRC proceedings because he did not enter his appearance as
the respondents’ counsel before the labor agency; further, he did not even indicate his office address on the motion
for reconsideration he signed.

2. The CA erred in not applying the doctrine of piercing the veil of corporate fiction to the case.

Livesey bewails the CA’s refusal to pierce Binswanger’s corporate veil in his bid to make the company and Elliot liable,
together with CBB, for the judgment award to him. He insists that CBB and Binswanger are one and the same
corporation as shown by the "overwhelming evidence" he presented to the LA, the NLRC and the CA, as follows:

a.CBB stands for "Chesterton Blumenauer Binswanger."26

b.After executing the compromise agreement with him, through Elliot, CBB ceased operations following a
transaction where a substantial amount of CBB shares changed hands. Almost simultaneously with CBB’s
closing (in July 2003), Binswanger was established with its headquarters set up beside CBB’s office at Unit
501, 5/F Peninsula Court Building in Makati City.27
 c.Key CBB officers and employees moved to Binswanger led by Elliot, former CBB President who became
Binswanger’s President and CEO; Ferdie Catral, former CBB Director and Head of Operations; Evangeline
Agcaoili and Janet Pei.

d.Summons served on Binswanger in an earlier labor case was received by Binswanger using CBB’s receiving
stamp.28

e.A Leslie Young received on August 23, 2003 an online query on whether CBB was the same as Blumaneuver
Binswanger (BB). Signing as Web Editor, Binswanger/CBB, Young replied via e-mail:29

We are known as either CBB (Chesterton Blumenauer Binswanger) or as Chesterton Petty Ltd. in the Philippines.
Contact info for our office in Manila is as follows:

Manila Philippines
CBB Philippines Unit 509, 5th Floor
Peninsula Court, Paseo de Roxas corner Makati Avenue
1226 Makati City Philippines Contact: Keith Elliot

f. In a letter dated August 21, 2003,30 Elliot noted a Binswanger bid solicitation for a project with the Philippine National
Bank (PNB) which

was actually a CBB project as shown by a CBB draft proposal to PNB dated January 24, 2003.31

g.The affidavit32 dated October 1, 2003 of Hazel de Guzman, another former CBB employee who also filed an illegal
dismissal case against the company, attested to the existence of Livesey’s documentary evidence in his own case
and who deposed that at one time, Elliot told her of CBB’s plan to close the corporation and to organize another for
the purpose of evading CBB’s liabilities.

h.The findings33 of facts of LA Veneranda C. Guerrero who ruled in De Guzman’s favor that bolstered his own evidence
in the present case.

3. The CA erred in not holding Elliot liable for the judgment award.

Livesey questions the CA’s reliance on Laperal Development Corporation v. Court of Appeals,34 Sunio, et al. v. NLRC,
et al.,35 and Palay, Inc., et al. v. Clave, etc., et al.,36 in support of its ruling that Elliot is not liable to him for the LA’s
award. He argues that in these cases, the Court upheld the separate personalities of the corporations and their
officers/employees because there was no evidence that the individuals sought to be held liable were in bad faith or
that there were badges of fraud in their actions against the aggrieved party or parties in said cases. He reiterates his
submission to the CA that the circumstances of the present case are different from those of the cited cases. He posits
that the closure of CBB and its immediate replacement by Binswanger could not have been possible without Elliot’s
guiding hand, such that when CBB ceased operations, Elliot (CBB’s President and CEO) moved to Binswanger in the
same position. More importantly, Livesey points out, as signatory for CBB in the compromise agreement between him
(Livesey) and CBB, Elliot knew that it had not been and would never be fully satisfied.

Livesey thus laments Elliot’s devious scheme of leaving him an unsatisfied award, stressing that Elliot was the chief
orchestrator of CBB and Binswanger’s fraudulent act of evading the full satisfaction of the compromise agreement. In
this light, he submits that the Court’s ruling in

A.C. Ransom Labor Union-CCLU v. NLRC,37 which deals with the issue of who is liable for the worker’s backwages
when a corporation ceases operations, should apply to his situation.

The Respondents’Position

Through their comment38 and memorandum,39 the respondents pray that the petition be denied for the following
reasons:
1. The NLRC had no jurisdiction over the dispute between Livesey and CBB/Dwyer as it involved an intra-corporate
controversy; under Republic Act No. 8799, the Regional Trial Court exercises jurisdiction over the case.

As shown by the records, Livesey was appointed as CBB’s Managing Director during the relevant period and was
also a shareholder, making him a corporate officer.

2.There was no employer-employee relationship between Livesey and Binswanger. Under Article 217 of the Labor
Code, the labor arbiters and the NLRC have jurisdiction only over disputes where there is an employer- employee
relationship between the parties.

3.The NLRC erred in applying the doctrine of piercing the veil of corporate fiction to the case based only on mere
assumptions. Point by point, they take exception to Livesey’s submissions as follows:

a.The e-mail statement in reply to an online query of Young (CBB’s Web Editor) that CBB is known as
Chesterton Blumenauer Binswanger or Chesterton Petty. Ltd. to establish a connection between CBB and
Binswanger is inconclusive as there was no mention in the statement of Binswanger Philippines, Inc.

b.The affidavit of De Guzman, former CBB Associate Director, who also resigned from the company like
Livesey, has no probative value as it was self-serving and contained only misrepresentation of facts,
conjectures and surmises.

c.When Binswanger was organized and incorporated, CBB had already been abandoned by its Board of
Directors and no longer subsidized by CBB-Hongkong; it had no business operations to work with.

d.The mere transfer of Elliot and Catral from CBB to Binswanger is not a ground to pierce the corporate veil
in the present case absent a clear evidence supporting the application of the doctrine. The NLRC applied the
doctrine on the basis only of LA Guerrero’s decision in the De Guzman case.

e.The respondents’ petition for certiorari was filed on time. Atty. Jacosalem, who was presumed to have been
engaged as the respondents’ counsel, was deemed to have received a copy of the NLRC resolution (denying
the motion for reconsideration) on March 17, 2006 when he requested and secured a copy from the NLRC.
The petition was filed on May 15, 2006 or fifty-nine (59)days from March 17, 2006. Atty. Jacosalem may have
failed to indicate his address on the motion for reconsideration he filed but that is not a reason for him to be
deprived of the notices and processes of the case.

The Court’s Ruling

The procedural question

The respondents’ petition for certiorari before the CA was filed out of time. The sixty (60)-day filing period under Rule
65 of the Rules of Court should have been counted from January 19, 2006, the date of receipt of a copy of the NLRC
resolution denying the respondents’ motion for reconsideration by the Corporate Counsels Philippines, Law Offices
which was the respondents’ counsel of record at the time. The respondents cannot insist that Atty. Jacosalem’s receipt
of a copy of the resolution on March 17, 2006 as the reckoning date for the filing of the petition as we shall discuss
below.

The CA chided the NLRC for serving a copy of the resolution on the Corporate Counsels Philippines, Law Offices,
instead of on Atty. Jacosalem as it believed that the labor tribunal impliedly recognized Atty. Jacosalem as the
respondents’ counsel when it acted on the motion for reconsideration that he signed. As we see it, the fault was not
on the NLRC but on Atty. Jacosalem himself as he left no forwarding address with the NLRC, a serious lapse that
even he admitted.40 This is a matter that cannot just be taken for granted as it betrays a careless legal representation
that can cause adverse consequences to the other party.

To our mind, Atty. Jacosalem’s non-observance of a simple, but basic requirement in the practice of law lends
credence to Livesey’s claim that the lawyer did not formally enter his appearance before the NLRC as the respondents’
new counsel; if it had been otherwise, he would have supplied his office address to the NLRC. Also, had he exercised
due diligence in the performance of his duty as counsel, he could have inquired earlier with the NLRC and should not
have waited as late as March 17, 2006 about the outcome of the respondents’ motion for reconsideration which was
filed as early as October 28, 2005.

To reiterate, the filing of the respondents’ petition for certiorari should have been reckoned from January 19, 2006
when a copy of the subject NLRC resolution was received by the Corporate Counsels Philippines, Law Offices, which,
as of that date, had not been discharged or had withdrawn and therefore remained to be the respondents’ counsel of
record. Clearly, the petition for certiorari was filed out of time. Section 6(a), Rule III of the NLRC Revised Rules of
Procedure provides that "[f]or purposes of appeal, the period shall be counted from receipt of such decisions,
resolutions, or orders by the counsel or representative of record."

We now come to the issue of whether the NLRC had jurisdiction over the controversy between Livesey and
CBB/Dwyer on the ground that it involved an intra-corporate dispute.

Based on the facts of the case, we find this issue to have been rendered academic by the compromise agreement
between Livesey and CBB and approved by LA Reyno.41 That CBB reneged in the fulfillment of its obligation under
the agreement is no reason to revive the issue and further frustrate the full settlement of the obligation as agreed
upon.

The substantive aspect of the case

Even if we rule that the respondents’ appeal before the CA had been filed on time, we believe and so hold that the
appellate court committed a reversible error of judgment in its challenged decision.

The NLRC committed no grave abuse of discretion in reversing LA Laderas’ ruling as there is substantial evidence in
the records that Livesey was prevented from fully receiving his monetary entitlements under the compromise
agreement between him and CBB, with Elliot signing for CBB as its President and CEO. Substantial evidence is more
than a scintilla; it means such relevant evidence as a reasonable mind might accept as adequate to support a
conclusion.42

Shortly after Elliot forged the compromise agreement with Livesey, CBB ceased operations, a corporate event that
was not disputed by the respondents. Then Binswanger suddenly appeared. It was established almost simultaneously
with CBB’s closure, with no less than Elliot as its President and CEO. Through the confluence of events surrounding
CBB’s closure and Binswanger’s sudden emergence, a reasonable mind would arrive at the conclusion that
Binswanger is CBB’s alter ego or that CBB and Binswanger are one and the same corporation. There are also
indications of badges of fraud in Binswanger’s incorporation. It was a business strategy to evade CBB’s financial
liabilities, including its outstanding obligation to Livesey.

The respondents impugned the probative value of Livesey’s documentary evidence and insist that the NLRC erred in
applying the doctrine of piercing the veil of corporate fiction in the case to avoid liability. They consider the NLRC
conclusions as mere assumptions.

We disagree.

It has long been settled that the law vests a corporation with a personality distinct and separate from its stockholders
or members. In the same vein, a corporation, by legal fiction and convenience, is an entity shielded by a protective
mantle and imbued by law with a character alien to the persons comprising it.43 Nonetheless, the shield is not at all
times impenetrable and cannot be extended to a point beyond its reason and policy. Circumstances might deny a
claim for corporate personality, under the "doctrine of piercing the veil of corporate fiction."

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for wrongful purposes.44 Under the doctrine, the corporate
existence may be disregarded where the entity is formed or used for non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions,45 in which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical.46
In the present case, we see an indubitable link between CBB’s closure and Binswanger’s incorporation. CBB ceased
to exist only in name; it re-emerged in the person of Binswanger for an urgent purpose

— to avoid payment by CBB of the last two installments of its monetary obligation to Livesey, as well as its other
financial liabilities. Freed of CBB’s liabilities, especially that owing to Livesey, Binswanger can continue, as it did
continue, CBB’s real estate brokerage business.

Livesey’s evidence, whose existence the respondents never denied, converged to show this continuity of business
operations from CBB to Binswanger.1âwphi1 It was not just coincidence that Binswanger is engaged in the same line
of business CBB embarked on: (1) it even holds office in the very same building and on the very same floor where
CBB once stood; (2) CBB’s key officers, Elliot, no less, and Catral moved over to Binswanger, performing the tasks
they were doing at CBB; (3) notwithstanding CBB’s closure, Binswanger’s Web Editor (Young), in an e-mail
correspondence, supplied the information that Binswanger is "now known" as either CBB (Chesterton Blumenauer
Binswanger or as Chesterton Petty, Ltd., in the Philippines; (4) the use of Binswanger of CBB’s paraphernalia
(receiving stamp) in connection with a labor case where Binswanger was summoned by the authorities, although Elliot
claimed that he bought the item with his own money; and (5) Binswanger’s takeover of CBB’s project with the PNB.

While the ostensible reason for Binswanger’s establishment is to continue CBB’s business operations in the
Philippines, which by itself is not illegal, the close proximity between CBB’s disestablishment and Binswanger’s coming
into existence points to an unstated but urgent consideration which, as we earlier noted, was to evade CBB’s unfulfilled
financial obligation to Livesey under the compromise agreement.47

This underhanded objective, it must be stressed, can only be attributed to Elliot as it was apparent that Binswanger’s
stockholders had nothing to do with Binswanger’s operations as noted by the NLRC and which the respondents did
not deny.48 Elliot was well aware of the compromise agreement between Livesey and CBB, as he "agreed and
accepted" the terms of the agreement49 for CBB. He was also well aware that the last two installments of CBB’s
obligation to Livesey were due on June 30, 2003 and September 30, 2003. These installments were not met and the
reason is that after the alleged sale of the majority of CBB’s shares of stock, it closed down.

With CBB’s closure, Livesey asked why people would buy into a corporation and simply close it down immediately
thereafter?50 The answer

— to pave the way for CBB’s reappearance as Binswanger. Elliot’s "guiding hand," as Livesey puts it, is very much
evident in CBB’s demise and Binswanger’s creation. Elliot knew that CBB had not fully complied with its financial
obligation under the compromise agreement. He made sure that it would not be fulfilled when he allowed CBB's
closure, despite the condition in the agreement that "unless and until the Compromise Amount has been fully settled
and paid by the Company in favor of Mr. Livesey, the Company shall not x x x suspend, discontinue, or cease its
entire or a substantial portion of its business operations[.]"51

What happened to CBB, we believe, supports Livesey's assertion that De Guzman, CBB's former Associate Director,
informed him that at one time Elliot told her of CBB 's plan to close the corporation and organize another for the
purpose of evading CBB 's liabilities to Livesey and its other financial liabilities. 52 This wrongful intent we cannot and
must not condone, for it will give a premium to an iniquitous business strategy where a corporation is formed or used
for a non-legitimate purpose, such as to evade a just and due obligation.53 We, therefore, find Elliot as liable as
Binswanger for CBB 's unfulfilled obligation to Livesey.

WHEREFORE, premises considered, we hereby GRANT the petition. The decision dated August 18, 2006 and the
Resolution dated March 29, 2007 of the Court of Appeals are SET ASIDE. Binswanger Philippines, Inc. and Keith
Elliot (its President and CEO) are declared jointly and severally liable for the second and third installments of CBB 's
liability to Eric Godfrey Stanley Livesey under the compromise agreement dated October 14, 2002. Let the case record
be remanded to the National Labor Relations Commission for execution of this Decision. Costs against the
respondents.

17. Woodchild Holdings Inc. vs. Roxas Electric Construction

G.R. No. 140667 August 12, 2004

 WOODCHILD HOLDINGS, INC., petitioner,
vs. ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.

This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 56125 reversing
the Decision2 of the Regional Trial Court of Makati, Branch 57, which ruled in favor of the petitioner.

The Antecedents

The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas Electric and
Construction Company, was the

owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title (TCT) No.
78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-1 which abutted Lot No.
491-A-3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo, Rizal.

At a special meeting on May 17, 1991, the respondent's Board of Directors approved a resolution authorizing the
corporation, through its president, Roberto B. Roxas, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an
area of 7,213 square meters, at a price and under such terms and conditions which he deemed most reasonable and
advantageous to the corporation; and to execute, sign and deliver the pertinent sales documents and receive the
proceeds of the sale for and on behalf of the company.3

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by TCT No. 78086 on which it
planned to construct its warehouse building, and a portion of the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot
container van would be able to readily enter or leave the property. In a Letter to Roxas dated June 21, 1991, WHI
President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for P1,000 per square
meter or at the price of P7,213,000.4 One of the terms incorporated in Dy's offer was the following provision:

5. This Offer to Purchase is made on the representation and warranty of the OWNER/SELLER, that he holds
a good and registrable title to the property, which shall be conveyed CLEAR and FREE of all liens and
encumbrances, and that the area of 7,213 square meters of the subject property already includes the area on
which the right of way traverses from the main lot (area) towards the exit to the Sumulong Highway as shown
in the location plan furnished by the Owner/Seller to the buyer. Furthermore, in the event that the right of way
is insufficient for the buyer's purposes (example: entry of a 45-foot container), the seller agrees to sell
additional square meter from his current adjacent property to allow the buyer to full access and full use of the
property.5

Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later or on July 1, 1991, Roxas,
as President of RECCI, as vendor, and Dy, as President of WHI, as vendee, executed a contract to sell in which
RECCI bound and obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.6On
September 5, 1991, a Deed of Absolute Sale7 in favor of WHI was issued, under which Lot No. 491-A-3-B-2 covered
by TCT No. 78086 was sold for P5,000,000, receipt of which was acknowledged by Roxas under the following terms
and conditions:

The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the beneficial use of and a right
of way from Sumulong Highway to the property herein conveyed consists of 25 square meters wide to be used
as the latter's egress from and ingress to and an additional 25 square meters in the corner of Lot No. 491-A-
3-B-1, as turning and/or maneuvering area for Vendee's vehicles.

The Vendor agrees that in the event that the right of way is insufficient for the Vendee's use (ex entry of a 45-
foot container) the Vendor agrees to sell additional square meters from its current adjacent property to allow
the Vendee full access and full use of the property.

The Vendor hereby undertakes and agrees, at its account, to defend the title of the Vendee to the parcel of
land and improvements herein conveyed, against all claims of any and all persons or entities, and that the
Vendor hereby warrants the right of the Vendee to possess and own the said parcel of land and improvements
 thereon and will defend the Vendee against all present and future claims and/or action in relation thereto,
judicial and/or administrative. In particular, the Vendor shall eject all existing squatters and occupants of the
premises within two (2) weeks from the signing hereof. In case of failure on the part of the Vendor to eject all
occupants and squatters within the two-week period or breach of any of the stipulations, covenants and terms
and conditions herein provided and that of contract to sell dated 1 July 1991, the Vendee shall have the right
to cancel the sale and demand reimbursement for all payments made to the Vendor with interest thereon at
36% per annum.8

On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for P8,649,000 to WHI for the
construction of the warehouse building on a portion of the property with an area of 5,088 square meters.9 WBI
proposed to start the project on October 1, 1991 and to turn over the building to WHI on February 29, 1992.10

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed its lease agreement with
WHI of a 5,000-square-meter portion of the warehouse yet to be constructed at the rental rate of P65 per square
meter. Ponderosa emphasized the need for the warehouse to be ready for occupancy before April 1, 1992. 11 WHI
accepted the offer. However, WBI failed to commence the construction of the warehouse in October 1, 1991 as
planned because of the presence of squatters in the property and suggested a renegotiation of the contract after the
squatters shall have been evicted.12 Subsequently, the squatters were evicted from the property.

On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the warehouse building for
P11,804,160.13 The contractor started construction in April 1992 even before the building officials of Antipolo City
issued a building permit on May 28, 1992. After the warehouse was finished, WHI issued on March 21, 1993 a
certificate of occupancy by the building official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as
lessee, executed a contract of lease over a portion of the property for a monthly rental of P300,000 for a period of
three years from March 1, 1993 up to February 28, 1996.14

In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a portion of the
property over which WHI had been granted a right of way. Roxas promised to look into the matter. Dy and Roxas
discussed the need of the WHI to buy a 500-square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085
as provided for in the deed of absolute sale. However, Roxas died soon thereafter. On April 15, 1992, the WHI wrote
the RECCI, reiterating its verbal requests to purchase a portion of the said lot as provided for in the deed of absolute
sale, and complained about the latter's failure to eject the squatters within the three-month period agreed upon in the
said deed.

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 for its beneficial
use within 72 hours from notice thereof, otherwise the appropriate action would be filed against it. RECCI rejected the
demand of WHI. WHI reiterated its demand in a Letter dated May 29, 1992. There was no response from RECCI.

On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial Court of Makati, for specific
performance and damages, and alleged, inter alia, the following in its complaint:

5. The "current adjacent property" referred to in the aforequoted paragraph of the Deed of Absolute Sale
pertains to the property covered by Transfer Certificate of Title No. N-78085 of the Registry of Deeds of
Antipolo, Rizal, registered in the name of herein defendant Roxas Electric.

6. Defendant Roxas Electric in patent violation of the express and valid terms of the Deed of Absolute Sale
unjustifiably refused to deliver to Woodchild Holdings the stipulated beneficial use and right of way consisting
of 25 square meters and 55 square meters to the prejudice of the plaintiff.

7. Similarly, in as much as the 25 square meters and 55 square meters alloted to Woodchild Holdings for its
beneficial use is inadequate as turning and/or maneuvering area of its 45-foot container van, Woodchild
Holdings manifested its intention pursuant to para. 5 of the Deed of Sale to purchase additional square meters
from Roxas Electric to allow it full access and use of the purchased property, however, Roxas Electric refused
and failed to merit Woodchild Holdings' request contrary to defendant Roxas Electric's obligation under the
Deed of Absolute Sale (Annex "A").

8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants of the premises within
the stipulated time frame and as a consequence thereof, plaintiff's planned construction has been considerably
 delayed for seven (7) months due to the squatters who continue to trespass and obstruct the subject property,
thereby Woodchild Holdings incurred substantial losses amounting to P3,560,000.00 occasioned by the
increased cost of construction materials and labor.

9. Owing further to Roxas Electric's deliberate refusal to comply with its obligation under Annex "A," Woodchild
Holdings suffered unrealized income of P300,000.00 a month or P2,100,000.00 supposed income from rentals
of the subject property for seven (7) months.

10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to comply with its obligations
and warranties under the Deed of Absolute Sale but notwithstanding such demand, defendant Roxas Electric
refused and failed and continue to refuse and fail to heed plaintiff's demand for compliance.

Copy of the demand letter dated April 15, 1992 is hereto attached as Annex "B" and made an integral part
hereof.

11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to Roxas Electric to
particularly annotate on Transfer Certificate of Title No. N-78085 the agreement under Annex "A" with respect
to the beneficial use and right of way, however, Roxas Electric unjustifiably ignored and disregarded the same.

Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and made an integral part
hereof.

12. By reason of Roxas Electric's continuous refusal and failure to comply with Woodchild Holdings' valid
demand for compliance under Annex "A," the latter was constrained to litigate, thereby incurring damages as
and by way of attorney's fees in the amount of P100,000.00 plus costs of suit and expenses of litigation.15

The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of Woodchild Holdings and ordering
Roxas Electric the following:

a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square meters and 55 square meters;

b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full access and use of the
purchased property pursuant to para. 5 of the Deed of Absolute Sale;

c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use and right of way granted
to Woodchild Holdings under the Deed of Absolute Sale;

d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual damages and unrealized
income;

e) to pay attorney's fees in the amount of P100,000.00; and

f) to pay the costs of suit.

Other reliefs just and equitable are prayed for.16

In its answer to the complaint, the RECCI alleged that it never authorized its former president, Roberto Roxas, to grant
the beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed to sell any portion thereof or create a lien or
burden thereon. It alleged that, under the Resolution approved on May 17, 1991, it merely authorized Roxas to sell
Lot No. 491-A-3-B-2 covered by TCT No. 78086. As such, the grant of a right of way and the agreement to sell a
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said deed are ultra vires. The RECCI further alleged
that the provision therein that it would sell a portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential elements
of a binding contract.17
In its amended answer to the complaint, the RECCI alleged that the delay in the construction of its warehouse building
was due to the failure of the WHI's contractor to secure a building permit thereon.18

During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot No. 491-A-3-B-1
consisting of an area of 500 square meters, for the price of P1,000 per square meter.

On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered directing defendant:

(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated 25 sq. m. and 55 sq. m.;

(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to allow said plaintiff full
access and use of the purchased property pursuant to Par. 5 of their Deed of Absolute Sale;

(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way granted by their Deed of
Absolute Sale;

(4) To pay plaintiff the amount of P5,568,000 representing actual damages and plaintiff's unrealized income;

(5) To pay plaintiff P100,000 representing attorney's fees; and

To pay the costs of suit.

SO ORDERED.19

The trial court ruled that the RECCI was estopped from disowning the apparent authority of Roxas under the May 17,
1991 Resolution of its Board of Directors. The court reasoned that to do so would prejudice the WHI which transacted
with Roxas in good faith, believing that he had the authority to bind the WHI relating to the easement of right of way,
as well as the right to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.

The RECCI appealed the decision to the CA, which rendered a decision on November 9, 1999 reversing that of the
trial court, and ordering the dismissal of the complaint. The CA ruled that, under the resolution of the Board of Directors
of the RECCI, Roxas was merely authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant
right of way in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the petitioner to buy a
portion thereof. The appellate court also ruled that the grant of a right of way and an option to the respondent were so
lopsided in favor of the respondent because the latter was authorized to fix the location as well as the price of the
portion of its property to be sold to the respondent. Hence, such provisions contained in the deed of absolute sale
were not binding on the RECCI. The appellate court ruled that the delay in the construction of WHI's warehouse was
due to its fault.

The Present Petition

The petitioner now comes to this Court asserting that:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE (EXH. "C") IS
ULTRA VIRES.

II.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO
ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY PLUS
THE STIPULATED 25 SQUARE METERS AND 55 SQUARE METERS BECAUSE THESE ARE VALID
STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. "C").
 III.

THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO RULE THAT THE
STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. "C") WERE DISADVANTAGEOUS TO THE
APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS.

IV.

IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE PROCESS BY
THE ASSAILED DECISION.

V.

THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT TO EVICT THE
SQUATTERS ON THE LAND AS AGREED IN THE DEED OF ABSOLUTE SALE (EXH. "C").

VI.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO
DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00
REPRESENTING ACTUAL DAMAGES AND PLAINTIFF'S UNREALIZED INCOME AS WELL AS
ATTORNEY'S FEES.20

The threshold issues for resolution are the following: (a) whether the respondent is bound by the provisions in the
deed of absolute sale granting to the petitioner beneficial use and a right of way over a portion of Lot

No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the petitioner to buy a portion thereof,
and, if so, whether such agreement is enforceable against the respondent; (b) whether the respondent failed to eject
the squatters on its property within two weeks from the execution of the deed of absolute sale; and, (c) whether the
respondent is liable to the petitioner for damages.

On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the respondent authorized Roxas,
then its president, to grant a right of way over a portion of Lot No. 491-A-3-B-1 in favor of the petitioner, and an option
for the respondent to buy a portion of the said property. The petitioner contends that when the respondent sold Lot
No. 491-A-3-B-2 covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide the petitioner
with a means of ingress to or egress from the property to the Sumulong Highway, since the latter had no adequate
outlet to the public highway. The petitioner asserts that it agreed to buy the property covered by TCT No. 78085
because of the grant by the respondent of a right of way and an option in its favor to buy a portion of the property
covered by TCT No. 78085. It contends that the respondent never objected to Roxas' acceptance of its offer to
purchase the property and the terms and conditions therein; the respondent even allowed Roxas to execute the deed
of absolute sale in its behalf. The petitioner asserts that the respondent even received the purchase price of the
property without any objection to the terms and conditions of the said deed of sale. The petitioner claims that it acted
in good faith, and contends that after having been benefited by the said sale, the respondent is estopped from assailing
its terms and conditions. The petitioner notes that the respondent's Board of Directors never approved any resolution
rejecting the deed of absolute sale executed by Roxas for and in its behalf. As such, the respondent is obliged to sell
a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 with an area of 500 square meters at the price of P1,000
per square meter, based on its evidence and Articles 649 and 651 of the New Civil Code.

For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991 Resolution of its Board
of Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less
convey a portion thereof to the petitioner. Hence, the respondent was not bound by such provisions contained in the
deed of absolute sale. Besides, the respondent contends, the petitioner cannot enforce its right to buy a portion of the
said property since there was no agreement in the deed of absolute sale on the price thereof as well as the specific
portion and area to be purchased by the petitioner.

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that:

A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the
property of the corporation is not the property of its stockholders or members and may not be sold by the
stockholders or members without express authorization from the corporation's board of directors. Section 23
of BP 68, otherwise known as the Corporation Code of the Philippines, provides:

"SEC. 23. The Board of Directors or Trustees. – Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and qualified."

Indubitably, a corporation may act only through its board of directors or, when authorized either by its by-laws
or by its board resolution, through its officers or agents in the normal course of business. The general principles
of agency govern the relation between the corporation and its officers or agents, subject to the articles of
incorporation, by-laws, or relevant provisions of law. …22

Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However,
under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind
the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them:

Art. 1910. The principal must comply with all the obligations which the agent may have contracted within the
scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he
ratifies it expressly or tacitly.

Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against
the corporation unless ratified by the corporation.23

In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing with an assumed agency, whether
the assumed agency be a general or special one, are bound at their peril, if they would hold the principal liable, to
ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it.

In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a portion of Lot No. 491-A-
3-B-1 covered by TCT No. 78085, and to create a lien or burden thereon. The petitioner was thus burdened to prove
that the respondent so authorized Roxas to sell the same and to create a lien thereon.

Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the respondent, which is
worded as follows:

RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested buyer, its
7,213-sq.-meter property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer Certificate of Title
No. N-78086, at a price and on terms and conditions which he deems most reasonable and advantageous to
the corporation;

FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be, as he is hereby
authorized to execute, sign and deliver the pertinent sales documents and receive the proceeds of sale for
and on behalf of the company.25

Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the
petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof. The authority of
Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to
sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may such
authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner "on such terms
and conditions which he deems most reasonable and advantageous." Under paragraph 12, Article 1878 of the New
Civil Code, a special power of attorney is required to convey real rights over immovable property.26 Article 1358 of the
New Civil Code requires that contracts which have for their object the creation of real rights over immovable property
must appear in a public document.27 The petitioner cannot feign ignorance of the need for Roxas to have been
specifically authorized in writing by the Board of Directors to be able to validly grant a right of way and agree to sell a
portion of Lot No. 491-A-3-B-1. The rule is that if the act of the agent is one which requires authority in writing, those
dealing with him are charged with notice of that fact.28

Powers of attorney are generally construed strictly and courts will not infer or presume broad powers from deeds
which do not sufficiently include property or subject under which the agent is to deal.29 The general rule is that the
power of attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it. The
act done must be legally identical with that authorized to be done.30 In sum, then, the consent of the respondent to the
assailed provisions in the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on
it.

We reject the petitioner's submission that, in allowing Roxas to execute the contract to sell and the deed of absolute
sale and failing to reject or disapprove the same, the respondent thereby gave him apparent authority to grant a right
of way over Lot No. 491-A-3-B-1 and to grant an option for the respondent to sell a portion thereof to the petitioner.
Absent estoppel or ratification, apparent authority cannot remedy the lack of the written power required under the
statement of frauds.31 In addition, the petitioner's fallacy is its wrong assumption of the unproved premise that the
respondent had full knowledge of all the terms and conditions contained in the deed of absolute sale when Roxas
executed it.

It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal
may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes
estopped to claim that the agent does not have such authority; second, the principal may so clothe the agent with the
indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority.32 There can
be no apparent authority of an agent without acts or conduct on the part of the principal and such acts or conduct of
the principal must have been known and relied upon in good faith and as a result of the exercise of reasonable
prudence by a third person as claimant and such must have produced a change of position to its detriment. The
apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent.33

For the principle of apparent authority to apply, the petitioner was burdened to prove the following: (a) the acts of the
respondent justifying belief in the agency by the petitioner; (b) knowledge thereof by the respondent which is sought
to be held; and, (c) reliance thereon by the petitioner consistent with ordinary care and prudence.34 In this case, there
is no evidence on record of specific acts made by the respondent35 showing or indicating that it had full knowledge of
any representations made by Roxas to the petitioner that the respondent had authorized him to grant to the respondent
an option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon,
or that the respondent allowed him to do so.

The petitioner's contention that by receiving and retaining the P5,000,000 purchase price of Lot No. 491-A-3-B-2, the
respondent effectively and impliedly ratified the grant of a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and
to grant to the petitioner an option to sell a portion thereof, is barren of merit. It bears stressing that the respondent
sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the respondent
had the right to retain the P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of the
principal to be considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent
with any other hypothesis than that he approved and intended to adopt what had been done in his name.36 Ratification
is based on waiver – the intentional relinquishment of a known right. Ratification cannot be inferred from acts that a
principal has a right to do independently of the unauthorized act of the agent. Moreover, if a writing is required to grant
an authority to do a particular act, ratification of that act must also be in writing.37 Since the respondent had not ratified
the unauthorized acts of Roxas, the same are unenforceable.38 Hence, by the respondent's retention of the amount,
it cannot thereby be implied that it had ratified the unauthorized acts of its agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in dismissing its complaint for damages against the
respondent on its finding that the delay in the construction of its warehouse was due to its (petitioner's) fault. The
petitioner asserts that the CA should have affirmed the ruling of the trial court that the respondent failed to cause the
eviction of the squatters from the property on or before September 29, 1991; hence, was liable for P5,660,000. The
respondent, for its part, asserts that the delay in the construction of the petitioner's warehouse was due to its late filing
of an application for a building permit, only on May 28, 1992.

The petitioner's contention is meritorious. The respondent does not deny that it failed to cause the eviction of the
squatters on or before September 29, 1991. Indeed, the respondent does not deny the fact that when the petitioner
wrote the respondent demanding that the latter cause the eviction of the squatters on April 15, 1992, the latter were
still in the premises. It was only after receiving the said letter in April 1992 that the respondent caused the eviction of
the squatters, which thus cleared the way for the petitioner's contractor to commence the construction of its warehouse
and secure the appropriate building permit therefor.

The petitioner could not be expected to file its application for a building permit before April 1992 because the squatters
were still occupying the property. Because of the respondent's failure to cause their eviction as agreed upon, the
petitioner's contractor failed to commence the construction of the warehouse in October 1991 for the agreed price of
P8,649,000. In the meantime, costs of construction materials spiraled. Under the construction contract entered into
between the petitioner and the contractor, the petitioner was obliged to pay P11,804,160,39including the additional
work costing P1,441,500, or a net increase of P1,712,980.40 The respondent is liable for the difference between the
original cost of construction and the increase thereon, conformably to Article 1170 of the New Civil Code, which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those
who in any manner contravene the tenor thereof, are liable for damages.

The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the lease of the property to
the Ponderosa Leather Goods Company. The respondent is, thus, liable to the petitioner for the said amount, under
Articles 2200 and 2201 of the New Civil Code:

Art. 2200. Indemnification for damages shall comprehend not only the value of the loss suffered, but also that
of the profits which the obligee failed to obtain.

Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable
shall be those that are the natural and probable consequences of the breach of the obligation, and which the
parties have foreseen or could have reasonably foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which
may be reasonably attributed to the non-performance of the obligation.

In sum, we affirm the trial court's award of damages and attorney's fees to the petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the assailed Decision of the Court
of Appeals WITH MODIFICATION. The respondent is ordered to pay to the petitioner the amount of P5,612,980 by
way of actual damages and P100,000 by way of attorney's fees. No costs.

SO ORDERED.